RCI Hospitality Holdings Inc (RICK) 2022 Q3 法說會逐字稿

Good afternoon, everyone. We're going to be kicking this call off very shortly. Hope everyone is ready for an entertaining call that will be just as good, if not better than the last one.

We've just surpassed 100 listeners, so we're going to go ahead and kick this off. Greetings, and welcome to RCI Hospitality Holdings Third Quarter Earnings Call. You can find RCI's presentation on the company website. Click Company and Investor Information under the RCI logo. That will take you to the company investor info page, scroll down and you'll find all the necessary links.

Please turn with me to Slide 2 of our presentation. I'm Mark Moran, CEO of Equity Animal and I'll be the host of our call today. I'm here with Eric Langan, President and CEO of RCI Hospitality and Bradley Chhay, CFO of the company.

Please turn with me to Slide 3. If you aren't doing so already, it's easy to participate in the call on Twitter spaces. On Twitter, go to RICK CEO and select the space titled DollarSignRICK 3Q '22 earnings call. (Operator Instructions) RCI is also making this call available to listeners through a traditional landline and webcasting. (Operator Instructions) This conference is being recorded.

Now turn with me to Slide 4. I want to remind everybody of our safe harbor statement. It reminds you that you may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated.

We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

Now please turn with me to Slide 5. I direct you to the explanation of non-GAAP measurements that we use. I'd also like to invite everyone listening in the New York City area to join Eric, Bradley and myself tonight at 7:00 to meet management at Rick's Cabaret, 1 of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street between Fifth Ave and Broadway, a little in from Herald Square.

If you have an RSVPed, ask for Eric or me at the door. Now I'm pleased to introduce Eric Langan, President and CEO of RCI Hospitality.

Thank you, Mark. Thanks for joining us today. The third quarter benefited from higher sales, continued rebound in Nightclub service revenues and sequential improvements in Bombshells. Year-over-year, nearly all our key metrics continue to increase on a double-digit basis for both the third quarter and the first 9 months. This resulted in a particularly strong free cash flow and adjusted EBITDA in the third quarter. Net cash from operating activities and free cash flow were further enhanced by a receipt of a tax refund I've mentioned on previous calls. We continue to execute on our growth plan and capital allocation strategies.

During the third quarter, we continued to buy back shares. We acquired the Playmates Club in South Florida. We also purchased for the 13th company -- purchased property for the 13th company-owned Bombshells. To date, in fourth quarter of 2022, we bought a club in Odessa, Texas that we have rebranded it and plan to reopen on August 18 as well as opening the rebranded Scarlett's Cabaret in San Antonio, Texas, that will also open August 18. We also bought the well-known Cheetah Club in South Florida, and we continue to take advantage of market conditions to buy back shares.

Now here is Bradley for a review of our financials.

Thanks, Eric, and good afternoon to all those listening. All of our comparisons in this call will be to a year ago third quarter, unless otherwise noted.

It is important to note that this was the first period since the first quarter of fiscal 2020 that was not affected by COVID restrictions. Looking at the numbers, we generated a record total revenues of $70.7 million, up 22.2%. EPS increased 8% to $1.48. Non-GAAP EPS increased 18% to $1.60. Net cash from operating activities was $18.9 million, an increase of 26.2%. Free cash flow totaled $18 million, which is up 39.1%. Net income attributable to RCI common stockholders was $13.9 million, up 13%, and adjusted EBITDA totaled $24.6 million, which is up 20.6%.

Please turn to Page 7. Our Nightclub segment had an excellent third quarter. Revenues totaled $54.7 million, an increase of 33.3%. Operating margin was 41.1% and 42.7% non-GAAP. Operating income was $22.5 million GAAP and $23.3 million non-GAAP. Highlights included $11.8 million in sales from fiscal 2022 acquisitions and 50.8% increase in our higher-margin service revenues. On a sequential quarter basis, revenues increased 13.5%. Non-GAAP operating margin expanded 321 basis points and non-GAAP operating margin increased 22.7%.

Please turn to Page 8. We created this slide to show the strong progress we've made in the Nightclubs segment since pre-COVID first quarter of 2020. At 77.3%, Nightclub revenues as a percentage of consolidated revenues have returned to just under where they were, at 36% service revenues as a percentage of consolidated revenues, have now slightly exceeded the pre-COVID level. As you can see, Nightclub revenues are closely linked to service revenues. Both of these trends reflect the combination of the rebalance and growth of existing clubs and the addition of club acquisition against the growth of Bombshells revenue.

Please turn to Page 9. Bombshells also had a great third quarter. As we mentioned on our third quarter sales call, revenues declined 1.8%. That was due to a tough year-over-year comparison against an unusually strong third quarter in fiscal 2021, which, by the way, was our record highest revenue quarter for Bombshells ever. That's when Bombshells sales and margins experienced a huge benefit from being one of the few bars and restaurants open in Texas due to the state of COVID at that time. Otherwise, Bombshells experienced typical seasonal trends in the third quarter of this year and results were in line with expectations. I'd like to point out that operating margin came in at 19.4% GAAP and 23.6% non-GAAP. On a sequential quarter basis, revenue increased 3% -- non-GAAP operating margin expanded 94 basis points, and non-GAAP operating income increased 7.2%.

Overall, we think that we're doing a great -- up of managing food and labor inflation.

Now please -- page 10 to review our consolidated -- quarter unless otherwise noted. Cost of goods sold improved 13% as compared to 15.3%. This improvement reflects the increase of sales mix of high-margin service revenues in the Nightclub segment. Salaries and wages were slightly higher at 24.6%. This reflected the addition of employees at acquired units along with new mandates, which increased minimum wage in some of the states in which we operate. SG&A -- totaled 2.1% as compared to a small gain. This year's third quarter reflected -- 32% with non-GAAP operating -- partially offset by higher sales and lower weighted average interest rate.

Please turn to Page 11. Cash and cash equivalents were $37.5 million on June 30. I'd like to point out that this was after utilizing more than $12 million for share buybacks during the 9 months, as portion of the Playmates acquisition and the down payment for our Bombshells location in Rowlett, Texas. Free cash flow for the third quarter totaled $18 million or 25.5% of consolidated revenues. This included a $2.2 million tax refund Eric mentioned. However, excluding that, free cash flow was 22.4% of consolidated revenues. That compares favorably to the 6.68% a year ago and 7.37% 5 years ago.

Our refinancing enables us to smooth out our debt maturity schedule. Our amortization continues in the $7 million to $8 million annual range for the next 4 years which is very manageable with our cash flow to pay off our balloons, periodic refinancings, enables us to convert higher rate seller financing and other unsecured financing into lower rate commercial real estate bank debt. We currently have multiple unencumbered properties in our portfolio. Should we need additional capital, we can borrow against them. Our occupancy costs were 6.7% of revenues. This continues to be well within the 6% to 9% range that we average when sales weren't dramatically impacted by COVID.

Please turn to Page 13 to look at our June 30 debt pie chart. Our debt now consists of 63% secured by real estate, 23.7% of seller financing debt, this is secured by the respective club to which it applies. 4.1% debt secured by other assets and 9.2% of unsecured debt.

Now let me turn the call over back to Eric, and thank you.

Thank you, Bradley. We continue to talk to new investors, so I'd like to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10% to 15% on a compound annual basis. Our strategy is similar to those outlined in the book The Outsiders by William Thorndike.

These study companies that focus on generating cash per share and allocating that cash effectively to generate more cash. We have been applying these strategies since fiscal 2016 with 3 different actions, subject, of course, to whether there is strategic rationale to do otherwise.

One is mergers and acquisitions, specifically buying the right clubs in the right markets. We believe we like to buy solid cash flowing clubs at 3x to 5x adjusted EBITDA using seller financing and acquire real estate at market value. So far this fiscal year, we have deployed $141.8 million in capital, $45.8 million, which was cash, $66 million, which was debt and $30 million, which was equity to acquire 15 clubs in new and existing markets.

Another strategy is growing organically, specifically expanding Bombshells to develop critical mass, market awareness and sell franchise. To date, this fiscal year, we deployed $6.8 million in capital, $2 million in cash, $4.8 million in new debt to open our 11th location, buy a property for 2 more locations. The third is under contract. In addition, our first franchisee opened in San Antonio, and we signed our second 1 for the state of Alabama. Our goal in both M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. Sorry, the third action is buying back shares when the yield on free cash flow per share is more than 10%. As of last Friday, we deployed $14.3 million in cash to buy back 255,962 shares this fiscal year at an average of $55.91.

Please turn to Page 15 to review our growth initiatives. We've accomplished so much already, so I'm going to focus on only the new developments since our second quarter call. In our Nightclub segment, we acquired a club and its asset in Odessa, Texas in July. We plan to reform it into PT Showclub and open it up on August 18. We think PTs will fit well with our other 2 clubs in that part of Texas. We also plan to reopen a reformatted club in San Antonio on August 18. Also in July, we acquired the Cheetah Club in Hallandale Beach in South Florida. Cheetah is a well-known with a very strong following. We believe it fits well with our 3 other clubs in North Miami Dade, South Broward County area, which includes Tootsies Cabaret. These acquisitions are all part of our effort to add $20 million of adjusted EBITDA in fiscal 2023. We have a number of meetings lined up with club owners to talk about acquisitions at our Exotic Dancer Expo Conference next week in Las Vegas.

