Golf Course Firm Hits Sand Trap in Hunt For Tax Savings

Wall Street Journal

Robbie Whelan and David Benoit

Dec 09, 2014

On Monday, a small company that owns golf courses and clubs sent waves of confusion through the real-estate investment trust world with an announcement that it would not be converting the company to REIT status, a move that is most commonly made to save on taxes.
But it wasn’t what Dallas-based ClubCorp Holdings Inc.MYCC +0.62% said, really. It’s more how they said it.
In an announcement Monday morning, ClubCorp said it had weighed several REIT conversion options, including dividing itself in two as an operating company (“OpCo”) and property company (“PropCo”) and converting the whole company into a REIT, all of which they rejected.
But discussing the option of a full-company conversion, ClubCorp said that “based on direct conversations between management and its advisors with the IRS, the Board believes that such a conversion is not feasible in today’s political environment.”
That last part is important. Over the last year, companies hoping to convert to REIT status have been getting a wide berth from the Internal Revenue Service in terms of what kinds of companies might qualify as REITs. A gaggle of billboard owners, gym operators, document storage firms, and other companies that aren’t traditionally thought of as real-estate based businesses have either gotten the IRS’s blessing to convert to a REIT or announced plans to seek it.
Gordon Haskett Research Advisors responded to the news with bafflement: “Wait, what?” the firm wrote in a note quoting the “political environment” comments. “That is not a great sign for other companies that may be wanting to press novel REIT/MLP interpretations with the IRS. Something to keep in mind.”
In a call with investors Wednesday, ClubCorp CEO Eric Affeldt did not clarify what the company meant about the “political environment,” but instead offered a different explanation: golf-club membership dues.
“We’re not going to get into the details of the conversation with the IRS, but we were not encouraged to seek an IRS private letter ruling … primarily over the question of: Are dues tantamount to rent, or is it a fundamental use right?” he said.
The comments suggested that ClubCorp’s issue stemmed not from any change in the political environment, but rather that the company might not meet the basic definition of a REIT: a company that generates income from rent on real property. That should come as a breath of fresh air for companies looking to become REITs, meaning that ClubCorp’s comments about a hostile political environment for conversions may have been a false alarm.
ClubCorp has been under pressure to become a REIT over the last few months.
In September, small activist firms Red Alder LLC and ADW Capital Partners LP said they had teamed up to take a “significant” position in ClubCorp and believed it should become a REIT.
The activists pushed the company to split into two as an OpCo and a PropCo, saying the new REIT could expand with other properties not in the golf and country-club world and estimated that the combined stocks could be worth up to $36 a share.
The company on Monday rejected the split option as one that would impede growth and its ability to continue buying up new courses and clubs. That left only the whole-company conversion as an option, which is where the IRS objection to a majority owner comes in.
KSL, a private equity firm, had bought ClubCorp in 2006 and took it public in September 2013. It sold a chunk of stock in June, but still owns about 51%.
The news Monday wasn’t all bad. ClubCorp forecast it would earn $1 billion in revenue next year and $225 million to $235 million in adjusted earnings before interest, taxes, depreciation and amortization. Analysts polled by Thomson Reuters had expected $975 million in revenue and $224 million in adjusted EBITDA for next year.
Red Alder and ADW had expressed support for management and its success in its September letter. Red Alder is run by Schuster Tanger, the son of the family who runs Tanger Factory Outlet Centers, while ADW is run by Adam Wyden, son of Sen. Ron Wyden (D., Ore.)
ClubCorp’s stock was down 2.23% to $17.99 on the New York Stock Exchange at 3 p.m. on Wednesday, the day of the investor call.