Who is Buying, How and Why?
The LIPG recently published the results of its 2016 Golf Investor Sentiment Survey. While the overall index fell by over 6 points (see article by Raymond Demby for more detail), this has not dissuaded investors from deploying capital into the golf market. Velocity in the transaction market remains healthy. Compared to 2015, the LIPG transaction volume is up by nearly 50%. This begs the question most frequently asked by golf asset owners: “Who is buying and how are they valuing targeted assets today?” We will answer those questions as well as WHY investors are buying into golf.
Beginning with the latter of the three questions, it is important to note that while golf course purchases are primarily a business acquisition, they are also real estate investments. Given the current geopolitical & economic events (both domestically and abroad), real estate represents a flight to safety for many investors. Stock market volatility, low interest rates, the bond market, the uncertainty of the BREXIT and a presidential election nearing, have collectively contributed to the attractive nature of real estate as an investment vehicle.
For the last 12 quarters, real estate investors have been chasing falling yields & Cap Rates in core asset product types (multi-family, office, industrial & retail). Stabilized golf assets with healthy earnings offer investors the opportunity to deploy significant amounts of capital into investments yielding double-digit Cap Rates and unleveraged IRR percentages in the 20’s. There is another telling reason; 65% of respondents from our GISS believed that their EBITDA would increase over the ensuing 12 months. That would not only translate into more income but greater capital appreciation. Assuming zero Cap Rate compression during a five to six year hold period and modest EBITDA growth of 4% per year, an investor would realize nearly 30% capital appreciation. Should Cap Rates happen to compress, every 100 bps would equal nearly 10% additional appreciation. This is in contrast to core assets which have little if any compression remaining, making golf that much more attractive.
There are always local, regional and institutional investors either seeking to gain scalability, fill a geographic hole in a portfolio or procure accretive income deals. However, of the total transactions facilitated by the LIPG in the past 12 months, approximately 55% have been to first-time golf investors. The aforementioned “reasons-to-buy” have seemed to propel the “crossover buyer” into the market. These are investors who are primarily invested in other real estate product types (such as core assets) but seek better returns in golf. One might conclude this to be the impetus for much of the private equity that entered the airspace during the Year of the Mega Deal in 2014. Now, private investors seem to be following suit. Those seeking courses for future re-purposing opportunities are also investing in golf. Over 35% of those we surveyed responded that alternative land use was either a very or somewhat important part of their acquisition criteria. That is understandable given the perception that golf’s future is uncertain.
Since most of the REO product cleared the system several quarters ago, and many more assets have stabilized, golf is returning to a more fundamental valuation model. The Gross Revenue Multiplier (the main metric used during the REO phase) has taken a back seat to Cap Rates and the EBITDA multiplier. Not long ago, all that was needed to increase the value of the asset was to increase top-line revenue. This valuation methodology is changing, particularly with respect to cash flowing properties. According to the GISS, 50% of those surveyed responded that the most important metrics are EBITDA multiplier and Cap Rate for assets in the upper echelon of earnings. However, investors valuing courses with a net operating income of less than $175K are also putting EBITDA ahead of GRM. The most surprising revelation was that 25% of those surveyed said that if a listed asset met their earnings criteria, there would be no limit as to the GRM they would consider. We could conceivably see GRM disparity returning to pre-recession levels. That is a complete reversal from the valuation methods of two and three years ago.