The U.S. golf industry supports only two real estate investment trusts. One REIT is shooting one under par; the other is stuck in a sand trap.
By Howard Rudnitsky
August 2001
Institutional Investor Magazine
Santa Monica, California-based National Golf Properties, in business for 30 years, is the successful industry leader; Charleston, South Carolina-based Golf Trust of America, started four years ago, is in the throes of liquidation.
Despite increased golf course construction (about 1,020 new courses have opened in the past two years, a 7 percent gain) and a slowing economy, National Golf Properties is expected to report record funds from operations of at least $3.30 a share this year, up from $3.00 last year. Credit smart acquisitions and the company’s relatively inexpensive fees, which average $33 a round at National’s 145 mainly daily fee golf courses, versus at least twice that at many of the nation’s more upscale courses.
Since the REIT went public in August 1993 at 193ò8, it has yielded a total return of 10 percent a year. Last year revenues were $124 million. The stock recently traded at 26.
In this match play, Golf Trust of America, with 2000 revenues of $55.5 million, has fallen far behind. It tried to take the high road, with its 42 upscale courses. GTA has been on an acquisition spree since the company was formed in 1997. But last year Golf Trust drove deep into the rough, recording a $62 million write-down in the value of its golf courses, after a number of the company’s lessees proved unable to pay their rent.
“GTA grew rapidly through acquisitions. Some of the courses have had trouble meeting their numbers, and there’s a ton of overbuilding,” says Paul Penney, until recently an analyst at San Francisco- based Robertson Stephens. Faced with lessee and debt covenant problems (since resolved), Golf Trust’s shareholders voted in late May in favor of a management proposal to liquidate the investment trust over a period of 12 to 24 months.
The estimated $10.74 to $13.93 a share value projected by management, to be realized upon completion of the sale of the entire golf portfolio, would still fall well below Golf Trust’s February 1997 IPO price of $22 a share and its third-quarter-1998 peak of $35.50, even after including the $6.70 in total dividends paid out. In late July GTA’s shares traded at $7.90, suggesting that for now investors are cautious about management projections.
Despite their poor performance, GTA’s top executives, chairman and CEO W. Bradley Blair II and CFO Scott Peters, together will receive a compensation package potentially worth $9.7 million, which already includes $1.9 million in retention bonuses and $2.8 million in loan forgiveness, plus $627,000 related to the accelerated vesting of 78,399 shares of stock valued at $8 a share. “Like most investors, I’m upset about that,” says Jeffrey Donnelly, an analyst at First Union Securities’ Boston office. “But the reality is that you can’t find anyone that can come in from the outside, ramp up and solve problems quickly.”
In contrast to GTA’s hurried and costly acquisition binge, says National Golf president James Stanich, “we’ve been acquiring golf courses for the past 30 years. GTA’s growth only began in 1997. So they tried to play catch-up and paid high prices for the properties.”
When National Golf bought underperforming or poorly managed properties in good locations, it was able to turn to the management expertise of American Golf Corp., National Golf’s $746 million (2000 revenues) management group. Says Stanich, “Through programs like group sales and player development, we are able to significantly improve the financial performance of the property.”
In using the sale and leaseback approach, GTA essentially financed its smaller operators. Many of its tenants proved less than creditworthy.
Unlike GTA, National Golf made some shrewd acquisition bets. In 1999, in a joint venture with ClubCorp, National Golf acquired Cobblestone Golf Group’s portfolio of 48 courses from Meditrust Cos. at a 40 percent discount to the $540 million purchase price Meditrust had paid only one year before. Since then National Golf has increased its half of Cobblestone courses’ revenues, particularly its group business, which is up 40 percent. That’s the financial equivalent of a hole in one.
