Ace River Capital Q2 2023 Quarterly Letter

Expensive Companions & Pals,

For the Second quarter 2023, Ace River Capital Companions, L.P. (the “Fund”) returned 3.73%. Over the identical interval, the S&P 500 (SPX) and Russel 2000 (RTY) Indexes returned 8.74% and 5.2%, respectively.

Technique

My aim is to take care of a concentrated portfolio of small and micro-cap corporations with distinctive benefits and development potential inside their respective industries. The intention is to carry them for the long run. Discovering such corporations requires important effort and time. Because of the shortage of appropriate alternatives, constraints on time and assets, and alternative prices, I’ll take substantial positions within the corporations that meet my standards and move my danger/reward evaluation. I don’t subscribe to large diversification and solely analysis and comply with a restricted variety of corporations deeply. I cannot spend a lot time on an organization if I’m unwilling to take a considerable place and have the conviction so as to add to that place on weak spot. This method requires lots of analysis and persistence. There will probably be lengthy durations of inactivity with few trades, and I’ll hardly ever maintain greater than 5 corporations at a time. I’ll usually intention to have one brief place. The brief place will often goal a a lot bigger firm than the small and micro-cap corporations held as lengthy positions. This technique accepts short-term volatility in pursuit of upper, long-term, tax-efficient returns.

High Place

The fund’s high place is RCI Hospitality (RICK). RICK is the one publicly traded proprietor of grownup nightclubs within the US. At present, they personal 54 golf equipment throughout 13 states and an extra 13 sports-bar eating places with the “Bombshells” idea that has not too long ago started franchising. With few municipalities issuing new grownup leisure licenses, these companies perform as native monopolies with wonderful unit economics.

RICK has not too long ago develop into positioned to open a Membership/On line casino/Steakhouse in Central Metropolis Colorado. I imagine that funding will carry out nicely and have a excessive ROI for the corporate, along with opening a brand new path to allocate capital.

Please see Q1 letter for extra info on this place.

Newest Strikes & Second-Largest Place

Drive Shack (OTCQX:DSHK) is a novel and progressive leisure and leisure firm that gives company an immersive expertise by its state-of-the-art driving ranges, golf programs, and now, its newest providing – The Puttery mini-golf venues. The corporate has come a great distance since its inception in 2016, evolving from a Actual Property Funding Belief (REIT) targeted on golf programs to a multifaceted leisure and leisure firm that’s dedicated to creating unforgettable experiences for its prospects.

Initially generally known as Newcastle Funding Corp., the corporate went by a big transformation in 2016, altering its identify to Drive Shack and divesting its property in conventional golf programs to give attention to creating modernized golf leisure venues. Since then, the corporate has opened a number of top-of-the-line driving ranges throughout the US, providing company an unparalleled expertise that merges know-how, leisure, and sports activities.

Investor Presentation – Firm Timeline

In 2018 the primary Drive Shack was opened in Orlando, adopted by 3 extra the next yr. These venues are know-how pushed, driving ranges with meals and beverage choices much like High Golf. The venues are costly to construct at round $20MM and the ROIC was within the 15%-20% vary vs. the improved Puttery idea which has confirmed to have a decrease value per venue and the next return along with shorter development timeline.

In 2020, Drive Shack expanded its portfolio to incorporate The Puttery, an idea that brings a brand new stage of enjoyable and pleasure to the standard recreation of mini golf. With cutting-edge know-how, stylish design, and a spread of meals and beverage choices, The Puttery venues are rapidly turning into the go-to vacation spot for pal outings, company occasions, and social gatherings.

Investor Presentation – Puttery Venues Efficiency

The Q3 2022 earnings report (11/21/22) confirmed a lack of -$0.09/share earlier than the voluntary delisting from the NYSE on 12/13/22. Right now, the corporate was in hassle and wanted to boost capital to proceed development commitments for brand new Puttery venues. Chapter appeared to be a severe danger. The Chicago Puttery was not too long ago opened earlier than this report and since then Pittsburgh is now open. With every Puttery venue including roughly $2MM in EBIT primarily based on the present 92.3MM shares excellent, every will contribute $.02/EPS, so we are able to count on the newest loss per share to be lower in half by these openings alone.

The corporate introduced a time period mortgage facility of $26.5MM on 3/8/23 which ought to have the ability to cowl the opening of 3-4 extra venues as final estimates had every venue costing $7MM. With the extra earnings from these venues, we ought to be at or approaching break even primarily based on the newest loss/share quantity. The newest earnings report confirmed some progress, with a lack of -$0.07/share. With the inventory at the moment buying and selling round 0.38/share, I can see the market having a powerful response to the upside after the subsequent earnings replace if the corporate can talk a plan ahead that eliminates any chapter danger. It appears working the present venues and planning to solely open 1 or two venues per yr primarily based on cashflow within the close to time period could be the right play on this excessive rate of interest surroundings and with the present depressed share value.

With the very engaging unit economics of The Puttery venues offering 25%-33% ROIC, I’m completely satisfied so as to add shares at these ranges as a result of if leverage is managed accurately, I see an extended runway for development and countrywide enlargement of the idea over the subsequent decade or extra. The latest change in CEO and CFO offers me extra optimism and I’ve elevated the place.

Thanks for studying. Please attain out for any cause.

Nicholas D’Agnillo

Nick@AceRiverCapital.com

Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.