Tag Archives: Ark Restaurants

UPDATED CORPORATE DESCRIPTIONS: with relevant transcripts – NOBLE ROMAN’S, FIESTA RESTAURANT GROUP, BURGERFI, BRC (BLACK RIFLE COFFEE), ARK RESTAURANTS

UPDATED CORPORATE DESCRIPTIONS: with relevant transcripts – NOBLE ROMAN’S, FIESTA RESTAURANT GROUP, BURGERFI, BRC (BLACK RIFLE COFFEE), ARK RESTAURANTS

NOBLE ROMAN’S

https://www.liptonfinancialservices.com/2021/11/noble-romans-updated-write-up/

FIESTA RESTAURANT GROUP

https://www.liptonfinancialservices.com/2022/05/fiesta-restaurant-group/

BURGERFI

https://www.liptonfinancialservices.com/2022/06/burgerfi-interational-in-process/

BRC, INC (BLACK RIFLE COFFEE COMPANY)

https://www.liptonfinancialservices.com/2022/05/black-rifle-coffee-company-brcc/

ARK RESTAURANTS

https://www.liptonfinancialservices.com/2022/06/ark-restaurants-arkr-new-writeup-performing-solidly/

ARK RESTAURANTS (ARKR)

*Corporate Description above does not reflect closing of Foxwoods Casino in July’22.

ANNUAL

(1) Other income represents the Gain on PPP Loan foregiveness

QUARTERLY

MOST RECENT CONFERENCE CALL TRANSCRIPT

https://seekingalpha.com/article/4535054-ark-restaurants-corp-s-arkr-ceo-michael-weinstein-on-q3-2022-results-earnings-call-transcript

There are a number of more lengthy articles describing the prospects for Ark Restaurant, some which are shown below, the rest being available by way of Search function on the Hope Page of this website.

ARK RESTAURANTS (ARKR – $16.93) – STILL UNDER-COVERED AND UNDERVALUED, A POTENTIAL DOUBLE, OR MORE!

ARK RESTAURANTS (ARKR – $16) – UNDERCOVERED AND UNDERVALUED

UPDATED CORPORATE DESCRIPTIONS – KRISPY KREME (DNUT), ARK RESTAURANTS (ARKR), BURGERFI (BFI), ARCO DORADOS (ARCO) and RED ROBIN (RRGB) with transcripts

UPDATED CORPORATE DESCRIPTIONS – KRISPY KREME (DNUT), ARK RESTAURANTS (ARKR), BURGERFI (BFI), ARCO DORADOS (ARCO) and RED ROBIN (RRGB) with transcripts

KRISPY KREME (DNUT)

https://www.liptonfinancialservices.com/2022/03/krispy-kreme-dnut-in-process/

ARK RESTAURANTS (ARKR)

https://www.liptonfinancialservices.com/2022/01/ark-restaurants-arkr-new-writeup-performing-solidly/

BURGERFI (BFI)

https://www.liptonfinancialservices.com/2022/01/burgerfi-interational-in-process/

ARCO DORADOS (ARCO)

https://www.liptonfinancialservices.com/2022/03/arcos-dorados-arco-in-process/

RED ROBIN GOURMET BURGERS (RRGB)

https://www.liptonfinancialservices.com/2022/01/red-robin-gourmet-burgers-inc-rrgb-corporate-description/

 

Ark Restaurants (ARKR) – reports productive March qtr. – balance sheet is strong – current business looks good so quarterly dividend (at half the previous rate) is reinstated (a 3% current yield)

Ark Restaurants (ARKR) – reports productive March qtr. – balance sheet is strong – current business looks good so quarterly dividend (at half the previous rate) is reinstated (a 3% current yield)

 We have written about Ark Restaurants in the past, and encourage our readers to use the SEARCH function on our Home Page, for our previous descriptions of ARKR, its position and its prospects.

 CONCLUSION:

We have followed ARKR since it came pubic in the mid-1980s operating with a few large-scale dinner houses in NYC (e.g., 500 seat “America” on 18th Street) catering to “yuppies”. There was often a “story” and the Company has been consistently profitable, though not on a straight-line upward path. For a combination of reasons, the publicly owned stock was hardly ever embraced. The lack of a “cookie cutter” brand with visible “white space”, operating results that proved to be inconsistent, and the Company’s ability to pursue growth initiatives without fresh capital from the public resulted in a lack of “coverage” by research analysts and statistical undervaluation of the stock. There has also been a limited amount of liquidity in ARKR since founder and CEO, Michael Weinstein, has always owned a practical controlling interest (27%) and outside public investors, with a long-term confidence in the Company, do not often trade.

An inflection point seems apparent. The balance sheet is the strongest in many years, easily capable of supporting future growth. The current base of cash flow generation, especially with the catering and special event activity just now rebounding from the Covid, is impressive relative to the Enterprise Value. Current properties, while running well, could be improved further once supply chain distortions and the labor crisis abates at least a bit, and there is an adjacent opportunity to build shareholder value through real estate (beneath restaurants) ownership. ARKR stock is statistically cheap based on trailing results alone, on top of which are (1) recovery of sales, especially related to catering and special events in NYC and DC (2) more growth in the southeast (3) long term participation in Las Vegas, which is booming again and (4) a material “kicker” by way of Ark’s ownership in The Meadowlands gaming venue. With an Enterprise Value only 4.3/7.8x trailing twelve months EBITDA (without/with capitalized leases), there seem to be a lot of ways to win with ARKR.

 Q2 (ENDING MARCH’22) SUMMARY:

Revenues were $39.6M vs. Covid depressed $25.8M in ’21. Adjusted EBITDA, excluding mostly the $1.1M foregiveness of PPP Loans, was $1.481M vs. negative $.495M. Net Income, similarly adjusted, was $1.055M vs $4.161M.