In our Bombshells segment, during the third quarter, we acquired property in Rowlett, Texas for our 13th location. We continue to look for more locations in Dallas, Austin, Florida and Phoenix. Our first franchisee opened in San Antonio and is continuing to do very well. The second franchisee is close to finalizing its first site in Huntsville, Alabama, and we continue to be in serious talks with other potential franchise groups.

Regarding capital management. In the fourth quarter, we sold an excess parcel in Philadelphia for $6 million in cash after paying down related debt and expenses, we received approximately $3.5 million in net proceeds. We still have 2 more pieces of real estate under contract for a combined sales price of approximately $3.5 million.

Turning to Page 16. With our new acquisitions, we wanted to give you a better picture of the geographic focus. In third quarter 2022, our regional revenue breakdown was Texas 41%, including Bombshells; Florida, 22.7%; New York, 8.6%; Illinois, 6.8%; Colorado, 6.6% and the other 8 states combined for 14.2%.

Turning to Page 17. I'd like to update you on how we are hunting new technology to drive club traffic and, in particular, attract the next generation of customers. Our guest benefit -- our guest benefits NFT program is in presale mode payable with a credit card online now. We currently plan to meet at the end of the month. This will be the ultimate party pass with an annual event at [Tootsies] access to other private parties, VIP experiences, a wide range of other benefits. Response has been very good. In Miami, our new social media platform, we currently plan to fully launch sometime at the end of August or beginning of September similar to Only Fans and enables entertainers to post content receive payment from admires. This will enable entertainers to build an Internet business as well as our club business with us.

This ends the formal presentation, a big thanks to all of our teams, Nightclubs, Bombshells and especially our corporate team for all their hard work and dedication. And with that, Mark, let's start taking questions.

(Operator Instructions) To start things off, we'd like to take questions from Rick's equity research analysts and then some of its larger shareholders. Our 3 analysts that are on the call are Rob of Granite Research, Anthony of Sidoti and then Josh who works for Joe Gomes of Noble.

Let's start off with Rob of Granite Research.

Congratulations about the quarter. Can you discuss the plan for Fort Worth, when you think that might be closed and then estimates for opening? And if you're going to look in the rebranding the facility?

Sure. We're definitely going to be remodeling, rebranding facility. We're waiting on the [platt] at the county level. Unfortunately, there's not much we can do to speed the process up. However, we have talk with the owners. They've given us keys. We have the architects and we're starting to drop remodel plans and get that ready. I suspect we'll probably open within 3 months of actually closing on the property. I believe the liquor license is in place, the adult entertainment license are already in place. So basically, it's just a matter of remodel, rebranding and of course, getting this platt done so that you can get a title coming from the title policy.

And then just shifting gears, can you talk about real estate pricing in this environment? Has it backed up at all? Is it helping you in terms of Bombshell locations?

I don't know that it's backed off a lot. We did recently make an offer on a property in Austin, Texas for Bombshells that was accepted yesterday. So we will -- that we have been looking at for some time, but the price was just -- was crazy. They finally came down to the price that we had offered and in contact with us. So we're going to do that. We may end up with a partner or a franchisee at that particular location. I'm not sure how that's going to go just yet. It's very early so we just got it under contract yesterday. We are also looking at multiple other sites at this time.

Great. And then I'll ask 1 last question and then I'll circle back in the queue. But can you just discuss the general contract or pricing trends you're seeing? Has it had any impact in terms of building out Bombshell locations? Or just in general, what you're seeing in there?

Sure. I have definitely slowed down. We had the original bid that came in on Stafford location. We have done the demo there. We have started no construction. I am making 2 different GCs -- right now, steel prices come down, lumber prices has come down. But the biggest problem that we're having are the subs have had so much work and so demand that they're just demanding crazy prices.

And I said, look, we're just -- we'll wait. We're not going to overspend just to build and try to meet some, if the ROI is not there. We'll take our time. We'll build slowly. We'll wait until certain things, maybe the roofing will come down and we'll find the right roof or you'll build it at a price that we are happy with, and we'll throw the roof on. Like we did with the tear-out we actually ended up with a company that came in well under the other bids because they had some -- they had an open space and one of the work. So we'll wait until they want the work and then build it that will be -- do and peace mill it together -- are very minor on these properties. (inaudible) sometime in mid-September or early October on that location. The Lubbock location where we have the final zoning hearings, I believe, in early September, I can't remember the exact date, first 15 days of September. We have worked forward on the plans, and so we should be able to apply for billing permits as soon as the zoning issues are all resolved.

And hopefully, we'll get that 1 started under construction sometime in December, early January. That's the current plan.

Thanks so much, Rob, for the questions.

We'll deal with those then. And so far, the cost has been, but we did have acquisition costs in here in this quarter that, in fact, can probably raise the overall G&A a little bit as well. So we may or may not see more of that because we actually close on a couple more acquisitions in this quarter and what type to see how that goes as we progress through time.

Got you. Okay. And in terms of the acquisitions, so since you closed the quarter, you announced the Cheetah's, Gentleman's Club as well as the Odessa Club. Just can you help us perhaps to think about those as to how we should think about the revenue and EBITDA run rates or contributions from those?

Sure. Cheetah is about $10 million. We expect EBITDA around $4 million. We could see some slight improvements on that. We're just going to have to -- like always have to get a few quarters in to figure out where we're at. But I think that's kind of where we're at right now.

The Odessa club, I'm going to guess -- similar to the Rick's type location, probably $1.8 million of revenue, which would put us probably around $600,000 a year in EBITDA on that one.

Got you. Okay. And then -- so just to circle back as far as the -- you mentioned, Eric, that you think the worst of the cost pressure is over. So now that that's kind of behind you. So as far as your operating margins kind of going forward, would it be reasonable to assume sequential improvement in your segment operating margins?

I know the business is seasonal, but if you could just kind of speak to that, that would be great.

I would say not in the next quarter, for sure. I think our goal is 30% EBITDA and 20% free cash flow on revenues. That's kind of where -- that's our target. I think we can do a little better, sometimes we may do a little under sometimes.

But overall, I think we'll -- if you take over a 1-year period, I think we're going to be very close to those numbers. So this season -- or this quarter, July, August, September is always our seasonal quarter will return to a more normality as what I'm seeing now that all the COVID restrictions are gone, people are traveling for holidays. So we're seeing our typical summer slowdown versus our prime season October to May, which to me is very exciting because that tells me if people are going back to a more normal lifestyle, we're going to see nice jumps from October, November, December and basically running through May.

I think this year, our first quarter of fiscal '23 is going to be a record quarter for us as New York City goes from 45% office occupancy and people working in the office to 85% in October, November as I believe the trends I've been reading about and hearing they're expected, which will help our service revenues in New York City even more.

I think you're going to see that in other markets as well as people, like I said, just returned to a normal life and normal patterns again. So I'm very, very excited about how that's going to play out for us during our prime season of fiscal 2023.

Next up, we have Josh of NOBLE Capital Markets. Josh, take it away.

So I just kind of want to start off with the Bombshells. I know that you're talking to a few just franchising groups. Can you talk about just kind of how the talks are progressing? Is 1 group kind of further along than others?

Yes. It's definitely all in different stages. The (inaudible) Group has 3 sites picked up for us. On the way back from Vegas, I'm going to stop in with David Simmons or we're going to buy back from Vegas together and stop in and they've got 3 sites picked out. We're going to look at those locations and give them approvals or declines on our opinions on those 3 locations. If we approve a location, we'll probably get into -- get the contract, the franchisee contract done. All franchise contracts have to be tied to a specific location -- on the first 1 before we can create the franchise agreement. So hopefully, we find 1 of our 3 locations we'll be able to approve and get them signed up what you give us our third franchise at this time.

I know the San Antonio group is looking for their second location right now as well. So hopefully, we'll have some more information as we progress through the quarter on franchisees for Bombshells. And like I said, we have a few others we're talking. Some are [bedding] process. Some are basically trying to figure out where they want to locate at and to get us locations for approval. So we'll just have to see how that plays out over the next couple of months. I know that recessionary fears have some people spooked a little bit. I know that interest rate increases are going to be a kind of concern if interest rates continue to climb. So we're just take it day by day and just keep working every day towards our goal.

Can you kind of led me to my next question. Obviously, you got recessionary fears that are out there at least among some people, just the general public. And kind of that leads me to the question of like, are you seeing a drop in visits to your clubs just due to this economic environment we're in?

I mean at typical summer slowdown, I wouldn't call it drops and visits. I don't think the customer spend has changed hugely at this point. As you can see from the last quarter through June 30, at least, our VIP spend has been fantastic. I've talked to the -- to different club managers and our upper management guys. And they say the VIP spend is still fairly strong. The biggest thing we're hearing is that people are on vacations. And so that's interfering with their normal flow schedules to the clubs and whatnot, but not in a huge way. And we're just going to have to -- I don't think we're going to really know if the recession is going to cause any problems until October, November, December. And I think any recession hit will be offset or more than offset by people returning to work and returning to the offices. So pick up our happy hours, we'll pick up our daytime lunchtime business.

