by Deidra Darsa

Over 16,000 golf courses decorate the American landscape. They were the recipients of $30 billion spent by 24 million U.S. golfers in 1998 on green fees, practice range fees, food, equipment and apparel, according to the National Golf Foundation (NGF). In its yearlong study, A Perspective on the Future of Golf, published in early 1999, the non-profit NGF, a trade association with the mission to foster the growth and economic vitality of golf, noted strong growth of industry revenues in the recent past. Looking forward, the NGF anticipates the number of golfers—increasingly made up of women, minorities and juniors—and rounds played will grow at a steady one percent to two percent per year. And, those are the folks who play readily.

Golf’s recent popularity and widespread attraction means REITs like National Golf Properties Inc., Santa Monica, CA, and Golf Trust of America Inc., Charleston, SC, are set to profit from the injection of new money into the game. Each company is positioning itself in a niche unique to their goals and mission. National Golf Properties Inc., public since 1993 with a portfolio of 151 public and private high-quality golf courses in 26 states, and Golf Trust of America Inc., public since 1997, owns 47 high-end upscale golf courses and resort properties. All but four of National Golf Properties Inc.’s courses are leased to and managed by American Golf Corporation while Golf Trust of America Inc. pursues an independent lessee structure with prior owners of the upscale courses it purchases. And, each company comes with a unique management style.

"When you have a company with the size and the resources that American Golf has, you’re able to drive rounds and revenues to your property more so than an individual golf operator could," explained James Stanich, president, National Golf Properties.

By leasing its properties to American Golf and tapping into its sales organization, NGP expects to see between 20 percent to 30 percent growth in the first year of its new property’s revenues. "We see tremendous benefits on the operation side," added Stanich. The REITs access to financial resources allow it to be selective in its acquisitions that consistently remain high quality properties operating under long term, triple net leases that pay NGF a base rent, a base rent escalation and an additional percentage of the revenues of the properties. All maintenance, repairs and capital improvements to the courses are the obligation of the operator. However, the REIT will, in certain circumstances, invest capital to renew older courses. It has invested $4 million to remodel the Pecan Valley, the site of the 1968 Professional Golf Association (PGA) championship, in Austin, TX which includes a new irrigation system and club house.

"It recently reopened and has received great reviews," said Stanich. "We expect terrific financial results as well."

NGF courses range from public properties with green fees as low as $10 to championship courses with green fees as high as $200. Its 56 country clubs are equally diverse. Those run the gambit from entry-level clubs to premiere clubs.

"The point is that diversity creates tremendous stability and predictability to our revenues," said Stanich. "You may have bad weather on the East Coast while the weather on the West Coast is beautiful. A large portfolio that’s diversified geographically creates stability in our revenue stream."

Since its founding, Golf Trust of America has focused on upscale golf course resorts and country clubs that attract affluent golf travelers, and baby and echo-boomers.

"Our view is to acquire upscale courses that have historically proven track records," said Bradley Blair, II, CEO, Golf Trust of America. "That’s where we believe most of the golf activity is showing up today and should arrive in the future."

Once GTA purchases a new course, staff guide the lessee—typically the previous owner—with its management style while capitalizing on the lessees knowledge of their market. The lessee, in turn, benefits from the economies of scale that come with ownership by a large company, and participates in the future profitability of the course.

"We think that these upscale courses demand unique localized talent," explained Blair. "Particularly the historically proven properties that are traditionally solid performing assets. That management has unique skills within those markets which would foreshadow the benefits of a multiple independent structure."

Even though the two REITs have different missions, clustering properties and the fragmentation of the industry play key roles in generating corporate income and locating acquisition opportunities.

Making the Links

Less than five percent of American golf courses are owned by a multi-course corporation. This fragmentation of the industry—over 95 percent of golf courses owned and operated by individual owners—opens the door for large companies to purchase courses in clusters and generate significant market power.

"Clustering properties is one of our key strategies in purchasing golf courses," explains Stanich. "If you can cluster several properties in the same market it creates terrific operating and marketing synergies and benefits that exist because of that." For example, clustering properties will allow for a centralized reservation system that can network golfers to multiple company owned courses within a specific market instead of losing them if one course can’t meet their tee time or price range.

"You’re going to have greater revenue if you’re able to control a larger portion of rounds available in certain price ranges," said Blair. "From the management side, you will find some economies in marketing courses as one package. It’s not simply owning them and they’ll come. You have to manage the process."

The spurt in golf course development has also led to greater opportunity for acquisitions across the country, with about seven out of 10 projects in the public market, according to Peter Kaczmarek, manager of club membership, United States Golf Association (USGA).

"That trend has changed remarkably in 12 years, in both the overall profile of the national golf facility supply as well as the USGA membership," said Kaczmarek. "Recent enrollment in the USGA is 60 percent public and semi-private. Prior to 1988, the majority of our membership was private courses."

The boom in golf course construction began around 1988 and "has continued almost uninterrupted," he said. "On average, there are, in ballpark figures, between 250 and 300 brand new golf properties opening per year," said Kaczmarek, adding, "While this is going on there’s a separate campaign to develop new golfers. You have to find people to populate these new golf courses."