The business continues to recover, as shown in the table below. The company’s major markets, Florida, Las Vegas, and Alabama (85% of total revenue) continue to see growth over 2019 levels. Florida’s growth of 95% over 2019 was aided by the acquisitions of JB’s on the Beach and Blue Moon Fish Company; however, revenue was still up 48.5% over 2020. The Original Oyster House acquisitions in Alabama continue to produce substantial revenue growth, with revenue up 19% since 2019. Las Vegas continues to be strong, with convention business returning, showing a 1% increase over 2019 (compared to a 12% increase in Q1).  “Comp sales”, of concern to management and investors alike, are not strictly relevant at the moment, due to social distancing and other Covid-related operating limitations.

Per the Conference Call:

While many major retailers and some restaurant chains have reported a weakening in consumer demand, ARKR management continued to see strong demand in May. The rebound in the events/catering business in NYC and Washington D.C. is helping drive this sustained improvement.

Relative to the June quarter, according to CEO, Michael Weinstein:

“by way of illustrating current trends, Bryant Park is doing $100,000/day at the moment, up substantially from the March quarter, a lot of that driven by events and has a calendar that is full to the end of June. Sequoia is seeing the same thing, a lot of events on their calendar…….we are six weeks into the June quarter. We’ve seen extremely strong results from the restaurants. So, I expect the June quarter to exceed our own projections and expectations.

 In response to a question regarding the current effect of Omicron variants:

“We’re not seeing that in our location in Vegas, we’re certainly not seeing it in New York…..and we weren’t seeing it in Florida or Alabama as of last week. We’ve seen a dramatic pickup in New York and Washington D.C., in part driven by a very strong event calendar in May and June.”

 EVENTS AND CATERING POTENTIAL

The improvement in the events/catering business is starting to show up in the financials as well. While the earned revenue YTD (and last year) was about 50% of levels in the previous two years (as shown in Chart 1 below), unearned catering revenue (as shown in Chart 2 below), a leading indicator of future revenue, is $5.77M, over 40% above the levels of the past two years (Chart 3), when Ark did $13.80M and $7.36M in catering for the year. Since catering revenue for 2021 was only $3.2M, this venue should show a substantial increase this year versus last. Investors should keep in mind that Event/Catering Revenue generally carries relatively higher profit margins.

CHALLENGES REMAIN – LABOR, OF COURSE, AND COST OF GOODS AS WELL

For the third time in the last four quarters, the company has seen a 300bp contraction in its gross margin. ARKR continues to feel the pressure of higher seafood costs. However, ARKR is not alone when it comes to higher seafood costs. Here are comments from Full House Resorts, a casino company that operates the Silver Slipper casino in Las Vegas:

“Actually, crab accounted for about a 110% of the increase in the food costs. We used to buy crab $8 a pound, now we are buying it at $17 a pound. For the 12 months ended March 31, the recent 12 months ended, we spent $4.6 million on crab. We went back and looked at the 12 months ended March 31st, 2021, we spent $2.4 million on crab.” Note: Management used the term “crab” 49 times on the conference call.

At Ark, the 300bps increase in costs lowered the company’s operating income by just over $1M in the quarter. Rather than raising prices equally in all of its restaurants, as many restaurant chains do, management is raising prices selectively at each individual restaurant. Management believes that this attention to detail helps maintain brand equity in each market.

 LAS VEGAS IS IMPORTANT, as shown in table above

The company has made significant progress on completing the three major lease extensions for the restaurants the company manages at the New York-New York casino in Las Vegas. On the conference call, CEO Weinstein said that all the leases are signed, or will be, within the next week or so. As a result of the extension, the company expects to spend up to $7M in leasehold improvements. Rents will be higher but there is pricing room on the menu, which will largely offset the higher occupancy expense. In the 10Q, the company disclosed that a 10 year extension for the Gallaghers Steakhouse location was signed in early April., Ark agreeing to spend $1.5M to “materially refresh” the restaurant. Considering that Las Vegas represents approximately one-third of the company’s revenue, this 10-year extension for all the leases in Las Vegas significantly reduces the risk while improving cash flow expectations.

UPDATE on MEADOWLANDS CASINO POTENTIAL

As usual, CEO Weinstein provided significant color on the opportunity that lies ahead for the company if New Jersey eventually approves a casino for northern New Jersey. The following quotes from the Conference Call provide the most salient points.

  • “We’ve become constantly more confident that within the next two to three years will have a casino license at the Meadowlands. There are conversations going on that makes us feel that we’re on the right path to getting that, so we’re looking forward to that possibility.
  • “We did 65% of the sports betting that took place in the State either in-person, which is called retail at the Meadowlands or over the Internet. But I think we were the only profitable entity handling these sports betting in the State, which then means the Atlantic’s casinos — Atlantic City casinos actually were unable to make a profit on their sports betting enterprises last month. I think we made $4 million last month – FanDuel is our partner.
  • “much like what’s happened historically with casinos and other areas of the country, the licenses have gone to places where there’s already betting of some sort and those are likely racetracks.
  • “..all the environmental studies and everything needed to support the construction of casino elsewhere on vacant land would take several years. We already have a building, we have plans to expand that building.
  • “….what we are likely to propose to the State is not only a casino, but a new 1,000 room hotel and convention center, which we are prepared to fund without any help from the State. We think that, that referendum will be quick to be passed by the Senate and the legislature in New Jersey. We think that timetable is about two years.
  • “I think it’s going to be successful, if I had confidence five years ago when we made this investment my confidence has consistently risen primarily, because Atlantic City is over, it’s really over and a new gleaming casino on the Hill, I think it’s what the State to look forward to.
  • “…as you know we have an exclusive on all food and beverage with the exception of a carve out by Hard Rock for one Hard Rock Café. But that requires an investment by the New Meadowlands in terms of tenant improvement money, which…..would be a big investment for us to do the eight or nine restaurants and all the bars. But I think those projections would be a positive enough that we would be able to finance it pretty easily between our balance sheet and maybe bank loans or bringing other investors. But I’m not too concerned, if there is a license issue about that.
  • “…conversations with MGM and their projection at that time was that the prior to paying any taxes to the State….they thought a casino….could easily do $500 million a year in cash flow. So whatever that means to us, it would be a significant, significant alteration of our projected EBITDA.
  • “But I’ve said this in the past, I don’t think it ever gets to that. My guess is we are a minority partner to casinos that’s being run by Hard Rock, I think we won’t get to see that cash flow….in terms of our ownership in the casino….Hard Rock would want……to buy our minority ownership in the casino.”

