FAT Brands (FAT) – WASTING NO TIME IN BUILDING MULTI-BRANDED FRANCHISED PORTFOLIO

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FAT BRANDS (FAT) – CLOSES $250M SECURITIZATION, ANNOUNCES EXPANSION IN MIDDLE EAST, COMPLETES TWIN PEAKS ACQUISITION, WITH FIFTEEN BRANDS SETS STAGE FOR $80M OF POST-COVID 2022 EBITDA.

We last updated our previous reports on FAT Brands (FAT) on September 2nd, all of which can be accessed by way of the SEARCH function on our Home Page.  A great deal of progress has been announced in a short six weeks since then. Recall that, including the acquisition of the Twin Peaks sports bar chain, the company, now franchising fifteen brands, has guided to $80M of post-Covid 2022 EBITDA.

We provide below a summary of the group of press releases since September 1st, as well as publicly disclosed remarks relative to the third calendar quarter ending September 30th.

On September 7th, the Company announced a new 200+ unit development deal in the Middle East, including 136 brick and mortar locations plus 70 ghost kitchens. In partnership with Kitopi, the master franchisee of this deal, the expansion over the next five years will cover six FAT concepts, namely Fatburger, Johnny Rockets, Buffalo’s Café, Great American Cookies, Elevation Burger and Yalla Mediterranean. The brick and mortar locations, to be located in the UAE, Saudi Arabia, Bahrain, Qatar and Kuwait, will add to Kitopi’s existing 70 cloud kitchens

On September 15th, the Company priced an offering of $250M of “Series 2021-1 Fixed Rate Asset Back Notes”, which have been used to partially fund the $300M acquisition of Twin Peaks. The weighted average fixed interest rate on the notes is 8.00%. As Andy Wiederhorn, CEO, stated: “This issuance gives us ample time to increase franchised locations of this extremely successful concept…prior to refinancing”. Wiederhorn obviously expects that the interest rate can be renegotiated in a relatively short time, just as he has done with previous securitizations.

On September 27th, the Company announced the opening of the 100th Fatburger, cobranded with Buffalo’s Express, in Arlington, TX. This is the second location for this particular franchisee, whose first location opened in June, 2020. This is the third location in the Dallas/Fort Worth area and the fourth in Texas.

On October 1st, only one month after announcing the planned transaction, the Company closed the deal. As reiterated in the release, the acquisition of Twin Peaks is expected to add $25-30M to FAT Brands’ previously expected post-Covid 2022 EBITDA, bringing the total to about $80M. Twin Peaks is especially notable for its steady unit growth, high average volumes, and impressive recovery (post-Covid) to well above 2019 AUVs and Same Store Sales.

THIRD QUARTER DATA POINTS

The above releases relate to long term growth objectives. In the meantime, The Company has publicly disclosed a number of data points relating to the third quarter, ending 9/30/21.

In the second quarter reported results, the Investor Presentation showed that the first three weeks of Q3 produced a portfolio AUV of $22,674, up 13% from $20,056 in Q2.

Within the Investor Presentation relating to the Twin Peaks acquisition, it was disclosed that, at Twin Peaks, Period 7 (July) annualized at $4.7M and Periods 5 through 7 annualized at $5.1M, compared to $4.5M in 2019 and $4.4M in 2018. Furthermore, Same Store Sales at Twin Peaks, compared to 2019, turned positive by 0.6% in P2,’21, and have increased every month to a positive 17.8% in P7’21.

The data points provided above, along with previously discussed development pipeline and unit openings, indicate that the third quarter should be encouraging to both equity and debt investors.

LD MICRO CONFERENCE on October 12th – WIEDERHORN COMMENTARY

CEO, Andrew Wiederhorn, pointed out that the development pipeline, across all brands is about 300 units, to be developed over the next four to five years, expected to grow the portfolio organically at 5-10% annually. The most recently acquired Twin Peaks, now 84 units, is expected to add eighteen restaurants in the next nine months, two thirds of which will be franchised. There are sixteen different franchisees within the Twin Peaks system. The Twin Peaks locations, without tenant allowances, cost $5-6M each, but sale/leaseback transactions generally reduce the out of pocket investment to approximately $2M, on which the franchisee can earn close to $1M annually, or a 50% cash on cash return. Wiederhorn expects that Twin Peaks can grow from the 100 unit level, to be achieved within a year, to double or triple that number over time.

CONCLUSION

FAT Brands is improving the quality of acquisitions over time, reflecting the growing level of acceptance from the lending community. Since FAT Brands came public in 2017 each  of the major brands that have been added have represented not only an expansion to the portfolio but an upgrade relative to stability and growth. While a number of smaller brands were acquired as well, Hurricane Grill and Wings was followed by Johnny Rockets, followed by Round Table Pizza and, most recently, Twin Peaks. Unit growth potential has been increasingly evident, especially so with Twin Peaks. The near term objective of $80M in EBITDA during post-Covid 2022 has been paid for with $750M of securitized funding at an average of about 7%, or $50M of interest expense. The current portfolio, without considering growth, would therefore be throwing off about $30M of free cash flow in the next year or so, about $2.50 per common share, hopefully more over time. At the same time, the Company has demonstrated an ability to refinance its early securitizations at reduced rates, has indicated an expectation to do the same in the future, which obviously increases the potential free cash flow from the current portfolio. As this strategy comes to fruition, the credibility of FAT common stock could obviously sell at a much higher level.

Roger Lipton