And I think business -- people return to the office, I think business travel will increase again. So we have certain locations that we'll benefit from that. So I think overall, we'll be in great shape and the rest we'll make up with acquisitions. So I don't think we'll see much slippage at all -- if we do -- I'm watching Mondays and Wednesdays, like I say all the time, watching them very closely. I see a weak Monday 1 week and then a strong the next or I see a very strong Wednesday, but then it's weak the next and vice versa on Monday. So I'm watching the weekends have been strong. And so -- right now, I don't have an answer as to what we're going to see or if we're going to see or when we're going to see a recessionary effect. But as of right now, I'm very happy with -- I know that I've been on Twitter a lot and I have seen some entertainers complaining about customer spend on the entertainers. We're not seeing that in our dance [dollar] sales at our clubs.

However, I don't know about the overall spend on [dancers] is if it's paid in cash. So maybe some of their cash customers have slowed down a little bit, and we don't know about it. But the growth that I talked to have been very happy. They're making money. And we're printing money, as you can see from our financials.

Yes, that's fantastic. And I just have 1 last 1 before I go back in the queue. I kind of want to give just an update on AdmireMe. Obviously, you guys were having talked about the soft launch last quarter. I just want to hear if there's anything just related to the traffic on it, if it's been going as you guys expected? Or it's been just surpassing your guys' expectations?

Right now, it's -- we're not really focused on -- we're trying to get it working correctly and getting -- we've got a couple of bug fixes that are going out right now in the next update. We finally getting the referral program put together. We thought we could do without a referral program, but we've now realized the more we learn, the more we do, the more we learn. The beta was good because it helped us get -- like the operational bugs worked out. But as we talk to influencers, as we talk to some of the larger people on only fans or entertainers and workers on only fans we realized some of the things we must have and how we have to set certain things up. Those are almost all programmed in and should be completed by the end of August, and then we'll start our launch because we'll have all the tools in place to do it right.

It's like a night club on the Internet. It's a chicken and egg. I can't get the girls because if I don't have the guys, I can't get the guys, if I don't have the girls. And so on the nightclub business, we have to get everyone there at the same time. So we've decided the soft launch, we're (inaudible) up and operating, but there's been no marketing, no push because a soft launch will not -- we don't leave in that space like a nightclub will not create the traffic we need on either side for the entertainers or for the content providers or the admirers to make it work.

So that's why we're going to do a much harder push sometime probably the first couple of weeks of September.

Next up, we have Adam Wyden of ADW Capital.

Yes, guys, look, I've been -- this, like. I think in the past, Eric, you never really had the balance sheet to support $15 million and $20 million EBITDA transactions. And I think combination of Bombshells, Lowrie, you taking the time and building this kind of free cash flow machine, we've got now the better a year of free cash, you can buy a couple -- if you wanted to, you could buy a few Lowrie's a year. I mean you're obviously slowing down Bombshells growth because the ROIs are not there. I don't like that. I love that. I mean it's so perfect, right? It shows the flexibility of mind the reality is materials costs are up, inflation is up, labor is up, like, why not be a buyer of these clubs at lower multiples, you own the real estate. In fact, these are the best inflation-adjusted assets, and you're the only owners of them. I mean I would be -- I think it's amazing that you've transitioned to focusing on clubs again, it shows a flexible mind.

I mean, do you think that we can take this from 100 to a couple hundred over the next couple of years because the math I'm doing is you guys could support about $50 million of EBITDA acquisitions through cash flow and balance sheet until you really start hitting walls.

And so obviously, with the stock, you can do more. But I mean, what's stopping you from ramping things up right now? Like -- and I'm not just talking about 20 a year, I'm talking about 50 a year.

Yes. I mean, I'm not -- nothing stopping us other than we have to find the acquisitions, do the deals, do the legal work, the due diligence. I'm talking with lots of owners. We're going to expo this year. We're going to put it out there everywhere. Our goal is to -- I think we can add about $200 million in purchases a year right now for the next 3 years straight and still stay under -- using about 65% of our free cash flow and still keeping our debt to EBITDA ratio under 3x. So I'm very excited about that. If we need to -- if the right deal comes along and we can step it up a little bit and push a little faster, we're going to continue to do that. You were absolutely right in that our focus is about 95% on clubs and about 5% on Bombshells right now. Because I do think in the next 3 months that there's going to be some great opportunities for us on the club side based on some of my conversations with guys right now with our hire.

We pay 3x [forever] or less for a long time, many years, -- we're starting to pay 4x to 5x right now for the big guys, for the limited clubs for the right licenses in the right markets and buying that market share up, and it has got a lot of guys talking to us right now. And I think we'll bring some of those guys onto our side of the equation soon, rolling up additional dollar amounts of EBITDA. I know we've been saying $20 million increase for 2023. If the talks go well, and everything goes well by our next -- by the end of the quarter by December, when we do the K, we may have a much higher larger target based on deals in the pipeline and I'll let everyone know at that time where I think we're actually going to be at and how that 2023 is going to go. I'll tell you I push my personal goal. I know we're 10% to 15%. We've been doing about 20%. I think 2022 will end at over 30% free cash flow growth. And I think that right now, 2023 is headed to be another 30% plus year as well. It's very exciting right now.

It should be higher than that, right? I mean if you're -- if you're not going to get the full -- I mean, if you can just do the math, right, like if you right now, you're run rating about $100 million, you'll probably -- I don't know the exact math, you'll probably clear $85 million of EBITDA for the full year. I don't know what the free cash flow will be. But if you exit the year at $105 million and you buy call it, if you buy $30 million you're at $135 million I mean you're going to be compounding EBITDA obviously at a much higher rate than $30 million in 2023 and presumably free cash flow faster because of how it's financed and all the rest and leveraging what you've got.

And so again, leveraging corporate overhead and what have you. And so like I mean, again, like 30% free cash flow growth would imply a much slower EBITDA growth. I mean, again, I feel like we have the same conversation every conference call, but it's like you put up these great numbers, you destroy margins, you generate cash and we trade at the same multiple. I mean, how do you guys think about getting the multiple to a point where you can actually grow more, right? Like you made a comment, you're like well, $200 million a year, but why not $500 million? I mean the only thing is the equity, right? So how do you think about kind of getting to a point where you can get this thing properly valued.

Well, I think I can take advantage of the tools the market gives me. And so it's up to you guys on this call. You guys have to decide if it's worth giving us those tools, paying the price for the stock, for the current cash flow and the future generation of cash flow. I think one of the biggest problems with Rick, especially through COVID. And so if nobody wants to value us on a go-forward basis, everybody wants the value us on a past run basis and give us no value for the growth. As you always say, they give us no value for the real estate or very little value for the real estate. And that's a huge advantage for us. If you look at typical restaurant stocks out there paying 8% to 14% occupancy costs. In other words, the cost with the use of their real estate to generate their cash flow, they're paying 8% to 14% for them.

We are now at 6.7%, one of our all-time lows. So those are the things that our capital allocation strategy has done for us. We are so focused on our cash-on-cash returns on creating the value for our shareholders and really keeping all of our costs in line to. COVID taught us so much the systems that Bradley put in place at the corporate office for our accounting systems give us information and tools in seconds instead of hours or days. And so we're able to just monitor these things, watch these things and continuously work to increase that. And I do believe that the market, at some point, is going to recognize, they're going to pay a premium for that future growth instead of just a past growth, and if not, then we'll just continue.

The beauty is we can do this either way. One way we're going to do it a lot quicker and 1 way is just going to take longer. So I guess it's just -- we're all here for the ride. And hopefully, we can -- right now, I think we're driving like a Toyota Camry, and I love to be in a Ferrari or Mambo, and really drive this thing at a much faster pace? Or as I know your favorite cars are Porsches, will even take a Porsche.

Yes. Look, it's sort of unfathomable. I mean when you think about the spaces we did with Edwin and we go back and we look at look, the stock is effectively with the exception of 2007 and '08, where the stock went up ahead of Vegas and you guys used the equity intelligently, but then went and bought back stock, whatever. I mean there's effectively been -- I mean, with a few select moments in time, the stock is effectively traded 5x or 6x EBITDA for basically the whole time the company has been public. And so like you've been able to -- and I mean, look, maybe you can comment a little bit about Lowrie, but like you've been able to buy businesses at 5x or 6x, right, and drive it down to 4x.

And so like in the absence of a currency, you've been able to use the cash on the balance sheet and your operating abilities to basically make deals work. But it's just incredible where you would be if, hey, the stock was trading at 10x, you bought a business with some percentage of stock and you bought it at 5x and took it to 3x. I mean this business would be $500 million of EBITDA in the heartbeat. And so like it's just look, obviously, in the absence of multiple expansion, right, you can look at the returns and you can say, okay, I'm buying this thing with I don't know, $105 million EBITDA, maybe that's or $9 a share of free cash flow, whatever it is. You're buying this thing at nearly a 20% or whatever $60, I guess it will be a 15%, 16% free cash flow yield. And if you can grow 30% free cash flow you're still getting a 45% total return without multiple expansion.

But I mean if you can get multiple expansion, I mean, the whole machine, like you said, it's just -- it's a Porsche not -- I mean this isn't even going to you Toyota Camry, It's a Pinto.