FURTHER ACQUISITION POTENTIAL

On the conference call, CEO Weinstein kept that possibility open. As we have described in previous articles, in the past five years ARKR has been able to significantly improve a purchased property’s cash flow within two years of an acquisition. We believe that ARKR is in a unique position within a limited pool of bidders, to continue to acquire restaurants for below market multiples, in the area of 3-4x EBITDA, often paid entirely in cash. Ark’s typical subsequent approach is to retain operating management, providing them new growth opportunity which improves morale, at the same time providing administrative support and purchasing power which lowers operating costs. Larger restaurant chains are looking for “cookie cutter” brands that they can grow, while ARKR is happy to buy “one-off” well-established local institutions, typically looking for properties that can generate at least $1M in annual cash flow

THE BALANCE SHEET

The company has very little net debt. More precisely, at the end of Q2, the company had net debt (excluding PPP loans outstanding of $2.6M) of $6.7M. Since the end of the quarter, the company received a tax refund and other cash which has increased the cash position to approximately $24M (40% of market capitalization) vs. $27.8M of total debt at the end of Q2. This balance sheet strength is obviously a source of comfort to management and investors, and has allowed the company to resume a $0.125 per share quarterly dividend (3% yield at current prices). The dividend will cost the company approximately $1.8M a year in cash.

 

ARK RESTAURANTS (ARKR) – UPDATE – A “SMALL CAP” WITH AN UNUSUALLY ATTRACTIVE REWARD/RISK RATIO

ARK RESTAURANTS (ARKR) – UPDATE – A “SMALL CAP” WITH AN UNUSUALLY ATTRACTIVE REWARD/RISK RATIO – Business continues to improve in spite of significant headwinds in New York City and Washington, DC.

On February 14th, Ark Restaurants reported 1Q’22 (ending 12/31) results and management provided further “color” on the conference call. Our previous articles describing more completely the outlook for ARKR can be accessed by way of the SEARCH function on our Home Page. In this update we will review what we believe are the most important takeaways from the formal corporate release as well as highlights of the conference call.

CONCLUSION:

We have followed ARKR since it came pubic in the mid 1980s operating with a few large-scale dinner houses in NYC (e.g., 500 seat “America” on 18th Street) catering to “yuppies”. There was often a “story” and the Company has been consistently profitable, though not on a straight-line upward path. For a combination of reasons, the publicly owned stock was hardly ever embraced. The lack of a “cookie cutter” brand with visible “white space”, operating results that proved to be inconsistent, and the Company’s ability to pursue growth initiatives without fresh capital from the public resulted in a lack of “coverage” by research analysts and statistical undervaluation of the stock. There has also been a limited amount of liquidity in ARKR since founder and CEO, Michael Weinstein, has always owned a practical controlling interest (27%) and outside public investors, with a long-term confidence in the Company, do not often trade.

An inflection point could well be at hand. The balance sheet is the strongest in many years, easily capable of supporting the contemplated growth. The current base of cash flow generation (in spite of the Covid’s remaining drag in NYC and DC) seems secure and there is a growth strategy that is more predictable (though not quarter by quarter) with an adjacent opportunity to build shareholder value through real estate ownership. ARKR stock is statistically cheap based on trailing results alone, on top of which are (1) recovery of sales in NYC and DC (2) more growth in the southeast (3) long term participation in Las Vegas, which is booming again and (4) a material “kicker” by way of Ark’s ownership in The Meadowlands gaming venue. With an Enterprise Value only 5.6x/9.6x times trailing twelve months EBITDA (without/with capitalized leases), there seem to be a lot of ways to win with ARKR.

The December Quarter – Total Revenue Above 2019 Levels

In spite of revenue in New York being 27% below 1Q99 and Washington D.C. revenue being lower by 19%, ARKR reported an 8% increase over 1Q99. ARKR’s strategy of diversifying away from New York and Washington DC by acquiring restaurants in Florida and Alabama continues to pay off.  Importantly, Alabama (+26%), Las Vegas (+12%) and Florida (+109%, aided by acquisition) now account for nearly 70% of the company’s revenue, which is up substantially from 53% in 2019. We do not believe investors are giving the company enough credit for reducing its exposure to the northeast (25% in ‘22 vs. 36% in ’19).

Even though New York and Washington DC make up a small percentage of the company’s revenue, a closer look at what is going on in New York and D.C. suggest that the back half of 2022 is going to be a very strong year for those two city segments.  If revenue just returns to normal levels in restaurants like Bryant Park and Sequoia, there will be a significant uplift in revenue ($2M-$3M). CEO Michael Weinstein highlighted how much revenue has been lost due to the impact of the epidemic and the magnitude of the potential rebound.

