Cap Rates and Gross Revenue Multiples in Golf – A 15 Year View
At the start of 2016, the US stock market had erased over $1 trillion in value as falling oil prices, volatility in China, shrinking world trade, rising debt and deflation had most all talking heads telling clients to sell everything in face of a “cataclysmic year.”
Midway through 2016, all three major US stock markets hit all-time highs, and equities worldwide regained nearly $4 trillion in July alone amid optimism over the outlook of the global economy.
So, in the span of six months the US economic outlook went from Armageddon to Are “You Freaking Kidding Me”. At home, jobless claims are at record lows, suggesting employment growth and the strength of the underlying business sector is solid. Fundamentals are healthy. Consumer spending is strong. Commercial property and equity markets are at all-time highs. And problems abroad have the fed pumping their brakes on any pending interest rate hikes.
Unfortunately, this polarity of good and bad, up and down seems to have tempered exuberance for the 2016 investor. With wounds of the Great Recession still fresh, it seems many are waiting for the other shoe to drop, for the next inevitable market crash. The good times can’t last forever, right?
For the first time in six years, mixed signals have cooled the previously white-hot core commercial real estate categories (apartments, retail, office, etc.). The bid/ask spread between buyers and sellers has widened a touch, slowing what had been an unstoppable force of commercial property price appreciation.
Golf asset pricing on golf courses for sale has followed suit. Six months into 2016 marked the first time since 2012 that average and median golf course prices declined, with the average down a modest 4.5%. The actual cause of the decline is not that concerning—essentially a disproportionate number of deals trading below $2M – 55% vs 47%.
But it does beg the question, is this a short-term blip driven by macroeconomic uncertainty bound to pass without concern, or a signal warning golf course investors of an upcoming market correction?
The Relationship Between Cap Rates and GRM
As the leading golf course brokers in the market, we’ve decided to share with our clients a look at not just the trends in average and median golf prices, but a deeper look at the fundamentals driving those trends—namely the underlying gross revenue multiples (GRM) and Cap Rates associated with each golf course for sale. The average is a powerful way of measuring statistical tendency, but an imperfect way of measuring price appreciation/depreciation. This more meaningful approach measures the over time are willing to pay more or less for the same rate of return, or put simply a higher or lower price.
The resulting data has some powerful implications. From 1999—2008, there was a strong relationship between Cap Rates and pricing, with the data tightly clustered around an average 9.99% Cap Rate. Conversely, the GRM data is less consistent and more widespread, suggesting that GRM as a pricing mechanism was largely unimportant.
Then the market crashed, and from 2009—2013 there was a new normal, a transition towards pricing decisions grounded in GRM rather than Cap Rates. In a lot of ways this was out of necessity, as a majority of available golf courses for sale during those times were distressed, bank-owned golf properties that were losing money, thus prohibiting a capitalization approach. The fact that golf course buyers, in the absence of historical cash flow, have forsaken Cap Rates as a pricing model, instead focusing on gross revenue isn’t groundbreaking or noteworthy. But the degree to which GRMs declined during the 2009—2013 “Cap Rate vacuum” is. The average GRM dropped from 2.22x to 1.48x to 1.30x during the period 2008 to ‘09 to ‘10, and has since held firm at an average of 1.30x, compared to the pre-recession 10yr average of 2.36x.
So does that mean golf asset prices are one whole multiple of gross revenue below what they were 10 years ago?
Not necessarily. First, declining prices, whether based on GRMs, Cap Rates or some other pricing model, during a time when the majority of golf assets trading hands were, in fact, losing money, is warranted and more importantly expected. As golf course brokers, it is no secret that golf courses make less money today than they did 15 years earlier. Investors began paying less for riskier assets that return less money while operating in a troubled airspace.
Second, and more importantly, it isn’t simply that GRMs declined. Rather, investors switched from a Cap Rate pricing model to a GRM model, seen clearly in the side-by-side scatterplot comparison (page 2). Lacking reliable and stabilized income to capitalize into a value estimate, investors turned to revenue as an indicator of value. What’s encouraging is that pattern has most recently begun to reverse course—transactional Cap Rates have begun to simultaneously tighten and trend upward towards their pre-recession averages, i.e. less negative income deals replaced by healthier, stabilized deals trading on historical cash flow. In the macro universe of golf, that is certainly a positive trend even more so if considered in the greater context of current sentiment among ownership. If 65% of owners believe their golf asset’s EBITDA will increase in 2016 (see page 4 for Investor Sentiment Discussion), and Cap Rate trends continue towards pre-recession levels, it’s a great marker to expect continued price improvement and throw out any 1H price fluctuations as temporary, economic induced blips. If core commercial property markets continue with modest and more measured improvement, and consumer spending stays strong, it’s a good bet golf asset pricing will continue long-term improvement.
Published October 24, 2016