Just the other day, an old friend and active buyer of golf and club properties called to ask about how we’re estimating value in light of the surge in golf participation, rounds and membership resulting from the COVID pandemic. This is a most interesting question and challenge for appraisers, lenders and buyers and sellers. Since it’s an appraiser’s job to interpret the market and not dictate it, I sought to turn the question back on my friend to get his impressions.
Property valuations (of any type) have been challenging during the past two years. At the beginning of the COVID pandemic, many predicted doom and gloom for real estate in general from the resulting economic distress. Certainly, few if any anticipated the surge in golf, which had been floundering. In some sectors, especially office and (especially) retail, centers struggle, close or seek repurposing alternatives and office buildings experience high vacancies as more people work from home.
Conversely, residential real estate has seen significant price increases in both the home buying and rental markets. In the golf and club property market, operational gains have been realized and the big question is how sustainable are they? Nobody really knows the answer, but I’m sensing that market participants may be re-evaluating their approach to valuations and we appraisers and consultants should consider doing the same.
In a very general sense, golf properties increased rounds and memberships in 2020 and 2021. In 2020, many courses suffered in the Food & Beverage area from forced closures, reluctance of people to eat out and restricted capacities. In 2021, the rounds and membership continued their improvement, and the F & B experienced a recovery. This has put many clubs in a stronger cash and profitability position than they’ve experienced in many years. Accordingly, lots of clubs are considering enhancements and improvements and at the very least looking at addressing deferred maintenance.
Recent history in the golf course world has shown that buyers (especially) and sellers have developed their internal valuations based on “snap shot” performance indicators. Multiples of either gross revenues or cash flows or EBITDA for either the most recent 12 months or projected next 12 months of operations have often been how negotiations are done and deals transacted. My conversation with my friend revealed a slightly different approach.
Acknowledging that he felt the “surge” was no more than partially sustainable, he sought to apply the concept of either gross revenue or cash flow multiples to a more “normalized” year. From his “buyer’s perspective” it made sense to focus on the club’s performance in 2019 (the latest pre-COVID year) and apply the multiple to that. When he asked my opinion, I mentioned that in the ski resort industry, it’s common practice to average the performance over a recent period of years (say, 3-5) and apply a multiplier to the average of those years, which in the ski industry helps to normalize the impact of variable weather conditions where slight differences in temperature can impact the number if skiable days in a season significantly.
Golf has similar, if not as dramatic issues with weather, but this method could also be used to normalize expected performance for golf and club properties, acknowledging both the club’s recent history and the industry’s spike in performance while managing risk the way an informed buyer might.
Time will tell if the COVID golf boom is sustainable. There are some who say “COVID did for golf what Tiger Woods couldn’t do.” We don’t know if that’s true or not yet because who knows if golf will recede again. Given the nature of market cycles, it’s reasonable to assume that the inflation of housing prices will settle back into a more normal pattern, especially as interest rates are increased for the purpose of controlling inflation. The fundamentals of office and retail real estate changed even before COVID with the ability to work and shop online. With the exception of golf simulators, those who seek a legitimate golf experience still have to head to the golf course.
Over the years, multiples applied to gross revenues and cash flow for golf properties have been generally consistent, but with a slight increase shown during the COVID era. Given the question of sustainability, it’ll be interesting to see how market participants in golf evaluate properties and how these dynamic impact tax assessments, lending and property reinvestment in the coming years.