CEO Weinstein, on the Conference Call:

“I mean, we do $800,000 a week at Bryant Park in the summer and good weeks. That drops down to 120,000, 140,000 in the winter when all the outdoor areas are closed. This year, we weren’t doing $120,000, $130,000 a week. We were doing $40,000 because of Covid, because there’s no one in the office buildings to have lunch, to walk across the street and have lunch…. The same thing could be said at Sequoia in Washington, D.C. Sequoia in Washington, D.C. has $400,000 weeks. Right now, they’re having $40,000 week…… So, we think that when we get into especially the September quarter and the first quarter of 2023, which saw this — the calendar December quarter that the event schedule bookings are going to be enormous.”

 As indicated, the return of high margin events in both New York and Washington D.C., post Covid will provide a substantial lift to revenue and cash flow. In our attempt to interpret Weinstein’s use of “enormous”: In the most recent 10Q, the Company disclosed the amount of catering /event revenue it recognized in the quarter. As highlighted in the table below, catering/event revenue in 1Q22 was approximately 57% below 1Q20. For the FY21, the company recognized $3.24M compared to $7.36M in FY20 and $13.8M in FY19.  Almost 100% of this revenue comes from the Bryant Park, Robert, and Sequoia restaurants. We believe that in 1Q23 the company could realize between $4M-$5M in catering revenue (30-60% YOY improvement). On the negative side, Clyde’s, which is now closed, did generate a modest amount of events business ($200K-$400K) which will not return.

Cost of Goods – Still Volatile

Food and beverage costs increased 340bps (28.5% vs. 25.1% or $1.5M) as a percentage of revenue compared to 2019.  ARKR was able to offset some of that increase with lower payroll costs, which were 240bps lower than 2019 (32.4% vs. 34.8% or $800K). There are several dynamics going on here that investors should understand.

The increase in F&B costs as a percentage of revenue is due to two factors. The first factor is the rapid rise in seafood costs that we discussed in our last report. On the conference call, management stated that it is starting to see a plateau in these costs. “While we do not expect the company to return to the 25-26% range in terms of food costs as a percentage of revenue, we do believe we are nearing peak margin compression on food costs.” However, any improvement in food costs is mostly likely to come from a decline in food prices and not menu price increases. The company is carrying over $1M in excess inventory in an attempt to manage these costs and we do think that some of the $1.5M in additional costs from higher prices can be reduced in future quarters.

The second factor contributing to the compression of F&B margins is the reluctance of management to take large enough price increases to fully offset the higher costs, in the interest of maintaining customer loyalty. After listening to numerous conference calls of other restaurant chains, we believe ARKR has been less aggressive than many other operators and we respect the long-term viewpoint. Our quotes below demonstrate the general philosophy as well as the sensitivity to the customer base of each individual location.

Per CEO Weinstein:

“As I have been in touch with all our managers, we’re not just raising prices because we think we can because everybody else is doing so and customers could be accepting it. What we’ve been looking at is, what is your customer makeup? So, for instance, at a Blue Moon in Florida, that’s a very high-end restaurant, entrees high $30 to low $40. There, we’ve been able to raise prices because there’s no customer that we’re going to get a backlash from…But when you get to JB’s, we have — or Rustic, we have a very mixed demographic. And you just can’t raise prices as aggressively because a portion of your customer base just can’t afford the increases. So there, we have to be more careful……. We’re also very concerned about the future in terms of as things get normal, cross our fingers, we hope they get normal. When there are other entertainment opportunities for disposable income, will people all of a sudden look at restaurant prices and say, ‘This is crazy’ because honestly, they are crazy in many instances. So, we’re increasing prices modestly…. This supply chain disruption stuff is not over. I mentioned to people a couple of months ago, there were 3 or 4 days in Southern Florida where you couldn’t get French fries because they can’t find truck drivers to deliver them. It’s crazy.”

Labor Costs – Manageable

There are also several factors impacting labor, which could offset each other and allow the recent leverage of labor costs to continue. While ARKR is understaffed in many locations, including Las Vegas, the company is actually overstaffed relative to the sales volume in New York and Washington D.C. This results in an interesting dynamic. The company is paying overtime in order to keep staff in some locations, while in others it is paying staff to retain them, even though unit volumes do not support their staffing levels.

Per CEO Weinstein:

“I got a call yesterday from JB’s that they got to give increases to some of our line cooks because they’re being poached by the restaurant next door to us. Not 3 miles away, next door. They’ve been offered $3 an hour more. They’re long-term employees, but $3 an hour more, another $120 a week in their pocket plus some overtime is significant to them. If they leave, we have no one else…. There’s some 6 million square feet of office buildings facing Bryant Park. They’re empty. So, we’re doing $40,000. Do we cut payroll? No, can’t cut payroll because if we tell people you’re on furlough, they go get another job, and we never see them again. And we can’t replace them. But they’re working too hard. They’re exhausted. And when I say exhausted, I really mean exhausted…. The same thing could be said at Sequoia in Washington, D.C. Sequoia in Washington, D.C. has $400,000 weeks. Right now, they’re having $40,000 weeks. Again, with full employment. We can’t afford to lose anybody.”

If labor markets loosen up, the company may be able to find additional staff, which could reduce the dependency on expensive overtime pay. In addition, as business returns to normal in New York and Washington D.C., we would expect to see significant operating leverage as the sales normalize in the overstaffed restaurants.

Las Vegas Lease Renewal Update

There was little news on the lease negotiations that are occurring on the Las Vegas properties. As a reminder, these leases expire in early 2023. Management remained confident that a deal would get done. As of the call, the finalized lease documents have not been delivered. While the company will need to spend a couple of million dollars on improvements, management believes the strength of the Las Vegas market in terms of pricing and volume will offset the higher lease costs and be fairly neutral to operating cash flow. In spite of virtually no conventions or conferences, Las Vegas revenue is 12% above 2019 levels.

The Balance Sheet – Strong and Flexible

We have covered the potential for sale leaseback opportunities using the four owned properties in previous reports. On this call, CEO Weinstein once again highlighted the potential value created by a sale leaseback transaction.

