CONCLUSION: Ark Restaurants is not typical of most publicly held restaurants companies. It’s operations are the furthest thing from “cookie cutter”, but long term value is accruing. Predictability of cash flow growth may be better today than at any time in its 35 year publicly owned history. Over the next year or so, Ark should be able to more or less repeat the last twelve months that showed a 20% increase in EBITDA. Over the next year or so better cash flow generation from Rustic Inn and JB’s in Florida, renovated food courts in FL and LV, and the absence of several properties that have recently penalized results should allow for better results. Intermediate term, expansion plans in Ohio should contribute to results. Longer term, 3-5 years out, The Meadowlands may become a reality. If and when that happens, Ark’s earnings and cash flow should move to a materially higher level. In the meantime, the stock is not overpriced with an enterprise value of $102M at under 8x trailing adjusted EBITDA. Stockholders receive a 4.3% yield while they wait for long term equity value to build.
THE COMPANY: Ark Restaurants operates 20 restaurants and bars, 17 fast food concepts, and catering operations. They have grown out of their New York city roots established almost forty years ago and are today located also in Washington, D.C., Las Vegas, Atlantic City, Florida and Alabama. They have also shifted over the years from neighborhood restaurants to larger destination properties that benefit from high traffic and can attract catered events. Included are 12 fast food facilities in Tampa and Hollywood, FLA (2004), Bryant Park Grill in NYC (1995), Sequoia in D.C. (1990), Village Eateries (1997) at New York, New York Hotel, plus room service, in Las Vegas, Gallagher’s Steakhouse and Gallagher’s Burger Bar in the Resorts Hotel in Atlantic City (2005), Yolos at Planet Hollywood in Las Vegas (2007), Robert at the Museum of Arts & Design in NYC (2010), Clyde Frazier’s Wine & Dine in NYC (2011)Broadway Burger Bar & Grill at the Tropicana Hotel in Atlantic City (2013), The Rustic Inn in Dania Beach, FL (2014), Shuckers in Jensen Beach, FL (2016), two Oyster Houses in Alabama (2017) and JB’s on the Beach in Deerfield Beach, FL (2019). There are also properties that are less than wholly owned, but managed by Ark, including El Rio Grande in NYC, a Tampa Food Court, a Hollywood, FL food court, and Lucky Seven at Foxwoods Resort in Connecticut.
The restaurants obviously differ in terms of themes, menu and décor, the last of which is generally marked by dramatic interior open spaces and extensive glass exteriors.
The most recent changes in the portfolio of restaurants include:
The acquisition, on 5/15/19 of JB’s on the Beach, in Deerfield Beach, FL, for $7,036,000. This acquisition was financed by way of a $7,000,000 bank loan. The food court at the Hard Rock was relocated, at landlord expense, closing the old space and at the same time reopening on 9/16/19, with an appropriate increase in rent. The food court at the Hard Rock in Tampa was renovated, at landlord expense, also with an increase in rent. That location was closed for about four months, reopening on 9/28/19. A disposition took place as of 12/19/18 (with closing on 1/12/19) of the Durgin Park restaurant in Boston, due to decreased traffic at the Faneuil Hall Marketplace and rising labor costs. As a result, a total of $1.1M penalized income in the third quarter ending 6/19/19, all but $52k impairment and accelerated depreciation non-cash items.
THE MEADOWLANDS OPPORTUNITY: The largest long term opportunity within Ark’s portfolio is represented by its investment in the Meadowlands Newmark, LLC, (MN) which is an owner of the New Meadowland’s Racetrack LLC (NMR). Ark began with a $4.2M investment in March, 2013, invested another $464k in November,2 2013 and $222k in February, 2017, so that Ark currently owns 11.6% of the first entity and 7.4% of NMR.
IN addition, in April, 2014, Ark loaned $1.5M to MN, at 3% due in Jan, 2024. In July, 2016, Ark added to that investment by $200k, same terms and maturity.
Currently: Ark has entered into a long term agreement with NMR for the exclusive right to operate the (current) food and beverage concessions serving the new raceway facilities at the Meadowlands grandstand. Ark currently receives an annual fee equal to 5% of the net profits earned by NMR at the concessions.
The bottom line here is that, according to Ark’s 10k, “if casino gaming is approved at the Meadowlands and NMR is granted the right to conduct said gaming, the Company (Ark) shall be granted the exclusive right to operate the food and beverage concessions in the gaming facility with the exception of one restaurant.” New Jersey, and many other states, with their need for tax revenues, are increasingly moving toward the legalization of casino gaming. In New Jersey, on June 7, 2018, the state legislature voted to legalize sports betting at casinos and racetracks in the state. It is impossible to judge the timing or magnitude of this opportunity for Ark but management obviously feels it could be very substantial.
SAME STORE SALES: Typical “cookie-cutter” analysis does not apply because of the variety of operations and financial structure of individual deals. However, the following table shows same store sales by region:
COMMENTARY: It’s worth noting that “Other Revenues”, outside of same region sales, include sales at new restaurants, JB’s on the Beach, purchased during ‘19, and Durgin Park which generated $1.04M in ’19, down from $2.84M in ’18.