Adam, let me be honest. I'll be completely honest. We didn't deserve it before 2016, okay? We were young. I was learning. I never ran a public company. I was an operator of adult nightclubs, good one, I think. But as we moved -- as we grew into 2016, things change for us. We figured out capital allocation strategy. We figured out the compounding. We figured out ROI figured out cash-on-cash returns, and we became a financial machine that wasn't in the [circular business] where we're in the free cash flow business.

When I say that a lot. Now what I would say to the market is if you want to keep punishing us for pre-2016, then you have that right. But I would ask you to forgive our past ins, look at 2016 on, can't control what COVID did and slowed us down a little bit, but if you look '16, '17, '18, '19 go from 2016 forward and start valuing this and take us and compare us to other companies with that type of broker from 2016 on and say, are we being fairly valued compared to those companies.

And I think you'll find we're not being fairly valued as you continuously tell everybody. But like I said, I think that part of that is we have to get everybody to understand that there will be a transformation of this company after 2016 or starting in 2016. And I've been in some debates on Twitter with various people and try to explain that when you look at a 30-year run or 20-year run, I am not the guy was in 2012, 2013, 1999 when I took over the company.

We've grown. We have learned, and I think we have executed to a [T] -- or even better than we said we would execute from 2016 on. And I would just ask the market to take a look at that and value the company based on those things. And imagine it began where we're going to take this company over the next 3 years, the next 5 years, the next 10 years, and be a part of it.

We're looking for long-term shareholders. We're looking for guys that want to partner with us over the next decade and make lots of money and wealth and create lots of wealth. Our interests are aligned with shareholders. You know majority of my wealth is in as in my Rick's stock. It took me a long time to learn that the investment bankers that were leading me in my younger days were basically taking advantage of us. They were having us to use our equity at super high cost of capital with the premise that a lot of companies use, well, at least we don't have to pay that back. It's not debt, guess what, you're always paying it back because you're paying it back with a reduction in free cash flow and you're diluting your existing shareholder base. And I was a big portion. Going forward I think we're ready to go.

Yes. No. I mean, look, I think your comment around 2016 is a good one. I mean, again, I don't know how my numbers in front of me, but as I recall, the business was probably on the measure of $12 million or $13 million of EBITDA. I think we're certainly in excess of $100 million now. And so if you think about that, it's talking about '17, '18, '19, '20, '21, '22, I mean in 6 years, you've more than 8x the business on an EBITDA basis and more importantly, as you said, on a free cash flow per share basis, it's meaningfully, meaningfully more. And so yes, look, I don't think that those types of companies trade at whatever, 5x or 6x free cash flow, 15% yield, growing 30% doesn't deserve the thing. I mean, look, to be perfectly honest, the business growing free cash flow 30% a year should trade at 30x free cash flow, not at 6x free cash flow.

So look, I would encourage you to continue to find creative ways as you have done in the past, whether it's deals like Lowrie, where you buy them at 5 or 6 and you find creative ways to get them down to 3. But I mean, look, look, it's -- you've definitely been guilty until proven innocent and I personally know a lot about that.

So look, you got to keep punching them in the face, and eventually, they're going to bleed, right?

We're going to keep doing what we do.

Keep punching them in the face, eventually, they're going to get a bloody nose. That's what I'd say.

Thank you so much, Adam, for the question. Next, we're going to have [Terra] (inaudible), but I just wanted to throw this out there for anyone in the New York City area to stop by a meet management at Ricks after and I want to spend a special invitation to Terra take it away.

I really hope I don't get disconnected. My phone is dying rapidly. But I just wanted to say -- thank you, number one, for doing this on Twitter spaces as your platform for your earnings. I think that is a really good marketing decision. As you know, we can interact with you, Eric, the CEO of Rick's, which I think is just a really good marketing strategy -- and yes, I'm wrong on Rick, and I'm excited for the future of the company and the things that you guys have touched on here. I was wondering if you could elaborate a little bit on your future, I guess, endeavors as far as competing with only fans?

Sure. I don't know as much -- I mean -- the original idea was never to compete with Only Fans. It was more to create a web-based business for our entertainers so that they could draw customers into our brick-and-mortar, which would that the customers meet new girls, which would, hopefully, they would follow on AdmireMe, which would bring them into our brick-and-mortar business, right?

So we get a circular feed there of business. However, I've had a lot of, I would call influencers Only Fans. I don't know -- I don't know what the word is for the -- I call them whales in the casino business. So like the whales of Only Fans, we've had a lot of them say, hey, look, we would like to be on a site.

We would like to talk to you about having meet and greets for our followers at some of your clubs and do those types of things where we have a safe environment where we have security and we'd be protected basically if we wanted to do those types of things. And so we're talking with some of those girls now or I say actually girls, I should say, ladies or women, I think. They're all over 18. And we're very interested and very curious as to can we create this? Can we make this work, especially in markets like New York, Miami, Denver, Chicago, where a lot of these big influencers seem to live and have reached out to us from.

We got to get the site up and running. I think we're some very creative stuff as we move forward and [porn] stars in the industry with some combination of brick-and-mortar performances at some of our night clubs around the country as well as through AdmireMe and different social media deals as well. So it's going to be a lot of fun, I think. I'm very excited about it. It was kind of a let down because when the Ukrainian war broke out and put us months behind on this, I really thought we'd have this thing going at a much better pace right now. But all of our programmers were in the Ukraine -- and we finally -- they finally got situated in places where they could get back to work and get this project done.

And so we're very happy for them in that regard as they're safe and we're ready to build this thing. We just -- it's got to be right. We've got to be able to -- one of the biggest things that we had, we were having issues with the private sell-through the private messaging, that is all fixed and up and operating now, which we were told is a very huge part of their revenue is selling private videos and private photos and those types of things through DM.

So we're happy to get all that done. You can answer anything else with let me know.

That is perfect. Thank you so much, Eric, for answering. And answering so clear and concisely. And yes, like I said, I think doing what you guys are doing. Mark and yourself and coming to Twitter where you can interact with shareholders and have this open dialogue in regard to the future of the company is not only very transparent, but also I think it's just extremely bullish because you're just opening yourself up to that many more potential investors.

So again, I really appreciate it. I appreciate your time and letting me up to ask a question.

And I love it because it puts me in a position where I feel like I'm operating the night clubs again. One of the things I loved about the nightclub business was I threw the party every day, I was talking to people every single day. And as I moved into the corporate world, I kind of lost that. And so Twitter, for me, especially in the last 3 or 4 months, and recently, it's just gotten so fun. It's so exciting. I get to interact with end users. I get to interact with investors. As you've seen on some of my Twitter feeds, I'll spontaneously go, I'm going to the club tonight come see me. And it's great because 7, 10, 15 people show up. We have some drinks, we'll talk. And I get direct feedback of exactly where we're at, what we're doing right, what we're doing wrong, I get to get the idea.

The reason we always -- I think one of the things that made us our company so great as we're able to talk -- upper management was involved in the club operation. They still are just at my level, it's been harder, and Twitter has given that back to me. So I'm very excited about that.

Next up, we're going to bring Eric to speak, Eric take it away.

And thanks to -- just wanted to get some clarity on the Cheetah acquisition. So we can kind of understand exactly how these acquisitions are valued. I know in the press release that you said that you expected $4 million of adjusted EBITDA for the club with $25 million of total purchase price for both the club and the real estate -- so that's a bit over a 6x multiple.

I don't know if the club is being valued at 3x to 5x, and there's some rent paid to the building? Are there something else going on there? Or maybe it's $4 million now, but you expect a higher run rate. But just helping understand the underwriting of that acquisition would be really helpful.

Sure. So let me give you the basics. What I look at is this is -- we have a 10-year (technical difficulty) promissory note at $15 million. If you take that and divide it out, you get the payments (technical difficulty) it's basically a couple (technical difficulty) basically, our cash-on-cash return is going to be about 33%. Maybe it's a little more, maybe it's a little less depending on how much savings we get. I know we're going to save on their insurance. Their insurance costs were much higher than ours. We look at a couple of other things we say -- we think we can save a few points off the cost of goods and this and that.

So hopefully, overall, maybe that $4 million becomes $5 million, $4.8 million, something like that. You pay out but you stop them. Basically, we need to make a little over $3.3 million a year to get that 33% return. I think we'll do that. And the rest is just basically the rent. I always call it managed to own, right? We're going to take owner financing. We're going to pay the owner 60% of its free cash flow or 40% of its free cash flow and then we're going to take the rest, give him cash for and then earn that cash back in basically less than 3 years, so that we come up with 33%.

And in a worst-case scenario, it takes us 4 years and it's a 25% return. And I'll do deals like that all day long. The 6x -- the real estate was a very big portion of this. I don't know if you're familiar with the property. It's 2.2 acres on Hallandale Beach Boulevard right off of 95, unbelievable access both to the beach and the freeway, you can't beat it. We bought -- to give you an idea, we bought the Scarlett's property across the street. I think Scarlett's is only 1.9 acres, and we paid $7 million for that property.

So we didn't really value these things separate. We did it as a global package because the financing that the owner offered was so great for us that we really weren't overly concerned with getting to a multiple but more of a cash-on-cash return. So that's how this one in particular was valued. That's not -- it's rare because we don't normally -- a lot of the owners don't want to carry that much paper or not, but that was fantastic. And he is 82 or 83 years, so I can't remember how old Joe is. He is in his 80s but for him, he's got a big monthly payment coming every single month guaranteed for the next 10 years. He knows our reputation. He trusts our management team. He knows Ed Anakar very, very well. Ed and him have talked many times over the last 5 years and had a good personal relationship.

