Tag Archives: Ark Restaurants

ARK RESTAURANTS (ARKR) – NO COOKIE CUTTER HERE, BUT THE UNDERLYING VALUE SEEMS VERY SUBSTANTIAL

ARK RESTAURANTS (ARKR) – NO COOKIE CUTTER HERE, BUT THE CURRENT VALUE AND THE ADDITIONAL POTENTIAL SEEM SUBSTANTIAL

CONCLUSION

Ark Restaurants represents one of the few investment opportunities in the small cap restaurant space for significant appreciation over the next few years. Unlike most restaurant stocks that are trading at valuations that significantly discount their future, Ark’s current valuation gives almost zero credit for the large amount of optionality embedded in their business model and Meadowlands Racetrack investment.

THE REINVENTION OF ARK RESTAURANTS

Ark Restaurants is a unique restaurant company with a 37 year operating history that focuses on large, one-of-a-kind restaurants located in such landmark locations as Bryant Park in NYC and the Sequoia in Washington D.C. The company also operates restaurants in Alabama, Florida, New Jersey and Nevada. The restaurants typically have 200-500 seats (an Olive Garden has about 250 seats) and require specialized management skill to operate efficiently. As of January 2, 2021, ARKR owned and/or operated 18 restaurants and bars, 17 fast food concepts.

In fiscal 2020, as a result of Covid 19 related shutdowns, sales declined 34% and the company lost $7.7M. In 2019 the company generated $7M in free cash flow and paid a $1 per share dividend (the company paid a $1 per share dividend since 2010). As the economy opens back up, the company expects to reach cash flow breakeven by at least Q3, 2021.

The purpose of this report is not to analyze these results, but to highlight several value creating strategies that could drive the stock price significantly higher in the next two or three years. We are going to focus on two specific areas. The first is the company’s strategy of acquiring restaurants and the land (or secure 20+ year leases, possibility with right of first refusal). The second is their 7.45% ownership in the New Meadowlands Racetrack LLC.   We believe these strategies could result in a share price in excess of $30 per share in the new few years.  We believe management’s interest is strongly aligned with outside shareholders due to it 40% ownership of the company. It should also be noted that Michael Weinstein is 77 years old and the average age of the other eight directors is 73 years old, including four 77 years old or older.

Brief Summary of Earnings Power and Liquidity

In 2019 Ark generated $10.6M in cash flow and approximately $7M in free cash flow. The company was using the FCF to make approximately $3M in debt amortization payments and $3.5M in dividend payments. We believe that the cash flow of the company in 2022 could be similar. The company should be able to service its debt without difficulty. While the timing of the resumption of the dividend is unclear, the company will have the flexibility to either reinstate a dividend or accelerate debt pay down.

As of Q1, 2021 (ending 12/31/20) the company had $11M in cash and $41M in debt, of which $15M is PPP loans. The company has applied for $4.1M in forgiveness and anticipates applying for an additional $7-$9M in forgiveness. The company also anticipates receiving $3.4M-$3.8M in tax refunds this year. Excluding the debt associated with the PPP loan that is expected to be forgiven, the company’s net debt position should be closer to $12M-$15M once all the tax refunds are received. The company has stated that it believes it could be cash flow positive within the next 6 months.

How the Acquisition Strategy Creates Significant Value

In response to losing over $6M in EBITDA due to lease expirations over the last 6 years, CEO Michael Weinstein has been replacing this lost cash flow by acquiring properties where they own the building and the land (or have a 20+ year lease).

As a result of wage law changes in New York and Washington D.C. in recent years, the company’s payroll expenses increased by over 300bps so Mr. Weinstein embarked on a diversification strategy to reduce the exposure to these states, increasing activities in Alabama and Florida. Since 2014, the company has spent approximately $34M acquiring restaurants in Florida and Alabama. These acquisitions have increased revenue from these two states to over 40% of restaurant revenue. Not only does this strategy reduced exposure to lease expiration and wage hike risk, but it also increases long-term value by sustainable cash flow improvement.

Acquisition Criteria

The acquisition criteria are straightforward but are designed to improve the chances of long-term value creation. The basics of the criteria are as follows:

One-off, non-branded restaurants to reduce competitive bidding. Acquire restaurant buildings and land for 4-6X cash flow, alternatively with a lease of twenty years or more with a purchase right of first refusal.

  • Mostly cash purchase (typically owners are 70-90 years old) to reduce buyer pool.
  • Preferably a restaurant with 200-1000 seats with complex operations.
  • Located in areas (i.e coastal locations) that have limited ability for new construction.
  • Opportunity to increase sales and profitability through professional management.