Per CEO Weinstein:

“We paid $7.5 million for a restaurant. At the time, we figured it was making $1.5 million a year. So 5x, but it came with the land, and the land was appraised at $4 million. If you look at Rustic and you said, “Hey, I’m prepared to give up $1 million of cash flow to rent.” In this interest rate environment, with an Ark guarantee, where we feel very, very comfortable guaranteeing that transaction, I still think you can get $10 million. If interest rates go higher, maybe you get a little bit less. Without an Ark guarantee, you’re probably getting $7.5 million, $7 million, $7.5 million for it. If I syndicated and we’ve done syndications before with our Hollywood and Tampa Hard Rock deals, we syndicated those. That same group, which has gotten enormous returns, would be interested in doing that for probably an 8% return. So maybe you get 12.5x or $1 million. So, I would say conservatively on the pieces of property we own, which are the 2 Alabama properties and the Rustic and the Shuckers property, those 4 properties, probably $25 million right now, give or take a few dollars based upon how you go about structuring the deal, whether with third-party sale leasebacks, syndicating it ourselves. Yes, I think $25 million is pretty easily achievable goal.”

  What is important for investors to keep in mind is that a sale leaseback transaction is just another form of financing. The company is currently flush with cash (over $20M in the bank with $2M-$3M in tax refunds due, $28M in debt, plus substantial cash flow). Therefore, we think that ARKR management would only utilize this option if an attractive acquisition or acquisitions were available. However, it does highlight the hidden value of the land and the optionality the company has to enhance shareholder value.

Meadowlands, Steady as She Goes

There is nothing new to report on the status of a casino at the Meadowlands since our last report. At the current valuation, we believe investors are getting a free option on any potential monetization of ARKR’s 8% investment. However, there have a couple of relevant pieces of information to give investors a sense for how much a new Meadowland casino would cost.

Wynn Resorts recently announced it entered into a definitive agreement to sell all the land and real estate assets of its Encore Boston Harbor casino to Realty Income for $1.70B in cash. This represents a 5.9% cap rate. It opened on June 23, 2019, at a total cost of $2.6 billion. MGM Resorts stated on their call that they would be looking to spend somewhere between $1.2B-$1.3B for phase one of a casino located near New York City. The company has 97 acres there.

Regarding Ark’s participation in the Meadowlands, as we described it in our previous report.

Meadowland continues to dominate the sports betting market in New Jersey. 40% of online betting websites and 50% of on-premise betting is captured by the Meadowlands. The handle is around $500M, with a 6% hold (higher than the 5% expected long-term average). CEO Weinstein disclosed that the partnership had $15M in EBITDA, meaning that the partnership is cash flow positive and will not require any additional investments by ARKR. The company expects to receive a cash distribution to offset the reportable taxes from the partnership. On January 8th New York legalized online sports betting on January 8th and industry experts have estimated as much as 25% to 30% of sports bets in New Jersey are placed by New York residents. We expect to see an initial decline in betting at the Meadowlands, but New Jersey will most likely remain the second largest sports betting market in the county.

The next benchmark will be the issuance of three full gaming licenses for downstate casinos in New York City. Lawmakers are already pushing to start the process to award the three licenses by the end of the year. Key politicians to watch are Gary Pretlow, chairman of the state Assembly Committee on Gaming and Wagering and Joe Addabbo, the chair of the Senate gambling committee. According to CEO, Weinstein: “If that is advanced forward, we may get some action by the New Jersey legislature to progress forward the consideration of casino license in the northern part of the state, particularly the Meadowlands. Honestly, what I think happens, if there is a casino license issued, I think it takes about 5 minutes for Hard Rock to come to us and say, how much do you want for your position? “

Is impossible to predict the timing or the magnitude of Ark’s opportunity to monetize their interest in the Meadowlands but we believe it would be material for Ark’s shareholders. If you press us for a number, we would only say “tens of millions of dollars”. (Bitcoins not accepted!)

CONCLUSION – provided at beginning of this article

UPDATED CORPORATE DESCRIPTIONS FOR: BLOOMIN’ BRANDS, KRISPY KREME, TEXAS ROADHOUSE, CRACKER BARREL, ARK RESTAURANTS AND NOODLES

UPDATED CORPORATE DESCRIPTIONS FOR: BLOOMIN’ BRANDS, KRISPY KREME, TEXAS ROADHOUSE, CRACKER BARREL, ARK RESTAURANTS AND NOODLES – with conference call transcripts

BLOOMIN’ BRANDS (BLMN)

https://www.liptonfinancialservices.com/2021/11/bloomin-brands-updated-write-up/

KRISPY KREME (DNUT)

https://www.liptonfinancialservices.com/2022/01/krispy-kreme-dnut-in-process/

TEXAS ROADHOUSE (TXRH)

https://www.liptonfinancialservices.com/2021/11/texas-roadhouse-updated-write-up/

CRACKER BARREL (CBRL)

https://www.liptonfinancialservices.com/2021/11/cracker-barrell-cbrl-write-up/

ARK RESTAURANTS (ARKR)

https://www.liptonfinancialservices.com/2022/01/ark-restaurants-arkr-new-writeup-performing-solidly/

NOODLES (NDLS)

https://www.liptonfinancialservices.com/2022/01/noodles-ndls-q4-results-were-promising-updated-writeup/

ARK RESTAURANTS (ARKR – $16.93) – STILL UNDER-COVERED AND UNDERVALUED, A POTENTIAL DOUBLE, OR MORE!

ARK RESTAURANTS (ARKR – $17.25) – STILL UNDER-COVERED AND UNDERVALUED, A POTENTIAL DOUBLE, OR MORE!

Our initial discussion of ARKR (at $19) was in April ’20 and our update in September ‘21 (at $16) described the underlying value within this Company. Both reports can be accessed by the use of the SEARCH function on our home page.