And we're able to harness that trust and that -- what we've done in the industry and use that to a great deal for us and a great deal for jobs. So I just think it was a win-win transaction all the way around.

Okay. Appreciate that. That's very helpful. And then one more question, kind of following up a little bit on Adam's comments, but maybe 5 years ago on these earnings calls, you'd talked about how banks -- Rick wasn't at the point where banks would finance it. Cost of capital is so much higher. Obviously, you just said the cost of occupancy is as low as it's ever been. So RCI eventually got to the point where banks would finance lowering that cost of capital and obviously making everything that much better.

Are there any other, over the next 5 years, as you try and get a larger shareholder base? Are there other tangible benefits like that, that you see as the company continues to grow and mature?

I think the next is our equity. If our equity becomes our cheapest cost of capital, then it's able -- we're able to grow at a much higher rate. We keep these top ROIs that we're doing at 25%, 30% cash on cash. The difference is that will go up even higher because we won't be having those huge interest expense payments if we're able to use the equity.

Obviously, we're going to be very cautious. We're not going to -- we don't want to go out and dilute our shareholders any time. We're not going to take undue risk just because our capital is cheaper. We're going to treat it just like cash. We're going to treat it just like the bank. It's just going to be -- we would use equity because that's the cheapest cost of capital to the company. If you look, we use debt more than cash because debt typically has been very cheap for us on a relative basis after taxes.

And so we're -- we just use the equation. It's all fifth grade, simple math in my book. I think Adam has really pushed me hard on if you had equity, how much faster could you grow? And we've started doing things if our cost of capital right now, which is between 6% and 12%, dropped to 4% or 5% we traded at a 20 or 25 multiple, I mean how great would that look? And how would the ROI on that become over time, especially as you compound year after year with that type of capital cost.

Eric, can I just clarify one thing. You said 6% to 12% equity cost of capital. But I don't -- if your shares are at $60 and you're doing $9 a share of free cash flow, then your equity cost of capital would be more like 16%? Now I agree with you, like, in general, if you think about how Warren Buffett value securities, right? He basically value securities as to what is the in-place free cash flow yield and what is the organic earnings growth, right?

And so in this specific case, you have a 16% free cash flow yield, your earnings growth is probably at least in the -- for now, at least 15%, right, because you're going to grow volumes, you're going to grow price, maybe build some Bombshells. And so in that specific thing, at the very least, right, you should be trading at a 16 multiple or 15 multiple of what your in-place free cash flow is, right, that your multiple is equal to your organic free cash flow growth and giving yourself 0 credit for M&A or capital allocation.

So if you look at See's Candies, for example, Warren Buffett bought it. He said, okay, this is the appraised per cash yield, what's going to grow organically, it's going to be my return. I mean -- so I mean even in a world where you had 0 M&A or 0 thoughtful capital allocation like at the very least, it should approximate what your organic free cash flow growth is, right?

And we know that you can grow 30% to 40% with M&A. So like, I don't know -- I agree with you, like a 4% free cash flow yield would be a 25x multiple of free cash flow, and that would be a substantial spread to what you're buying, right? If you're buying assets at 5x EBITDA, whatever call it, after you get tax advantages, whatever, maybe it's a 16% or 17% free cash flow yield when you factor in the depreciation and what have you. But I mean your -- I'm curious how you're getting to 6% to 12% or is my analysis making sense?

I mean you're always like 15 steps ahead of me. I have to sit down and write it down and do the math, get back to you as we were talking the other day, and I told you all my stuff at napkin math. Yes, I mean it makes sense. And yes, I understand that -- I agree with you that I think we're trading much lower, but I think the market is going to have to sit, I'd call it the reward system, right? The market rewards us for performance. So I don't know what the market wants to reward us with on what kind of multiple basis. Everybody sets in discount. And the reality is we should give a (inaudible) bonus. Our businesses are onboarded. Our cash flow is solid year after year after year. It's like we own the only bubblegum machine in town that you can get a bubblegum from. So we can want to charge a quarter, we charge a quarter. We want to charge $0.35, we charge $0.35. We just can't charge so much that nobody wants to have bubblegum.

And so I think at some point, that market is going to realize that. As we've talked in the past, I said we could be 50 clubs, we could be 100 clubs, we need 200 clubs. At some point, like waste management like other roll-up stories, we're going to get a premium. I don't know when that will be. I hope sooner rather than later because, as I've said, it makes everything faster. And it seems to me like the market -- the industry is ready to be rolled up more now after COVID than ever before. We're doing this since 1989, been rolling these things up since '99.

And I just think that the market is more ready than it's ever been, that the industry is more ready than it's ever been. We just need the tools. And that's what we're asking for. On these calls, that's why we switch the Twitter spaces. We've asked institutional investors, everybody talks about ESE. I don't need institutional investors. I need 1 million or 2 million of retail investors to go buy 10 shares of stock, go buy 20 shares of stock, 50 shares of stock, help us create the momentum we need, give us the tools and we'll build this thing and we'll grow with it.

And you can become part of our community, you buy our NFT, you can come into our clubs, came to do the discord, management has made theirselves accessible, I've made myself accessible. You're never going to guess, you're always going to know exactly where we're at and what we're doing. And as I say many times, what you see is what you get. And when things are bad, I'll tell you things are bad. I've said this quarter has been a little slower, it's summertime, but that's returned to normal. And I think that's how we're going to continue to do things forever.

And like I said, I think at some point, we'll reach the right people. We're not for everyone, not everybody should own our stock. But hopefully, you can find the right people that can and will and will create those long-term holders that will build this into a corporation and real company as you always reach.

Next up, we're going to be bringing The Blonde Broker to the stage. [Erin], take it away.

Yes, I just had a quick question. I noticed you mentioned you all were going to (technical difficulty)...

I think that Mark will do what Mark always does and capture the essence of Expo and one of the things we're really going to work on out there is we're going to have about 300-plus of RCI employees out there. And so we're going to be doing some interviews. So I think you'll see some -- as we move forward, you're going to see equity and we put some of those interviews on spaces and let you get to know some of our top executives around the country. I think one of the things that's missed in RCI story is that everybody thinks it's a one-man show or it's a couple of guys that own this. And we're a company with 3,000-plus employees.

We have 20,000-plus independent contractors. We're actually a very large company and growing at a very rapid rate. And I want to get that message out there, and I want more people behind the scenes exposed to the marketplace so that we realize just how big and how important and how dedicated our employees are. The number of employees that we have that have been with this company for 20 years, the number of companies in 15 years, 10 years, it's just an amazing number of people. And I want to -- I've told Mark and told -- I wanted to ask how many more years do you think you're going to be with this company? What plans do you have to leave there?

What other things do you want to do? And I think everybody is going to be surprised at how much people love the company they work for. And RCI strong is actually -- it's real. It's ingrained in all of us, and you're going to get the fee part of that.

And I think that's some of the stuff that's missing. I think that the empowerment of women that our industry gives, we're going to highlight several of our key female employees around the country from host to club management to corporate office staff, and we're going to get their stories out there and let you hear them in their own words without any guidances. You know, Mark, it's all raw with Mark. He's just going to go in, he's going to ask you crazy stuff, he's going to get you talking.

And there's going to be a lot of fun and a lot of jokes in it. But at the same time, you're going to get serious information on the company. And that's what I hope to get at Expo this year.

Awesome. I'm excited.

You got to get you out there. You got to come, visit with us. So...

9:31 (inaudible) Definitely, please come to Vegas with us. We're looking forward to it. Now next question is going to be coming from Howard W. Penney of Hedgeye.

First time I've listened to your call, thank you for doing it. How big is the opportunity for you, meaning how many clubs are out there that you could roll up over time?

Well, there's about 2,200 clubs in the U.S. based on past magazine articles and Barron's and Fortune and whatnot. I think 500 are key clubs for us. Right now, we have about 50. So we're about 10%. I'd like to get us to 200 clubs or about a 40% market share of the clubs. What I call our premiums clubs are the ones we're very interested in. At that point, we'd be basically 4x the size we are today.

Based on our current market cap, we have a market cap somewhere between $2 billion and $3 billion, a free cash flow range of $400 million to $500 million. And if our free cash flow has stayed -- margin stayed at 20%, we'd be somewhere between $800 million in free cash flow. So I think that would be very exciting for us.

How many clubs do you have to look at to get in accurate?

I'm sorry, $400 million of free cash flow. I try to get too much money.

I don't think you can ever have too much. How many clubs do you look at for you? Like you said 20 -- you look at 20 to get 1 or is it 10 to get 1? Like how often -- what's the -- I don't know if I'm making sense asking that question.

No, no, no, exactly. I'm trying to think about -- we've had so many calls like we've even -- I've got clubs we haven't even been able to look at yet. But we're looking at numbers, we're pulling the numbers. Basically what we do is try to get financials first. We look at financials before we even look at properties. If the financials are not there for us, I'm not looking for clubs that have to go upgrade and fix or -- I want to buy cash flow. I'm in a free cash flow business. I want to buy free cash flow. I want a track record of 5, 10 years plus, I want to see solid cash flow for the trailing 2 years, and I just want to acquire it, bring it in, put it into the umbrella, put our synergies in with cost controls and POS and securities, the things we do, brand it or keep the brand depending on how good their current brand is and then move on to the next one.