2020 Example: Blue Moon Fish Company, Lauderdale by the Sea, FL. – Voted “Best Waterfront Dining in Fort Lauderdale by Zagat”

In December 2020, Ark acquired the Blue Moon Fish Co. near Fort Lauderdale, FL for $2.8M. The company paid $1.8M in cash and issued a four-year note in the amount of $1M with a 5% coupon. A lease which expires in 2026, has four, five-year extension options.  The rent payments are approximately $360K per year (6% of revenue) and increase approximately 15% as each option is exercised. The restaurant produced approximately $6M in pre-Covid revenue and $1M cash flow. Management believes there is a strong possibility that capacity can be expanded.

2020 Example: JB’s on the Beach, Deerfield Beach, FL

In 2019, the company purchased JB’s on the Beach in Deerfield Beach, FL for $7.04M. In January, 2020, the company exercised its right-of-first refusal to acquire the land, building and parking lot associated with the restaurant for $11M (original offer price was $18M). The original agreement required the company to fund a $3M deposit, but Ark contributed its rights and interest to a new unaffiliated entity which funded the entire $11M. At this point, Ark continues to operate the restaurant and negotiations continue in terms of the real estate development.

2016 Example: Rustic Inn, Jupiter, FL.

No longer in Ark’s portfolio, the company took over the restaurant, then called the CrabHouse, in 2014, for $250k. They then spent $750k for renovations, reopening in January, 2015 as the Rustic Inn. Ark exercised its right of first refusal in October, 2016, for $5.2M, at the same time selling the same property for $8.25M, which generated a net gain of $1.637M, obviously an admirable return on their $1M investment in just a couple of years.

Another Example, with Dramatic Value Created

Another of the four properties currently owned is the Rustic Inn in Dania Beach, FL that was acquired in 2014 for approximately $7.7M.  The acquisition was financed with an original bank loan of $6M, of which $3.7M is remaining. The seller was a 94 year old owner/operator. At the time of purchase the restaurant was generating $1.5M in cash flow. Since the acquisition the restaurant has increased sales 15-20% (through price increases and better management) and increased cash flow pre-Covid to $3.5M.  Among other things, cash flow was increased through the combination of a reduction of 400-500bps in food costs, as well as the operating leverage on sales increase. These improvements effectively reduced the purchase multiple to a little over 2x cash flow.

At this point, Ark has the financial flexibility to leverage the cash flow if they like, with a sale/leaseback. This potential transaction, providing a $1M rent to the purchaser, for example, could generate something like $10M in proceeds, still leaving the Company with $2.5M of annual EBITDA.

THE MEADOWLANDS -RETURN COULD BE VERY SUBSTANTIAL

Background

In 2013, the company made a $4.2M investment in the New Meadowlands Racetrack LLC (NMR). Over time the company has increased its total investment to $5.1M for a 7.4% fully diluted stake. Additionally, in 2014 the company loaned NMR $1.5M by way of a 10 year note. The principal and accrued interest currently totals $1.78M.  The managing partner of NMR is Jeffery Gural, who owns the casino Tioga Downs and a racino at Vernon Downs in New York. Hard Rock International has an equity stake in NMR and a long-term agreement for future development at the Meadowlands.

ARKR has also secured the exclusive right to operate the food and beverage concessions (excluding a new Hard Rock Restaurant that could be built on-site) at the new raceway grandstand and casino. ARKR already has a relationship with the Hard Rock as the operator of food courts for them at two casinos in Florida.

Recent Developments

New Jersey’s mobile sportsbooks produced more than $359 million in revenue in 2020. The Meadowlands has been the primary beneficiary of the legalization of sports betting in the state, with a 52% market share of sports betting in New Jersey in 2020. The Meadowlands partners are FanDuel and Pointsbet, rumored to be in the frontrunner to partner with the world famous Las Vegas Westgate SuperBook. Other advantages of the Meadowlands include the fact that it is only six miles away from New York City and is one of only two active sports books in the country within walking distance of an NFL stadium.

New York lawmakers have recently agreed to legalize mobile sports betting. Lawmakers considered and rejected a budget provision that would have permitted up to three additional casinos in downstate areas, including New York City. Licenses for that area are on hold until 2023. While the Meadowlands could see an initial decline in sports betting (an estimated 20%-30% of NJ revenue comes from New Yorkers), the consensus among industry players is that New Jersey casinos will benefit in the long run.