OPERATING EXPENSES: The following table shows the line by line operating items:
COMMENTARY: Cost of Goods Sold, as well as Labor, were well controlled, virtually flat as a percentage of sales, which is admirable in the currrent environment. Occupancy expense was down 90 bp to 10.7%, as a result of renegotiated rent at one of the D.C. properties and higher sales at certain properties owned outright. Other Operating Costs were down 80 bp as a result of cost cutting initiatives and reduction of legal fees. G&A (New York corporate support) was up 40 bp due to annual wage increases and higher professional fees. D&A was flat as a percentage of sales, at 3.2%, up $159k in dollars as a result of fixed asset additions.
CORPORATE CASH FLOW, AND THE DIVIDEND: Michael Weinstein, founder, in 1983, the largest shareholder, and CEO of Ark, in addition to leading his operating team, is obviously an opportunistic deal maker. Weinstein’s primary objective is to build upon the current cash flow which has proven its stability over the years. It’s important to note that this company has been built over the last thirty years with no dilution of equity. The last equity raise was in 1987. The company has paid a dividend of $0.25 quarterly, providing a current yield of 4.5%, continuously over the last ten years, and that seems comfortably covered by consistent cash flow generation. There seems every reason to believe that the dividend will be, at the least, maintained in the foreseeable futfure.
RECENT DEVELOPMENTS: per the yearend (@9/30) report and conference call in mid December and Q1’20 report and conference call on 2/11/20):
EBITDA in the fiscal year ending 9/29/19, adjusted for non-cash items was $12.39M, up from $10.11M in fiscal ’18. Weinstein stated on the conference call that a 20% increase is a possibility in the current year. We have provided the line by line income analysis above.
Michael Weinstein, CEO, reviewed the current properties and prospects, as follows, on the December conference call, as follows:
Florida is doing well. Recently acquired JB’s on the Beach is promising, doing better than under previous management, but the high season has just begun on 12/26. Shuckers and Rustic “continue to perform better than our expectations”. $1M was spent at the Rustic Inn to build a new barge which includes seating and a rooftop bar, and delivery of the barge is expected by the end of February. Sequoia in D.C. is still disappointing, but improving and ’20 should be better than ’19. The higher minimum wage is pressuring margins in NYC but there seems to be room for increased menu pricing. The food courts in Tampa and Las Vegas that were renovated are both reopened and showing increases. There is nothing new regarding a casino license at the Meadowlands, but Weinstein points out that New Jersey needs to replace the revenues from the declining base in Atlantic City. With new casinos opening in Philadelphia and New York State, things are not going to improve in Atlantic City. Sports betting is working well at the Meadowlands, and Ark, with a 10% minority interest, is presumably earning 800-900k, but does not know when that will be distributed. Negotiations are taking place with MGM regarding the New York, New York (Las Vegas) activities, since those leases expire in about three years, and they seem favorable but the outcome is not yet clear. Ark has a new project planned at the Easton, Ohio large regional retail center and expects to be building 10-20 restaurants, with and without operating partners. The first two or three restaurants will be built, owned and operated by Ark. With that base, further projects will likely be joint ventures or licensing deals with minimal capex requirements. The tenant allowances in Ohio are substantial but will still cost Ark $750k to $1M per restaurant that they own themselves, with Easton providing something like 70% of the cost. Ohio will not impact ’20 but could be substantial thereafter.
Overall, Weinstein guided to the possibility of a 20% increase in EBITDA for the current year. He does not expect any further borrowing. Capex will be limited to “whatever is left on the build-out of the barge, which is not very much, and the Ohio projects. So free cash flow should be pretty good this year”.
The Q1’20 report and conference call (2/09/20) supported the expectations provided by CEO, Michael Weinstein two months earlier. Revenues were $43.5M vs. $40.5M, including $2.4M from newly acquired JB’s on the Beach and excluding $839k from closed Durgin Park in Boston. Restaurant operating income was $2.436M, up 77.6% from a year earlier. Same store sales were up 3.5% for the quarter. Corporate EBITDA from operations was $3.485M vs $2.543M, up 37%, adjusted for non-controlling interest, non-cash stock options, and non-cash losses from Durgin Park last year. Net Income was $1.5M ($0.43/share) vs. ($62k) or ($.02) per share.
Breaking down the SSS change, as disclosed in the 10Q: Las Vegas was down 2.4% due to lower convention traffic and increased competition. NYC was down 0.8% as a result of increased competition and contruction at one of the restaurant sites, Atlantic City was down 7.7% due to new competing casinos, Alabama was up 6.5% due to the closure of several competitors, Florida increased 24.2% due to an increase at the food court in the Hard Rock Casino as well as higher traffic and modest price increases at the other Florida properties, Washington, DC increased 8.9% as a result of the strong catering activity at Sequoia.
The conference call was brief, with Mr. Weinstein stating simply that operations are generally on track and expected to remain so in the foreseeable future (next couple of quarters, at least). Florida and Alabama are operating steadily in terms of sales and profits, with JBs ramping up with the season. NY is stable, after coping the minimum wage increases of the last three years. There are always cost challenges, and competition from delivery at other restaurants in NYC is a factor. Sequoia, in D.C., after a major investment, is improving sales but profits are not building as much as hoped for because ala carte sales are the slowest portion of revenues and the outdoor season has not yet begun. In both Las Vegas (with MGM, where the lease has three years remaining) and at the new project in Ohio, lease negotiations are taking place. Thel initial restaurant in Ohio is expected to open in Ohio toward the end of the current fiscal year (9/30), with two more planned for Q2’21 (ending March’21).
Overall, the first quarter was a solid start against the prospect for the 20% EBITDA growth that management suggested was a possibility in the current fiscal year.
CONCLUSION: Provided at the beginning of this article