I would say we probably look at 3 or 4 a week at this point right now in various ways. And we do pass on a lot of the smaller ones. We pass on clubs that we just aren't confident in the market or in the competitive level of certain markets. But overall, we're pushing very hard. We're building our -- I call it, we're building our down line up. So we have several lined up over the next period of years. We're going to be meeting with owners in Vegas. Some guys aren't ready to get out yet, but they talk about well probably in a year or 2. I'm 67. By the time I'm 70, I want to do this or I'm 63, I don't want do this after 65 or stuff like that.

So we're talking about those, we're getting those numbers in and putting -- just putting some offers out there. We've got some offers out there right now that haven't been accepted yet, but the guys are looking, and I'm sure they're shopping. They're trying to find other buyers, they'll pay them more or not. But basically, they're going to come back to realize that a buyer that will pay them more is going to give them a whole lot less cash down. They're going to want more financing. Their risk is going to be higher. They may get more [paying]. They may get more money, but they never collect the money, but unless they have guaranteed to get their money. We've been doing this for a long time. We've got an unbelievable track record.

Our track record is filed with the Securities and Exchange Commission for -- since 1995. So you can see our track record and what we've done as far as main -- all our bank payments, we've never defaulted on loans. We paid everybody. So I think that gives us a lot of credibility. And guys get there. It takes time. Plus they -- it's like letting go your baby. A lot of these guys have been doing this for 30 years, and they've been that same club, they've got employees that they care about. They're like their family.

And so they don't just want to sell to somebody who is going to come in and buy all their employees. And so it takes time for them to get comfortable, but we're not going to come in and just buy everybody. In fact, we're buying your cash flow. We want the same people to operate it because that they're the ones that have built that cash flow business. And -- so it just takes time to get to that point. But like I said, I think it's accelerated. We're getting more calls than ever. And the pipeline is great right now.

I don't know even more after I get back from Vegas and the weeks following Vegas as we -- I plant the seeds of, hey, this is what we could do or this is -- we're paying a higher multiple now and guys start doing their math and they start coming back to numbers. They start realizing royalty, I could live in Florida or I can retire to the islands or you go to a ranch in Montana, and those types of things.

And that's where we -- I think that's what really gets -- I guess the train rolling with certain owners.

Thanks so much for the question, Howard. I'm just noting Eric is doing all this without M&A bankers because no one knows the business better than this management team. Next up, we're going to have an international caller, Matthias, from Germany.

Just, I have to apologize maybe for my silly question because it's the first call of you I'm hearing, but maybe I may ask first. I just don't understand what's the difference between a night club and a bombshell? Is it simply kind of brand for a special type of night club? Or is it a restaurant only, restaurant and bar? I couldn't understand that, first question.

Second question is, you mentioned that you are able to buy new clubs at 3x to 5x EBITDA. Why is someone selling at that low price, doesn't really make sense in my eyes. So what's the main reason for sellers to sell? And why do -- you already mentioned that a little bit in your last answer? Why do they especially sell to you and not make a kind of auction if someone pays more on that?

And as you also mentioned that you are buying really a lot of new clubs, what about management resources? Is there a natural limit of clubs that is -- that you're able to manage, let's say, 500, 1,000 or something like that? Is there a limit that you think would not be clever to go over to still keep the margins?

Sure. I'll start at the top. So what's the difference between Bombshells and Nightclubs. Bombshells are a typical restaurant sports bar. There's no lap dancing. There's no really [patronizing] with independent contractors. It's more of a waitress typical, waitress more like a (technical difficulty) and more like -- at the same time, more like a Yard House, a darkroom product called Yard House or (technical difficulty) dinner, traditional lunch crowd in the daytime, traditional dinner crowd evening time.

The guys that hang out at the bar watch TV, flirt with the girls in the afternoons. And then late night, we convert into -- we bring in live DJs. We can crank up the music. It gets loud and we become more of a meet and greet place for 20 to 35-year-olds to come on their way out to the night clubs, to have a little cheaper drink, maybe grab some food, get into the vibe, get into the mood. And the nice thing is they -- a group of girls come, a group of guys come, all of a sudden, they're flirting with each other, talking to each other and the next thing that they never made it to night club. They spend all night, drinking in a party at bombshells, which gives us great margins.

The nightclub business were a typical strip club gentlemen's club, whatever term, I don't know what the term is in Germany. But basically, we have nudity, (inaudible) or whole new dancing, lap dancing, VIP room, champagne rooms, that type of stuff. Why the guys sell for 3x to 5x EBITDA? Because private equity and banks do not lend money for the acquisition of the adult-related businesses or very few in the United States. Other operators do not have access to capital and the capital structure that RCI has.

Because of our large real estate holdings, we're able to borrow money from banks against our real estate, pull out equity, use that equity to buy and pay cash down in large sums anywhere from $10 million. In this last transaction, we paid out $5 million of transaction, up to $30 some million in the Lowrie transaction. And we're able to use $30 million of equity in that transaction as well.

And you say why us? That's the same answer. We have the ability, we have the capital, we have the track record. And what's our limited managing clubs? Right now, our internal goal, I want to get to 200 clubs. I don't -- I'd like to do it in 3 years. If it takes 5, it takes 5. If it takes a little longer, takes a little longer. I think at that point, we'll -- our systems are all in place. We're completely scalable. The amount of management talent, we bring a lot of our talent up from our existing operations, bring guys up.

A lot of times, we buy the talent. When we buy the club, it's already well managed. It already has great cash flows. Why are we going to change anything? We're going to leave that current management in place. When we bought Scarlett, the same general manager has been there for 15 years. He's been there since, I think, 2017 for us. He has no desire to retire. He's doing a great job, prints out cash. So a lot of times, we don't make hardly any management changes, and we just actually grow our team that way.

So we grow it organically through bringing people up in our clubs or we do it through acquisitions, where we not only get the club and the land, the property, but we get great employees that have worked in that location for years and years. So I don't know that there's a limit at this point. I'm sure at some point, we might reach that limit. But I think I know operators of Burger King that own 1,100 of them. So if you put the formulas and you put the systems in place, there is no limit, I don't think.

Are there companies similar to Rick? For example, non-listed companies with -- which are maybe much bigger?

It's hard to tell the private companies. There's 2 major private companies, I would say, in the U.S. There's a lot of midsized. As revenue size of Rick's, I don't know Deja Vu's numbers, but Deja Vu is a very large chain. And Spearmint Rhino was another fairly large chain, but they're more West Coast and international in -- in the markets that we operate in at this time. But I don't know their capital structures. I don't know their access to capital. But I can tell you that both of those companies, when I started in 1999, were much, much larger than us.

And we -- if we haven't passed them, we have definitely closed in. Probably Deja Vu is -- they have the most locations. If there's one that's revenue-wise as large as us, that would be them. I don't think Spearmint Rhino is anywhere near our revenue size.

Okay. One last question, if you allow me. What about the moat of a single restaurant, a single night club? Isn't it quite easy to get a new competitor just down the road? How stable is the restaurant or nightclub business on the long term for "concerning" a single restaurant or single nightclub because in -- as I have an impression in Germany, restaurants come and go and also clubs come and go, often maybe for -- as you told, the general manager is going to another club, the business sometimes collapses. Is that a real risk concern in the single club? Or don't you see that?

In the nightclub-- on our nightclub side, we're adult nightclub. So we have nudity, which requires special licenses, adult entertainment license, (inaudible) business licenses. Whatever the local government has put in place or states have put in place, those license are mainly grandfather. There were major -- many, many court cases throughout the last 25 years. The existing locations are basically the only locations that can operate now in those markets. If anybody else tries to open, they're basically not allowed in what I call economically viable locations or they have operating restrictions that are much, much different. They can't operate at the same level or same manner that we do.

And so that gives us a huge moat in the nightclub business. That's why we own our property. The property is -- the licenses are tied to specific property address or zoning. And so that's why we buy our property in the nightclubs. As far as the bombshells, sure, other people can open bombshells. There's been a lot of -- there's a lot of other types of sports bars, restaurants, nightclubs that do similar things to bombshells.

But bombshells, we buy our property for the most part. We're super high traffic, high flow areas and the population growth in our areas are all strong where we're at right now. It's very expensive to build a bombshells. It's not a typical small hole in the wall, place that is easily to open and compete at the same level.

And I think that we have certain operational advantages with our history of being in the business for so many years that we've been fortunate and very strong that all of our locations are profitable. They all continue to be profitable. And we haven't had any real competition that comes in and affects our revenues. Our oldest location has been there for over 10 years. Most of our locations are going on 4 to 7 years old right now. And we're just starting to expand over the next 3 years, hopefully, another 18 locations.

If you ask me the biggest risk, bombshells would probably be, what I consider, the higher risk than the nightclubs, but I still think it's relatively pretty low. And anybody can go knock off Chili's or Olive Garden or any other maybe Texas Roadhouse, any other major Ruth's Chris Steak House, they all seem to have their brand, their branding, their concept and they have their followers that like that brand, our patrons of that brand and support that brand. And I think bombshells has done and created the same type of atmosphere. And we've proven the concept works for over 10 years now.

