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October 24, 2014

ClubCorp Holdings: On The Tee For Gains

ClubCorp Holdings (MYCC) is the largest owner-operator of private country clubs and business clubs in the United States. MYCC recently completed the acquisition of Sequoia Golf, the third largest owner-operator of country clubs, and now owns or operates over 200 clubs in more than 26 states. Clubs are somewhat clustered in warmer clients with Texas and Georgia providing a strong regional presence. MYCC has been around since 1957 and prior to its IPO was controlled by private equity firm KSL Advisors. KSL still owns just over 50% of MYCC but has indicated its desire to sell down the remainder of its ownership over the next three years. MYCC came public via an IPO during the second half of 2013.

MYCC shares look very attractive trading at just over 8 times 2015 estimated EBITDA. This is a sharp discount to somewhat similar companies in the lodging and leisure industries. The multiple should expand as the company continues to generate steady organic growth and adds more clubs via acquisition. At 10 times 2015 estimated EBITDA, the shares would trade at $23 for a gain of 20%. MYCC also pays a very secure dividend adding a current yield of 2.6%.

More dramatic upside could occur if MYCC converts into a real estate investment trust (REIT). This has been suggested by shareholders and management has acknowledged that it is exploring this option. REITs pay no federal taxes and return most of their cash flow to shareholders. Current valuations on comparable REITs suggest that a conversion could realize value at $30 or above for MYCC with a near doubling of the dividend. Recently, two activist hedge funds sent a letter to the MYCC advocating for REIT conversion. On its most recent conference call, MYCC management indicated it would provide further detail on its Board level discussion about REIT conversion, possibly as soon as December.

MYCC reported slightly better than expected third quarter results last week. The results did a nice job of supporting the long-term economic model for MYCC: 1-2% membership growth, upselling an enhanced membership granting privileges at other MYCC owned clubs, continued acquisitions of country clubs, and occasional start-ups of business or alumni clubs. This model should drive mid-single digit revenue growth. MYCC reinvests heavily to upgrade many of the clubs it purchases limiting operating leverage. Nevertheless, some margin expansion should occur as the company integrates its acquisitions. Sequoia, in particular, should offer some operating leverage given economies of scale in purchasing and much greater regional concentration it provides in several markets.

Besides the general risk related to a weaker economy, I think the biggest obstacle for the stock in the near-term will be secondary offerings as KSL reduces its ownership. KSL has a lot of stock to sell but one offset to the added supply is that KSL has to own less than 50% to allow the REIT conversion. As a result, if a secondary is announced, it will likely trigger speculation that a REIT conversion could happen sooner rather than later, helping to support the shares against the added supply.

MYCC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. MYCC is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at October 24, 2014 07:18 AM in MYCC