CONCLUSION

The appeal of ARKR lies in the demonstrated cash flow, the long-term value in the underlying real estate, the dramatically increasing participation in the rapidly growing southeaster US (Florida and Alabama) and the substantial long term “kicker” from their involvement in the NJ Meadowlands gambling venue. Though every aspect of the shareholder value equation has improved over the last nine months, we attribute the continued undervaluation to the normally very light trading of the common stock, and the secure control (with 36% ownership) of management. ARKR (at $17) is trading at only 7.6x trailing 12 mos. EBITDA (including a pretax loss in the normally profitable first six months), which should look even better as recovery from the worst of the pandemic continues.

The current liquidation of Luby’s (LUB) at a value many times what it traded for less than a year ago is unrelated to ARKR but reminds us that underlying value does not get ignored forever.

We believe that the assets within Ark could be monetized for a total value somewhere between two and three times the current stock price. Our expectation (with no guidance from management) is that the dividend, which could easily begin at the old $1.00 annual rate will be reestablished within the next twelve months (subject to the Covid), providing a handsome current yield that could go higher over time. While management is clearly content building long term value in the current fashion, CEO and controlling shareholder, Michael Weinstein, is in his seventies and his inclination to monetize assets and provide liquidity for ARKR shareholders could obviously change for any number of reasons.

THE BUSINESS

The following table provides the annual revenue breakdown by geography. It is clear how Florida has become much more meaningful, how NY and Washinton, DC, have continued to negatively impact results in 2021 (reasonably expected to improve), and also how material Las Vegas is, considering that those leases are in the process of being renegotiated. We note that Ark has lost $5M in revenue due to restaurant closures since 2020, namely: Gallagher’s Steakhouse & Gallagher’s Burger Bar which did $2.2M in 2020 before closing last year; Thunder Grill in Washington DC, which generated $1.03M in 2020; and Clyde’s in New York City which did $2.04M in 2020 before closing down in 2021.

On the call, management called out a couple of examples of higher seafood costs. For example, six months ago the company was paying $23 a pound for King crabs (1 out of 4 people order King crabs at the Rustic Inn. A typical serving is 2 pounds of crab and originally retailed for above $75 for a 39% margin. At its peak the prices rose to approximately $53 a pound and the company raised the price to $125, which resulted in only a 7% margin. Product costs as a percentage of sales at the Rustic increased from 43% to 57%. The company was carrying $2.3M in inventory at the end of the quarter, which is nearly $1M or 50% higher than last year. A second example was the price of conch products, which are used at Shuckers. The price went from $300 a case to $1250 a case. The current price is around $750 a case. If commodity costs can revert to more normal levels, there is the potential for a $1M-$3M increase in operating margins.

One cost center that was favorable for the company was labor. Due to staffing shortages, the company was able to keep labor costs 200-250bps below historical levels. A 10-15% reduction in employees helped to offset the higher hourly labor costs.

 CONFERENCE CALL COMMENTARY

Regarding Las Vegas:

CEO Weinstein said that the company is waiting on the new leasing contracts for their New York New York restaurants in Las Vegas (which has averaged about 30% of total revenues), obviously an important consideration. While 2021 revenue was $38M, which was down $11M from 2019, revenue in Q4 was $13M, 13% above 2019. Considering the lack of convention business and the Covid-19 restrictions in Vegas earlier in the year, a strong Q4 hints at a strong 2022. Payroll costs were flat YOY. Higher wages were offset by staffing issues that resulted in an 8% shortfall in employees (50 people short out of 600 staffing requirements. Company expects to spend $5-$7M on leasehold improvements. While rent will undoubtedly be higher, the Company believes that pricing opportunity can recoup a large portion of the higher rent.

Regarding The Meadowlands:

Meadowland continues to dominate the sports betting market in New Jersey. 40% of online betting websites and 50% of on-premise betting is captured by the Meadowlands. The handle is around $500M, with a 6% hold (higher than the 5% expected long-term average). CEO Weinstein disclosed that the partnership had $15M in EBITDA, meaning that the partnership is cash flow positive and will not require any additional investments by ARKR. The company expects to receive a cash distribution to offset the reportable taxes from the partnership. On January 8th New York legalized online sports betting on January 8th and industry experts have estimated as much as 25% to 30% of sports bets in New Jersey are placed by New York residents. We expect to see an initial decline in betting at the Meadowlands, but New Jersey will most likely remain the second largest sports betting market in the county.

The next benchmark will be the issuance of three full gaming licenses for downstate casinos in New York City. Lawmakers are already pushing to start the process to award the three licenses by the end of the year. Key politicians to watch are Gary Pretlow, chairman of the state Assembly Committee on Gaming and Wagering and Joe Addabbo, the chair of the Senate gambling committee. According to CEO, Weinstein: “If that is advanced forward, we may get some action by the New Jersey legislature to progress forward the consideration of casino license in the northern part of the state, particularly the Meadowlands. Honestly, what I think happens, if there is a casino license issued, I think it takes about 5 minutes for Hard Rock to come to us and say, how much do you want for your position? “

CURRENT LIQUIDITY AND EXPANSION PLANS:

Ark exited 2021 with over $23.3M in cash (and current receivables) on the balance sheet and $3.9M receivable in tax refunds, ARKR is close to “net debt free” against the $32.5M of Total Debt (excluding lease liabilities) ($25.5M LT and $7.0M ST). The Total includes $3.5M incurred with the purchase of Rustic, $4.0-Shucker’s, $3.5-Oyster House, $4.8-JB’s, $2.2 Sequoia, $0.8-Blue Moon, $4.7-PPP of which $3.1 is expected to be forgiven), and a bank revolver of $9.2. Ark can obviously service the short term obligations from cash flow generation and has $28M of cash equivalents to invest in attractive opportunities.

