My Largest Investment: Interview With RCI Hospitality (Strong Buy Reaffirmed)
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My Largest Investment: Interview With RCI Hospitality (Strong Buy Reaffirmed)
RCI Hospitality (RICK) is the only publicly listed company that specializes in the ownership and management of adult nightclubs. It owns a portfolio of 56 high-quality clubs, mostly located in rapidly growing markets like Miami:
I have previously described it as a "REIT on steroids" because it is able to buy clubs at 20-33% cash flow yields, resulting in massive spreads over its cost of capital. Most REITs are happy to buy properties at 5-7% cap rates, earning far smaller spreads in comparison.
Moreover, RICK has a major competitive advantage in that it is the only acquirer of clubs with large scale and access to public capital markets, and this happens to be a very fragmented sector with lots of owners approaching retirement.
It puts RICK in a great position to consolidate this highly rewarding and inefficient sector that has many potential sellers, but few buyers due to the social stigma and unique complexities of managing such assets.
RICK can use retained cash flow, seller financing, and raise equity and invest it at 20-33%, pocketing the huge spread in between. Even better, most of these clubs have significant value-add potential. RICK is commonly able to boost the cash flow of its new acquisitions by another 15-20% by simply changing their menu, pricing strategy, implementing management best practices, and reducing some costs thanks to their economies of scale:
This has historically allowed the company to grow its FCF per share by ~20%+ annually, and this rapid growth coupled with some multiple expansion has already earned investors a little fortune. The shares of RICK 10x:ed investor's capital over the past 10-year period ending in 10/31/2022:
And I believe that it is still just getting started.
RICK today owns only 56 clubs, but there are 500+ clubs in the US that fit its acquisition criteria, and each new acquisition has a major impact on its bottom line because of it is still relatively small in size.
Therefore, I think that the company is likely to keep growing its cash flow at a rapid pace for many more years to come.
Despite that, it is today priced at just 7x its FCF, which is exceptional for a sector leader with such rapid growth prospects.
This is why I am so heavily invested in the company. I just don't know many other stocks that offer as much growth potential for such a cheap price and I expect it to result in exceptional returns over the long run.
What's the catch?
Well, the catch is that the company's business is much more volatile than that of a typical REIT so if you are going to invest in it, you need to be patient and be willing to endure long periods of high volatility.
There is no long-term lease to protect the cash flows and the past 4 years have been especially volatile because of the pandemic. It led to a lot of bumpiness with its same-property performance first surging at the reopening as everyone was looking forward to having fun and had stimulus checks to spend. Moreover, international borders had not reopened yet so people were traveling domestically and Miami was doing especially well. That's where some of RICK's biggest clubs are located.
This strong performance coupled with some major acquisitions caused the company's share price to surge.
But unfortunately, this exceptional performance was not sustainable. Stimulus checks eventually ran out, people returned to international travel, and consumer behavior normalized.
This caused the same property performance of its clubs to suffer in this post-covid normalization period of 2023 and 2024. It also prevented the company from acquiring new clubs because sellers were asking for too much, basing their valuations on the exceptional years of the reopening.
So we saw a boom, then a correction, and we are now in the stabilization phase.
This is also well reflected in the share price of the company. I started buying shares at around $15 in 2020, I then saw it rise all the way to $90, and it is now back down to $45.
I think that we are now likely at an inflection point, which could mark the beginning of a new multi-year bull run for the company.
We reached out to the CEO of the company, Eric Langan, to learn more about all of this. Eric built the XTC Cabaret nightclub brand and later merged it into RICK in 1998, which is when he became the CEO of the company. Two decades later, the company is still owner-operated and Eric is still the second largest shareholder of the company. In a previous call, he told us that he has 87% of his net worth in RICK stock and has no plans to sell any of it. His stake is today worth about $32 million:
We first provide a summary of all the main takeaways. We then also share a transcript of our call. Please note that the conversation was nearly an hour long so some parts of the call were deleted and some responses were slightly edited for better clarity.
In case you haven't already, we recommend that you start by reading our investment thesis by clicking here.
My Main Takeaways
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