In fact, Mr. Gural was pleased with how the New York sports betting bill turned out. He was quoted in the Wall Street Journal as saying, “It’s the dumbest thing I’ve ever seen. I consider this a gift to New Jersey and to me at the Meadowlands, and my only regret is that Andrew won’t be around to see this totally fail.” In the past Mr. Gural has been quoted as saying “I think the best hope for The Meadowlands is to get a casino. Once downstate New York gets them, hopefully we would then get them, which would create a lot of revenue. I do think, long term, that we will get a casino.” While the New York lawmakers did put the possibility of three new land-based casinos on hold until 2023, this does not change the long-term attractiveness of the Meadowlands as a land-based casino.  In addition to the large increase in revenue from sports betting, the Meadowlands racetrack has seen a 61% increase in handle over the last 10 years. Mr. Weinstein’s decision to invest in NMR seems to point to a potentially substantial long term payoff to shareholders one way or another.

WAYS TO WIN WITH THE MEADOWLANDS 

Current investment in NMR is profitable

Even without a casino at the racetrack, the NMR partnership is profitable. On the Q4 2019 earnings conference call, Mr. Weinstein stated that ARKR’s share of the cash flow was around $800K.  However, since it is carried on the balance sheet at cost, and not being distributed to the company, it cannot be counted as income. We believe 2020 attributed cash flow could be similar, if not higher, so this imbedded value continues to build.

Important Equity Stake in New Casino Development

The ultimate reward for shareholders would be the approval of a casino at the Meadowlands. As discussed above, the timing of such approval is highly uncertain. However, we do believe that approval will occur in the future. A simple analysis shows the potential value creation that could occur for shareholders once that happens.

Jeff Gural has estimated a Meadowlands casino could generate $800M-$900M in revenue. For reference, in 2016, the Borgata in Atlantic City had revenue of $812M and EBITDA of $212M. MGM sold the Borgata to MGM Growth Properties for $1.175B in consideration.

Example of Hypothetical Meadowlands Casino:

  • Casino cost $1B
  • Debt to equity 60/40 –
  • ARKR prorated share of equity contribution $25-$35M
  • ARKR expenditures for restaurants $55-$65M
  • Funding – many possibilities – returns discuss below are non-leveraged by Ark
  • Company could execute more sale-leasebacks to fund some of the cash
  • Normalized cash flow could also help fund expenditures
  • Outside investors have expressed interest in the project.
  • Per the Q4 2020 conference call:

“And in the last two weeks, I’ve gotten two calls. …….very wealthy groups, one a family office with some $4 billion. And another one…….not involved in the restaurant business but sees the opportunity. And both of them have said that they would like to partner up with us if we saw anything that was attractive. I know one of the group has gaming interest and sort of would like to buy Ark stock, either a convertible preferred or something that converts into Ark stock because they’re not only looking at the capability of us to acquire other restaurants, but they really got their eye on the Meadowlands to own a piece of that through us.”

Potential Value Creation

 We believe that the single most likely scenario is that NMR buys out Ark’s equity interest, with Ark retaining foodservice opportunities at the site. The majority partners may want to takeout its minority partners to simplify the operating structure. It is difficult to project a value, under this scenario, but we believe the payoff to ARKR would be substantial.

 Should the current partnership structure prevail and the Casino get built with Ark remaining a 7.4% equity partner, we suggest that the new Casino could do a minimum of $1B in revenues and generate $200M of EBITDA. Ark’s 7.4% interest in that EBITDA would be worth about $14.8M annually.

Without considering the degree to which Ark could leverage their total gross investment of $90M, inclusive of building the restaurants, one could create a matrix of values with revenues from $1.0 to $1.5B, and multiples of EBITDA between 6x and 10x. A minimum expectation of $1B in revenues, $200M in project EBITDA, and a valuation of 6x, would generate a value for ARK of about $90M, almost exactly matching their gross investment, but without considering the value of operating restaurants.

Possible, based upon the population density in northern New Jersey, is revenues closer to $1.5B and $300M of EBITDA. Ark’s share of project EBITDA would be $22.2M, worth $133M at 6x, net after debt to ARK of $43M or $12.28/share. At a 10x multiple, Ark’s share would be worth $222M, or $37.71/share net after debt.

The range of expectations and values just above are substantial, and exclude the value of Ark’s right to manage the restaurants at the new casino, in which they have invested $50-60M. Assuming those restaurants generated EBTIDA of $10-12M, only a 20% ROI, a 6x multiple on that would be $60-$72M or $17-$20/share.

The range of expectations goes from zero for the project as a whole but $17-20/share for the right to operate the restaurants, to a value as high of $37/share for the project plus the $17-20/share for the restaurants. These are obviously very substantial possibilities, and are provided not as specific projections, but an indication that the long term potential is large relative to the current price of Ark common stock.

CONCLUSION: Provided at the beginning of this article

Prepared by: Roger Lipton and Tim Heitman

ARK RESTAURANTS (ARKR) – NEW WRITEUP – performing solidly

 

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