While new golf facility openings are few, golf course transaction activity has been vigorous over the last six years. From publicly available sources, NGF has tracked nearly 1,300 golf facility transactions since the beginning of 2007, and this number is almost certainly understating actual sales.
In an upcoming issue of the Dashboard, we will provide an analysis of these transactions – the types of facilities that are selling, where these sales are occurring, why they are changing hands, how they are being funded, etc. As a preface to that discussion, this month we are presenting summary results of the 2013 edition of the Society of Golf Appraisers’ Annual Investor & Lender Survey, which reveals, among other pertinent information, how investors and lenders are valuing golf courses.
The Society of Golf Appraisers (SGA) is a non-profit organization (www.golfappraisers.org) that is dedicated to advancing and continuously improving the profession of advising, consulting, and valuing golf related businesses and assets while serving the interests of its members. The SGA works closely with many of the industry’s leading golf organizations, golf architects, developers, owners and operators, planning firms, and financial institutions, as well as tourism and governmental organizations.
The SGA survey provides salient information relating to financing and investment criteria that are instrumental in the evaluation of golf course-related investing and lending activity. SGA survey contributors include owners, investors, operators, life insurance companies, commercial banks, venture capital groups, management firms, brokers, developers, appraisers, and consultants who are active in the golf industry.
The SGA Investors Tour
The 2013 SGA Survey reveals that current or “going-in” Cap Rates ranged from 6% to 14.5%, and averaged 11.1%, reflecting a relatively flat trend since 2010. The average terminal or residual Cap Rate was 11.8%, similar to what was found in 2011. The results indicate that most investors still focus returns on recent historical financial performance rather than on “Proforma” or potential performance. However, investors in clubs that are considered to be reposition opportunities vis-à-vis management and/or significant capital improvements tend to focus on the returns they expect after the facility is improved.
The 2013 SGA Survey reports the average Net Income Multiplier (the inverse of the Cap Rate) at 8.1, comparable to the 2011 average of 7.9. This multiple is generally applied to what is referred to as the “going-concern” net income of the facility (typically net of management fee and reserves, but can vary on the specific transaction). However, some investors and market participants defined net income or net earnings differently. In some cases net income may simulate EBITDA (earnings before income tax, depreciation and amortization) prior to a deduction for a management fee and/or a capital allowance/reserve.
As many clubs struggle to improve operating margins to long-term norms, buyers and sellers give varying credence to the Gross Income Multiple (GIM), the ratio of price or value to a clubs gross income (actual or proforma). The 2013 SGA Survey indicates an average Gross Income Multiple (GIM) of 1.5x gross income. According to interviews with industry participants, the GIM has added relevance for clubs experiencing persistent declining revenues and/or weak or negative margins.
From a discounted cash flow perspective, the survey reveals an average discount rate (DR) of 14.6%, generally unchanged since 2010, and a range of 9.5% to 22.0%, which reflects the varying types of clubs, operations, investor thresholds, capital improvements, etc. Projected annual income growth ranged from 1.0% to 4.0%, and averaged 2.3%, a slight increase over recent trends. Meanwhile, annual expected expense growth ranged from 2.0% to 4.0%, averaging 3.0%.
Some other interesting findings from SGA’s 2013 survey include:
- The average management fee ranged from 1.0% to 5.0% of gross income, with an average of 3.6%.
- Capital reserves / allowances (excluding equipment leases) ranged from 2.0% to 6.0% of gross income, averaging 3.0% - slightly lower than the 2012 average indicator of 3.3%.
- Marketing period ranged from 6 to 18 months, with a 12.2 month average, representing a 2+ month decline compared to the 2012 average of 14.5 months.
- Broker commissions averaged 3.5%, relatively unchanged from 2012.
The Lenders Tour
General lending terms remain favorable in the U.S., as the Federal Reserve continues to keep interest rates at all-time lows. The current Federal Funds Rate (the short-term interest rate that banks charge each other for overnight loans) is zero or nominal, which has kept commercial lending rates comparatively low as well.
However, according to the SGA 2013 Survey the golf lending industry continues to be highly fragmented, and effectively lacks all the dedicated regional and national industry lenders that existed pre-recession. There appears to be high interest, at least anecdotally, from various sources in the development of new regional and national debt sources. Time will tell if the golf economy will improve sufficiently to induce the development of substantive industry dedicated debt sources. Until then, the golf lending that does exist will continue to come primarily from local and regional banks.
The SGA 2013 survey revealed some of the following key findings regarding golf-specific lending:
- The average interest rate on a golf loan is 7.4%, effectively unchanged from 2012. According to the Wall Street Journal, common indices such as the Prime Rate (3.5%) remain unchanged from a year ago.
- The debt coverage ratio (DCR), also called debt service coverage ratio (DSCR), is the ratio of cash available for servicing interest and principal. The DCR is calculated by dividing the property's annual net operating income (NOI) by a property's annual debt service. This lender benchmark ranged from 1.2 to 2.1, and averaged 1.41, compared to 1.34 in 2012.
- Loan-to-value (LTV) was in the range of 50% to 80%, averaging 63.0% - generally comparable to recent trends. The typical amortization period ranges from 15 to 25 years, and averages 20.8 years.
- The average call period increased again slightly to 6.7 years, up from 6.5 in 2012.
To participate or to subscribe to the SGA’s Golf Investors & Lender Survey please go to www.golfappraisers.org and sign up today.