There is no reason to “reach” for a deal. While potentially attractive new opportunities are always under investigation, a number of current properties provide expansion potential at negligible risk. In addition to the $5-$7M of improvements the company will make in Las Vegas, CEO Weinstein discussed several other projects. The Company is hoping to move the event space at their Robert restaurant located at the Museum of Arts and Design in New York City from the 7th floor to the 10th floor, at a cost of $2-3M, which would more than double that square footage and connect to the restaurant on the 9th floor. At JB’s on the Beach in Deerfield Beach, Florida (which is generating about $12M of revenues annually), ARK plans to build a deck over the top of the restaurant at a cost of $2-3M. At Blue Moon Fish Company, Lauderdale-By-The-Sea, FL, Ark is hoping to expand the deck which overlooks the intracoastal waterway to add 60-70 seats (more than doubling the current 50 seat capacity) at a cost of $2-3M. These projects combined will require close to $15M over the course of two to three years and should generate a very high return on invested capital. At the same time, the Company could easily raise debt capital, at an affordable rate, to finance opportunistic acquisitions such as Ark has implemented in recent years.

LAND – “they ain’t making any more of it”

Ownership of the land under a business, especially in an obviously attractive location, provides a material degree of financial strength to the operator. It’s been proven time and again that the land can turn out to be worth more than the business. In the near term for the operator, however, the advantages of land ownership are (1) No rent to be paid, so free cash flow is that much larger (2) A lower cash breakeven point, allowing for survival in difficult economic times (3) Easy borrowing capability if and when it becomes necessary (4) Based on number (3) a higher sale value for the business because the land can be so easily monetized. Of course, the reason that banks are so much more willing to lend to a business that owns, rather than leases, their operating property is because the land in essence “protects the downside”. If the business goes bad, the land value can be the savior.

Back to Ark Restaurants, and their LAND:

Over the last seven years Ark has purchased four restaurants including the underlying properties: Two Oyster Houses in Alabama (2017), Shucker’s (2016) and Rustic Inn (2014) in Florida. ARKR paid about $26M, five times the $5.2M TTM store level EBITDA at the time. In the last twelve months those properties generated about $8.5M in EBITDA (Out of about $20M of co-wide store level EBITDA), reducing the purchase price to close to only 3x the latest EBITDA. Most importantly here and now is that $8.5M has been generated without lease expense. Depending on the cap rate, ARK could raise on those four properties $30M, for example, which after rent could still leave well over $5M in store level EBITDA. That $30M could obviously be redeployed in the purchase of other properties, hopefully to be bought for 5-6x EBITDA, with margin improvement under Ark’s management a predictable objective. A great deal more than $30M could obviously be raised, for any combination of purposes. This simple exercise demonstrates how ARKR’s Enterprise Value of about $64M so substantially undervalues the Company.

CONCLUSION: Provided at the beginning of this Update

ARK RESTAURANTS (ARKR – $16) – UNDERCOVERED AND UNDERVALUED

ARK RESTAURANTS (ARKR – $16) – UNDERCOVERED AND UNDERVALUED

CONCLUSION

 While admittedly there are a number of unknowns in terms of revenue trends and costs, we believe that the future will be more predictable than the past, to a large extent due to a now demonstrated productive evolution of the expansion strategy. Based on (1) continued focus on current highly productive restaurant properties (2) New restaurants to be purchased, rather than built from scratch, based on existing (expandable) cash flow, ideally combined with underlying real estate value (3) Geographical expansion largely in the rapidly growing southeastern US (4) Substantial long term potential from Ark’s involvement in THE Meadowlands, not so much a question of “if”, rather “when” within the next several years (5) Unusually high insider ownership with an obvious commitment to building long term shareholder value: We believe that Ark (ARKR) is unusually attractive with an Enterprise Value at about 4.5x current normalized EBITDA.

BACKGROUND

We wrote our initial report, at $19/share in April, which can be accessed through the SEARCH function on our Home Page. Since then, the reported results have improved dramatically, and the prospects are better than ever.

We believe Ark Restaurants (ARKR) is undervalued, largely due to:

  • Though consistently profitable long term, results have been erratic.
  • There is no “cookie cutter” concept here.
  • The company has not had to raise public equity capital, so analysts have not been motivated to cover it.
  • The stock is thinly traded.

However:

  • Equity has not been diluted over the decades.
  • Long term strategy is relatively unique among restaurant chains.
  • More predictable fundamental progress can be expected.
  • Offsetting illiquidity in stock: high mgt. ownership creates long term value.
  • Major value “kicker” with Meadowlands equity.
  • Enterprise Value roughly 50% of peers.

 THE FUNDAMENTALS

 We estimate that Ark is currently producing “normalized” annual EBITDA at a rate of approximately $14-16M annually. We believe that commodity costs will eventually revert back to normal levels, but wages may stay at a higher level due to increases in the minimum wage and the current labor shortage requiring higher pay to attract workers.

 The company’s recent Q3 earnings release was much stronger than expected, producing $5.6M in adjusted EBITDA (including a $2M drag from lack of revenue in New York) in spite of lagging properties doing a total of $9M less in revenue. Along with other restaurant and retail companies, Ark has not has a “normal” quarter in well over a year.  While sales have been extremely strong in Las Vegas, Alabama and Florida, food and labor costs have risen sharply, negating some of the expected operating leverage. Commodity costs have risen for certain items  as well, and though menu prices can be adjusted over time, management is appropriately cautious in this regard.