Thanks so much. We appreciate it. Now Eric, one question that was submitted to me by [Hot Girl Capital]. Is you plan to open a Nashville location, maybe a naughty (inaudible) in the future?

Well, Nashville is a very tough market. We actually were working on a partnership club up there. And sorry, we had echo there. And so we've kind of stayed out of that market. The liquor laws combined with the adult entertainment laws are very different in Nashville. They want to be the bachelorette capital of the world. And I don't think they really want all the guys there, but I don't know.

It seems like they're not very favorable to our industry in that market. But I would never say never guy. So we're always looking, we're always trying. And hopefully, someday, we find something that makes sense.

Fantastic. Now we just hit 90 minutes, so would love to encourage everyone to retweet and share this to get some more people in here. For our next question, we're going to be going to [Caesar].

I have a question, Eric. Okay. You're telling us that you think that the expansion will be 3 to 5 years, but that's U.S.-based. So when will be the time that you think -- the management thinks that you can go with -- towards hospitality abroad? I'm talking Europe, Amsterdam, Paris, Milan, Mexico, Latin American country, Los Cabos, Cancun, Monterrey, Mexico City. When will be the time for Rick's Hospitality to go abroad to expand the business abroad?

Yes, sure, that's easy. When we run out of opportunity in the U.S., one of the biggest things is we have to learn those markets. We have to learn the legalities, the laws. We have to find legal counsel. We have to -- there's a lot of homework and a lot of leg work to expanding the international (technical difficulty) right now. We've done some of that leg work in Canada. We've done some of that leg work in Mexico in the past. So it's not -- and of course, Argentina (technical difficulty) it has been a while.

Since then, we've decided to stay focused in the U.S. When we -- like I said, we run out of growth here and run of expansion plans here, not against international travel and international markets. I think it would be great to create a conglomerate of that size and basically a branding that would exceed continents. Actually, it's just going to take time.

Right now, I think we've got enough. Like I said, the next 3 to 5 years, I think we're pretty wrapped up here in the U.S. As we continue to roll up this industry and complete here, then we'll have to look at other markets. Now Bombshells may expand in some of those markets. We're franchising much faster. It's just early in the stage of Bombshells, but we'll see as our expansion grows through franchise.

Great. Just want to take a moment to encourage everyone to follow Eric, equity animal and most importantly, Bradley on Twitter. We want to get his follower count into the 4 digits or else he's not going to be allowed at home once he returns to Houston. Next up, let's bring [Ice] to the floor.

So my question is kind of about Bombshells. So you've been pretty methodical about growing Bombshells. I'm pretty sure you have like 11 locations over the last 10 years. But right now, you really seem to want to be ramping that up with both kind of having franchisees and company-owned locations. I know you have to slow down now due to inflation concerns.

But I guess what about the concept now makes you really positive about Bombshells? Is it just like the size of the location, the patio spacing? Your newer locations seem to be performing a lot stronger than your older locations. So I guess if you could just kind of touch on that, that would be great.

Sure. It took us time to learn. Our first few years were massive learning experiences for us. We didn't understand the demographics of our customer base. We didn't understand a lot of things. Restaurant, it was new to us. We knew the nightclub business. We know the liquor business very, very well, but the lunch crowd, the dinner crowd, the different day parts of the business. So we brought in an expert. And the big thing is just growing the team and the support staff. We've grown that so much now.

We opened 6 clubs -- 6 locations in 18 months in the past from 4 to 10 locations. The growth was very rapid. We stretched management very thin, and we realized we needed to take some time and build up, and right as we were getting to the end of that, COVID hit us. We're right ready to go, all right, let's go do 6 more locations and then COVID hit, so we had to take some break from that. We are working on 6 locations. Like I said we have 2 bought, 1 under contract -- or actually 2 under contract. We ended the other contract yesterday. It's still very early on that. There's a lot of due diligence to do.

It's -- we have time on that one to figure out just in case something doesn't work. But right now, the architecture engineers are working a little time to get that location up. We're not too far off from Stafford. We're starting on some construction. We've got the -- the demo is all done. We're going to start putting the restaurant back together, start doing some of the work, but we're waiting for certain things like concrete costs. Steel has come down. So we're probably getting the steel order here very soon. The roofing costs are coming down. We found a roofer who's looking for some work.

The biggest part is, like I said, the subs just, they have so much work that they're -- it's like, "Oh, yes, I'll do it for you, but the $100,000 job is going to be $180,000." Well, when you have 20 contractors or subs telling you it's $80,000, you spend another $1.6 million in that location, and I'm just not prepared to do that. So we'll wait. We'll take our time. We'll wait until the subs need to work, we'll negotiate down, and we'll build them at the costs they are supposed to cost and maybe pay a little bit more here and there, but not to the tune of additional, basically, 70% of cost of what we built for Arlington -- we paid to build the Arlington store.

Like I said, those costs are coming down. We're getting more in line. We're kind of, I would say, GC but we're doing some of the sub search ourselves and same thing for Rowlett, Texas. We're waiting for building permits there. The bid sets, we'll get those bids out. It's a new construction project. Typically, a new construction project will have a easier job for the GC because you'll end up going with -- they'll go with a group that will do 90% of the build-out of the building, land and concrete, all that stuff themselves.

So they tend to -- if they're going to bid it, they're going to tend to give us a barely market rate bid versus all I'll do this job if I get paid a lot of money. So I think we're on the course of that. We'll see as the next few months go by. I think September, October, November, we're going to watch inflation and watch commodity costs and we'll -- let's have to see where it goes.

If at some point, it doesn't -- like I said, we're sitting on the land, we've got the land finance most of it at 4.99%, 5.25%, 5.4%, stuff like that. So we can sit on it and we pay a little interest. It's a lot cheaper to pay the -- a little more interest costs and an extra $1.6 million per build. So that's just kind of where we're at on it.

Next up, let's bring [John Schinn] to the floor.

Good job in the quarter and all that. Yes, I kind of wanted to go back to the Cheetah's deal just because it's new, it's interesting. It's a decent size. Is it -- would you say -- it sounds like you didn't quite say this, Eric, but it sounded like you were kind of saying this was a unique deal that this wasn't exactly that we wouldn't -- it wouldn't be appropriate -- would it be inappropriate to sort of try to model future M&A off to closely off this deal? Is that a fair interpretation?

Very fair. It's definitely a very unique situation. I'm not saying we won't get more unique situations, but the BCG deal or Lowrie deal, as most people call it, for the Denver clubs, E11EVEN club acquisition, the Playmates acquisition. If you look at the Playmates acquisition in May. If you go back a few years and look at Scarlett's acquisition, those are more typical acquisitions for us, which basically will be about 4x EBITDA for the business, plus the real estate, which typically will make the deal up to overall 5x deal.

And then we typically will go in and improve everything by about 20%, which turns around and makes it basically a 3x for the club and the 1x EBITDA. So we end up taking it from a 5x EBITDA deal down to 4x. And you'll see us put about anywhere from 30% to 40% cash down and finance the rest or maybe some of them are all cash deals but we use a third-party financing group. So we get 30% to 40% of our company cash and then we finance -- or even on Scarlett, for example, we borrowed 100% of the money.

So the whole entire down payment was borrowed from a third party or a group of third -- a group of people for a third party, basically. And so it's almost infinite cash on cash returns because anything we made over the interest rate expense on that transaction was all additional free cash flow for our shareholders. And it just depends on our leverage at the time. I'm comfortable to 3x leverage. The highest leverage ratio, I think we've ever been at was 3.14x trailing 12-month EBITDA to debt ratio.

Currently, we have $188 million in debt. We're probably at most 2x, probably under 2x debt to EBITDA margins right now -- our ratios right now. So we've got a lot of room to grow through debt. We've got $37.5 million in cash. We're generating $1 million plus a week in cash, I think, right now. So we've got plenty of capital available, and it looks like plenty of runway out there with the acquisitions that we're working on. Obviously, the more cash we have to put down, the better and bigger the deals we can do because if you're making $14 million in cash and I offer you a $20 million down payment where you can wait 16 months, you make the same $20 million, you really got to want to be a seller.

But when I can walk in and offer you $40 million cash down, so now you've got almost 3 years with cash in advance and then you're getting big monthly payments every month, the guys are more inclined to do the larger deals and sell me $14 million plus in EBITDA at a single time. So those are the kind of things we're running up against.

On the Cheetah's deal, the other thing is our current bank -- the current bank after all the interest rate raises is quoting a 6.39% on a 5-year interest rate adjustments, and we locked in 10 years at 6% for the entire length of the node on Cheetah. So like I said, it was a very favorable financing deal for us and just an overall great deal for us, as you'll see on the cash-on-cash returns as those numbers come in over the next 3 years.

Yes, that definitely seems likely. On that sort of note, I guess, maybe if you don't want to talk specifically about this because I'm really curious more generally. When we look at seller notes, I'm guessing, the company doesn't tend to prepay these. Does it? I mean is prepayment -- is that usually something that, that's completely off limits based on the structure of the notes? Is there anything that can accelerate payments? Like so for example, if this is like when you have like retirement seller notes, if it moves into in a state situation sort of the -- again, what's sort of like the model framework?