Driving the Green

"The future of the game is its broad appeal," noted Stanich. "There’s some good things happening from a population side."

The NGF identified 41 million potential players. If a small portion of those 41 million Americans the NGF has identified as potential players, who for some reason don’t play or play very little, got the right encouragement to play, the growth rate in rounds played could double, the NGF noted. No wonder golf organizations and corporations are working diligently to stimulate those golf wannabes who have been inspired by the likes of Tiger Woods, Sergio Garcia, and Juli Inkster.

"When I visit our golf courses and driving ranges I can see that we’re attracting a different golfer than we did 10 years ago," said James Stanich, president, National Golf Properties. "I see many young people out there, which from our standpoint is great to see. Golf has become the cool sport for the young generation. Another trend that we sure like is that in the last five years we’ve seen more women and minorities playing the game. These population and demographic trends are working in our favor."

While women comprise only 22 percent (5.7 million) of the golfer population, they account for 39 percent of beginning golfers. And, 10 percent of golfers (2.4 million) represent a racial minority mix of 882,000 African-Americans, 851,000 Asian/Pacific Islanders and 712,000 of American Indians, Eskimos and Aleuts. Additionally, the African-American golfer population has jumped 30 percent since 1996 and 100 percent since 1991, according to NGF. Besides the jump in minority interest, industry insiders anticipate aging baby boomers to increase the number of golf rounds they play which will translate into increased fee revenues.

"People who are between 50 and 60 play twice as many rounds as golfers in their 30s," said Stanich. "Once they’re over 60, they play three times as much golf as people in their 30s. As the baby boomer generation continues to age, we expect to see a significant increase in the number of rounds of golf because they’re coming into their prime golfing ages."

The USGA, by accepting golf training facilities that employ teaching professionals who also instruct students on golf etiquette and rules as members, is hoping to open the game to new players. "We are interested in the number of golfers who will be coming through what is considered a non-traditional way to learn golf," said Kaczmarek, adding that the USGA has a charitable arm that funds education grants for inner cities, caddy, and disabled golfers programs.

"All golf oriented charitable foundations are seeking to encourage the growth of affordable, accessible golf to insure there is money, time, and attention being devoted to develop opportunities for all young people who play the game and follow in the footsteps of Tiger Woods and other young stars," he said.

American Golf, manager of National Golf Properties, formed an alliance with the Tiger Woods Foundation to bring golf to youngsters, ages eight to 18 years old. "Tiger Woods puts on five golf clinics for inner city kids," explained Stanich. He visits for one day at the NGP properties and then we take over from there to make sure that the kids continue to come out and play golf."

By offering programs like Hook-A-Kid-On-Golf that allow kids to play on weekday afternoons for $1, NGP is breaking down barriers for children who want to learn the game.

Even though the high-priced courses owned by Golf Trust of America won’t benefit immediately from these types of programs, they expect to feel the impact as those golfers mature, said CEO, Bradley Blair, II. "We’ve also had the benefit of the introduction of people like Tiger Woods who have caught the attention of the youth in this country. We’ll see some growth at these core levels because of Tiger. While we may not get the benefit of that in these upscale courses now, down the road, younger people will want to play here."

Youngsters’ aside, aging baby boomers and the affluent golf traveler are the clientele most likely to be found at Golf Trust of America courses. "Avid and moderate baby boomer and echo-boomer [children of baby boomers] golfers are who we see playing in the upscale window," said Blair, adding that the affluent golf traveler has grown by 45 percent in the last nine to 10 years.

The Badlands Golf Club oin Las Vegas, NV is one of National Golf Properties' top properties.

Staying in the Fairway

Both golf REITs are making money. "Our FFO has increased each year by at least 10 percent," said NGP’s Stanich. "Over the next three years, we’re projecting at least a 10 percent growth in FFO with a modest level of acquisitions. We’re in a good situation capital wise and we have a stock buyback plan in place. We’ll have about $25 million retained cash flow in the company next year."

And, Golf Trust of America Inc. reported a 10 percent increase in FFO per share for the third quarter 1999. "Our course portfolio performed extremely well in the third quarter," said Blair.

Wall Street has taken notice of the golf REITs FFO up-ticks, too. In its October 20, 1999 report, Merrill Lynch raised its opinion on National Golf from "accumulate" to long-term "buy" with a 12-month price objective of $27 per share. Robertson Stephens rates NGP as "maintain long-term attractive" and it rates Golf Trust of America as a "strong buy."

"National Golf has some significant cluster areas such as Phoenix, AZ, southern California and Texas," explained Paul Penney, junior analyst, Robertson Stephens. "They just have a strong, strong presence."

As for Golf Trust, Penney noted that its upscale courses operate at a higher net income margin (NOI of 30 to 45 percent) than the average golf course. "That’s approximately twice the level of an average moderate golf course portfolio which would be 15 to 25 percent." Deidra Darsa is the managing editor of Real Estate Portfolio magazine.