RCI Hospitality (RICK) share: my biggest investment
Typically, most investors’ biggest investment is something like Amazon (AMZN) or Alphabet (GOOG, GOOGL): a mega-cap stock that’s part of the S&P500 (SPY).
My largest investment is RCI Hospitality Holdings, Inc. (RICK), a small cap specializing in the ownership and management of strip clubs. I invest so much in it because I think it has a clear path to rapid growth as it acquires high quality strip clubs at very low multiples.
He has $40 million in cash and access to relatively cheap capital through seller financing and traditional debt, as he adds mortgages on the real estate he buys with the clubs.
Its cost of capital is less than 10%, but it acquires assets at 3-5x its cash flow. The accretion is very important and has allowed the company to grow by more than 20% per year. We expect this rapid growth to continue as they acquire additional clubs. She’s acquired 15 in the past year, growing her portfolio to over 50 clubs, and she’s just getting started!
With a path to over 20% annual free cash flow (“FCF”) growth, RICK is a bargain at just ~7.5x FCF, and we think it offers a realistic path to quadruple your money at over the next 5 years.
If you missed our last article on RICK, I recommend you read it before diving into today’s update.
CLICK HERE TO READ OUR LATEST ARTICLE ON RICK
I’m writing this follow-up today because RICK recently announced another club acquisition.
This deal is particularly interesting because it is large, highly accretive, and it highlights RICK’s smart approach to deal structuring.
The club they buy is Cheetah Hallandale Beach, located in Hallandale Beach near Miami. It is one of the biggest clubs in the area and RICK’s management knows it particularly well as it is located close to three of its biggest clubs:
- by Scarlett is just across the street!
- Tootsiesthe largest club in the country, is only 10 minutes away by car.
- And playmates club is 30 minutes south.
So Cheetah is the 4th club in this area. Ed Anakar, President of RCI Management, said:
“Cheetah fits perfectly with our renowned Miami-area brands, each of which caters to different market segments – mega club Tootsie’s Cabaret in Miami Gardens, party club Scarlett’s Cabaret in Pembroke Park and hot Playmates Club of Coral Gables.”
The Cheetah is a 14,000 square foot building and it sits on a 2.2 acre property at the intersection of busy 95/858:
Below I share some pictures of the club itself:
The purchase price is $25 million and includes the real estate, which is probably worth half that alone.
RICK CEO Eric Langan estimates the club should generate around $4 million in EBITDA based on its current operations.
But this will increase as RICK increases its margins by reducing costs and improving its management. Pro forma, RICK’s largest shareholder expects the property to generate over $5-6 million in EBITDA once the value add is implemented. RICK is used to paying 3-5 times EBITDA before value added, so the $5-6 million EBITDA would make sense for a purchase price of $25 million:
That’s huge considering RICK’s current run rate is around $100 million in annual EBITDA. This means that this unique acquisition has the potential to increase the company’s EBITDA by 5%.
And RICK can continue to make such deals over and over again given the way he structures them.
This included a cash payment of $10 million and the remaining $15 million is vendor financing with a 10-year term and a 6% interest rate. RICK is able to secure such attractive financing terms because, as we explained in our previous update, there simply aren’t many buyers for these clubs and since RICK is the preferred buyer , it enjoys strong bargaining power with sellers when negotiating its financing terms.
Additionally, the sellers of these clubs would often be hit with a massive tax bill if they took the full purchase price in cash on day 1, and as a result they are often happy to provide seller financing in exchange for a relatively modest interest rate, especially as they consider RICK a safe borrower due to its large scale and reputation.
For RICK, this is fantastic because it means he doesn’t need to invest a lot of money in his acquisition. The cash on cash return will be phenomenal since it acquires around $5 million in EBITDA! After interest charges, the return would be 30% and more since he is only investing $10 million.
Where else can you get such feedback?
An even better question: where else can you get such returns from a relatively defensive asset? (High-quality, moated, recession-proof strip club that enjoys high margins and a barrier to entry due to licensing.)
I don’t know of any other investment with such an attractive risk-return ratio and that’s why I like RICK so much.
And the best part is that RICK can close many of these deals since he had $40 million in cash. Additionally, RICK currently generates approximately $1.5 million in free cash flow each passing week. About half of that is currently spent on buybacks because management feels its stock price is too cheap, but there’s nearly a million dollars left each week, which will accumulate over time and allow RICK to pursue even more acquisitions.
What I mean here is that RICK does not need to raise equity to grow quickly. If it can close only a few such transactions each year, RICK can increase its FCF by 20% or more. Meanwhile, he also continues to build and franchise his Bombshells sports bar concept, he buys back shares with a very high FCF yield, and he also develops other businesses like his own version of OnlyFans (Admireme) and his own NFT that provides benefits. in its clubs to attract the youngest. All of this is additional growth.
How much are we paying for this growth opportunity?
They come out of the year with about $100 million in EBITDA as a run rate, potentially more once you factor in this acquisition. If you take out ~$10 for taxes, ~$5 for maintenance investments, ~$8 interest charges, and you get nearly ~$80 million in FCF.
The current market capitalization is $520 million, so we only pay 7.5 times FCF.
Now imagine if they can continue to grow at 20%+ for another 5 years and during the same period its FCF multiple increases to 15x FCF. That would be over 4 times your money.