There's no prepayment penalties. There's no acceleration in any of our seller notes (technical difficulty) lots of capitalists. Obviously, if I can save 4 points, sure, I'm going to go to the bank, borrow the money and save 4 points of interest on a $15 million note. Sellers are realizing that. And we're seeing -- as you're seeing in our deal 6% notes, 7% notes because they don't want those notes paid off.

These sellers really want to create an annuity for their family, they're older and they want that monthly cash flows that they know that they're going to be taken care of, their families going to be taken care of or whatever as that money comes in every single month over the period of a note.

Okay. That's cool. That's kind of -- yes, that makes sense. Now you mentioned having a couple of offers out. And obviously, it's reasonable to expect they're kind of being shopped around. Do you tend to get a good amount of visibility or intel on when deals don't happen -- obviously, when deals don't happen, you end up finding out no matter what, usually who the buyer is. I mean does it feel like you're mostly dealing any situations with one-offs? Or do you kind of see the same names pop up?

Typically, if we don't buy, it doesn't sell. That's what we find. It's like, "Oh, I need more money than that, and you're not going to pay me more money and no one else is going to pay me more money." So if you listen to other industry buyers out on the street, you'll hear them complain RCI pays too much. RCI pays too much. RCI makes fair and good deals. And a lot of -- in the past, especially in our industry, it's all been about only buying people when they're in forms of desperation. And so you've seen super low prices and that's what guys are used to.

But when you have a retiring seller who understands the value of his business, who -- you have to give them a fair price or why would they sell? As the caller said earlier, why would somebody sell it 3x to 5x EBITDA? Well, there's multiple reasons. Typically, 5x is a very high offer in our industry right now. I think it's a very fair offer due to the risks and uncertainties of our industry. The stem of our entry and the fact that there's just no one else that at this point can deliver.

And everybody says, why doesn't anybody -- the people buy restaurants all the time, they buy nightclubs all the time, why don't they buy -- the adult entertainment is a very specific and unique management capability that you have to have. There's regulations that people aren't used to. There's all types of situations that you have to deal with or be aware of or block, you have cash handling. There's just a lot of complexity to the overall industry. And we have the issues ourselves where people won't do business with us and they won't lease to us or they don't want to sell property to us because we're in the adult entertainment business.

So you got to be willing to deal with those things as well. Maybe if you're fairly well to come up the kind of money and do the deals we're doing, you're talking about fairly wealthy people, maybe they're big in their community, they're big in their church, they're big in their country clubs and they don't want that stigma of adult entertainment, where something -- RCI is not only -- we just embraced and move forward and we are what we are, and we know where we are, but we're trying to change the perception of what the industry is as a whole.

The biggest problem (technical difficulty) with our industry is, as I've learned through almost 25 to 35 years as we've moved into Twitter, as we moved into the NFT space, their concept of an adult nightclub is Ozark. I don't know if you watch the Ozarks, but they see the (inaudible) gang or drug dealers and Rick is the exact polar opposite of that. It's very corporate America, very structured, very reliant, very -- our cash handling systems are comparable or equal to casinos. And that's just a different business model.

And that age group that hasn't been to the club, but hasn't seen firsthand in our industry doesn't know any better. And so that's why we embrace Twitter, and that's why our NFT project is about building the future and building that 20- to 35-year-old customer base and bringing them into the -- into our businesses and giving that life experience of the fun and excitement of our industry.

Great. And sorry, just one more, and it is back to Cheetah's. And it's just kind of popped into my head when I heard you talking about it earlier. Because I remember the press release saying $4 million kind of an expected EBITDA. And then it sounded like kind of when you were freewheeling -- you're starting to use some like synergy add-ons. So is that $4 million EBITDA figure in the press release, is that a sort of pre-synergy, pre-operational improvement number? Is that -- like where is that coming from?

That's technically based on the existing business as it is at the time we purchase.

Okay. So for this, like, are you -- since it's Florida, are you just looking at it like last year? Or are you still doing like kind of a pre-COVID interpolation there?

We kind of do a current year, past year and 2019 still right now. It's kind of what we look at. Yes, we want to see where they were in 2019 versus where they are in the last 2 years.

Because, I mean, for Florida, it could be that this is actually a banner year for them, right, because (inaudible)?

Yes, which is why we -- they made more money in 2021 than they're going to make in 2023. '21 was the banner year. You got to remember the right. The last check went out in March of '20. The last big stimulus checks went out in March of '21, and they rocked through September, right? 6 months. They rocked about 6 months, everything was kind of blown up. So that's why I'm really excited. Everybody says your comps get harder, yes, the comps are probably harder for July, August, September this year because nobody has traveled They had the stimulus money, not a lot of it was left, but some of it was left, but nobody traveled.

That's when -- nobody went to Europe, nobody went to Mexico. This year, Europe's complaining, everybody's complaining and all those airlines are complaining about all the people flying. You go to Florida, look at the tourist market in Florida right now. I mean it's insane where, like I said last year, I don't -- I think I went to -- actually I just remember, I went to Gulf Shores, Alabama because it was the only thing opened. You couldn't even rent a VRBO last year in Florida. So we ended up in the Gulf Shores, Alabama, which is actually a very nice great white sand beach, it's highly recommended, especially for a family-type vacation. You can't beat the -- it's lower cost, and it's actually really nice and it's not -- it's in the middle of Florida and Texas. So...

Yes, talk to my wife, I added her on the call to figure out where to take her and the kids for vacation. And I just want to say, I mean nothing. But you mentioned the kind of how much stimulus would have been left? I mean I think people are undercounting stimulus because there's a lot of things that weren't officially stimulus that are like the student loan repayment. This is essentially for a lot of high earners like if you're a doctor with student loans, it's not materially different from just getting $2,000 a month from the Fed right now for just however long that goes. But thank you so much for the answers. that really helps kind of firm up how we're thinking about it.

We're going to take questions from 2 more individuals, but just happy to know I'm taking my ex-wife to Gulf Shores, Alabama for our next vacation.

Next up, we are going to have [Hot Girl Capital] of BTT Long Short Equity Partners.

The space has been great. I was just curious, does RCI Hospitality or any of the specific clubs have merchandise for sale?

Yes, we do. Especially Tootsie's has a big -- it's different from market to market. But yes Tootsie's is probably our biggest marketing club. I think Diamond Denver has some stuff. But basically, we have stuff everywhere. What we probably really need is a strong online presence, it's something we've never developed. We've always been kind of small. But that's one of the things we should probably look into as we move forward, especially for the Bombshells brand.

Bombshells has tons of merchandise. Every store has a big merchandise display case in the front, whatnot. There are some things you can buy online right now like Rick's has some different products through some of our websites. But expanding that and trying to always sure we need to be like Hard Rock Cafe and Planet Hollywood and have a lot of cool little neat things that people could collect and go to all the different clubs and try to collect all the different shot glasses or key chains and stuff like that.

So bring that up is some that I'm going to put on the Vice President's calendar to start putting together and see what it looks like.

It looks like we'll be adding that to Euro, tango, tango to deal with. (inaudible) Capital, it's those hard-hitting questions that we really appreciate over here. So that you for that. Last, but certainly not least, we have Dime Square Holdings.

Congrats on the quarter and all that. So I was talking to my friend so as an analyst. And we're wondering maybe why or why not it would be a good idea for you guys to do sale leasebacks when you're doing acquisitions?

Yes. We've looked at sale leasebacks in upfront but the reality is (technical difficulty) pay higher interest rates. Why use all of the amortization, depreciation, just to report higher EPS, but have lower free cash flow per share.

To us, it just -- we're not worried about EPS. We're worried about free cash flow per share and it's our overall free cash flow. And so that's the reason we kind of -- we also looked at a REIT in the past, the real estate investment trust. The problem is our licenses are tied to the real estate. And at any point, we lose control of the real estate, we have basically an uninvited partner because every time a lease runs out, the rents go up and they go up more and more based on how much money we make.

So the better we do our job, the more they try to take from us. And so learned that for -- after many, many years in this industry. In fact, we just passed on a really nice acquisition I would love to have because the owner won't sell us the property because I want to keep the property, we talked them to a 1031 tax-free exchange. So we've told them everything. But the reality is, he wants to be our landlord, so that 10 years from now, his family can raise the rent on us again. And 20 years after -- 10 years after that, they raise it again. And we're just not -- it's not what we do. We own our real estate basically for the control of the licensing.

Fantastic question, Dime Square Holdings, to finish this up. I want to thank everyone for tuning in and encourage everyone to follow Eric, Bradley, Zero Tango, Tango and Equity Animal on this. For those who joined us late, we want to say that you can meet up with management and myself tonight at 7:00 at Rick's Cabaret, one of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street between Fifth Ave and Broadway, a little in from Herald Square.

If you have an RSVP, yes, ask for Eric Langan, or me at the door. On behalf of Eric, Bradley, who will be offering free complementary fireball shots, the company and our subsidiaries, thank you, and good night. As always, please visit one of our clubs or restaurants. And actually, we are going to take 1 more question. Let's bring you up as a speaker. All right. This will be our last one. And once we connect, we will go from here.

Given that, I just want to thank everyone again. Encourage everyone to come out to Rick's 50 West 33rd Street tonight. We'll be there. We're heading there.