The $5.6M of EBITDA just reported was within a generally strong season, though negatively impacted by NYC, in particular. While admittedly there are a lot of unknowns in terms of revenue trends and costs over a full year, especially considering the pandemic and the yet to be experienced seasonal and pandemic influence at the newly owned, highly productive Florida restaurants, we do believe using a simplified back of the envelop calculation indicates the company can produce at least $14-$16M in EBITDA on a more normalized basis. We believe that commodity costs will eventually revert back to normal levels, but wages will likely remain at a higher level due to increases in the minimum wage and the current labor shortage.

Some other assumptions in our model are:

  • Revenue eventually normalizes to 2019 levels for New York, Washington D.C., Atlantic City and Connecticut. While Clyde’s is now permanently closed in New York, we believe the revenue can be replaced at higher margin over time. For example, the events business returns to normal in New York, helping margins.
  • The Las Vegas lease is renewed. Revenue of $49M does not include any benefit of return of tourist or convention business, which would offset potentially higher occupancy expenses, and menu prices may have room for adjustment upward.
  • Modest revenue growth in Alabama.
  • Florida benefits from return of cruise ships, growth at Blue Moon Fish acquired in 2021, offset by some reduction in post-pandemic pent up demand from locals.
  • No acquisitions, obviously unpredictable from a timing standpoint.

Base Case

Bullish Case

 Using these assumptions, we feel that Ark can generate $14M-$16M in EBITDA depending on revenue growth and margins. The most significant upside to our estimates could come from additional acquisitions of restaurants, most likely in the southeastern US.  Downside to our estimates could come from the events business not returning as strongly as anticipated in New York City and Washington D.C. It should be noted that management estimated that New York City’s cash flow was about $2M less than normal in Q3 due to restrictions and lack of events and tourism. Admittedly, it could be early 2022 before complete normalization takes place.

Las Vegas uncertainty: Important leases expire in 17 months

 An important renegotiation is pending of the leases at four restaurants in the New York-New York Hotel & Casino, due to expire in January 2023.  The Las Vegas segment generates about $50M in revenue (25% of total company revenue) and approximately of $7-$8M in EBITDA. We believe Ark pays at least $6M in rent in Las Vegas. Losing this lease would be a significant negative for the company, since it would obviously be difficult for the company to replace this lost revenue and cash flow in the short run. On the Q3 conference call, management indicated that negotiations on these leases is set to begin in early September. While relations with MGM over the years have been friendly, there has been a significant amount of turnover in management at the company and Ark will be negotiating with nearly an entirely new team (one key person remains). We also believe that as part of any lease renewal, Ark may have to spend on the order of $5M to refresh some of the properties.

Our current conclusion is that, in all probability, the leases will be renewed. The company has several factors in its favor, such as, an exemption from using a unionized labor force and successfully operating the current restaurants since 1997. Because union pay and benefits are higher, a new lessor would be less willing to pay percentage of revenue as rent and therefore, MGM would receive less rent than continuing leasing to Ark. CEO Weinstein has proven to be a very effective negotiator, as demonstrated time and again over the decades.

THE MEADOWLANDS

Offsetting Las Vegas uncertainty is increasing clarity relative to the Meadowlands “kicker”:

The following commentary from management took place on the recent conference call, particularly in response to a question about the desirability of taking the company private:

“The Meadowlands to us is a huge positive. First of all, we’re probably the largest sports betting facility on the East Coast.

 “But the geometry of that investment that we made 5 years ago could be really significant to our current shareholders, some of whom I know have their eye on that and are comfortable owning our stock despite the fact that it doesn’t reflect the current operations.

“And for the first time, I think, this year, Meadowlands will make its first distribution. That will not be an insignificant number to Ark that we’ll be allowed to report. (Note: we expect only cash equal to the tax liability will be distributed.)

“But more importantly, as New York state starts to play out with the downstate casino licenses, which there’s been a moratorium on because the guys they’ve built upstate had to deal with Coumo essentially that nothing will happen downstate until 2023, which will give the upstate guys time to recapture some of their capital investments. And there’s a lot of lobbying pressure going on to try to get those downstate casinos issued prior to 2023.

“But even if we wait until 2023, once those downstate licenses are issued, we don’t see any way in which New Jersey doesn’t react and make Meadowlands a casino.

“And if it were to become a casino, I would tell you that our projections from just casino operations would dwarf our current EBITDA. Our percentage would dwarf our current EBITDA.

“So to me, I think our current shareholders should have the advantage of that.”

We view visibility of the year-end Meadowlands distribution as an important first step in giving shareholders some insight into the current cash flow of the partnership. Management has not indicated a dollar range that the distribution could be, but we believe it could be several millions of dollars. On the Q4 2019 conference call, Mr. Weinstein stated that the Meadowlands partnership was on pace to generate around $8M-$9M in EBITDA. ARKR’s share would have been around $800K-$900K. The amount was not distributed. In 2019, the Meadowlands generated about $120M in gross gaming revenue. According to the New Jersey Division of Gaming Enforcement division, the Meadowlands has generated over $245M in gaming revenue through July of 2021. With football betting season just about to begin, the Meadowlands could generate over $500M in gaming revenue or 4X 2019 revenues. However, the only distribution in 2021 would be an amount to cover any K-1 cash tax liabilities Ark would have. But investors can see how strong the underlying business is at the Meadowlands. The company has recently received a payment on the $1.8M receivable from the Meadowlands as well.

STRONG BALANCE SHEET

In January the company had $11M in cash and $46M in debt (including $14M in PPP loans). Included in the debt figure was a $9.7M revolver balance coming due in May. Liquidity has improved substantially since then. On June 27, 2020 the company had a cash balance of $20.7M after receiving $15M in PPP money. At the end of Q3, the company reported $18M in cash, the second highest cash balance in at least a decade. The $9.7M revolver maturity was extended to June 2025. The company is now required to pay $500K a quarter and a balloon payment at maturity. Total debt service is approximately $4.8M a year. Excluding any cash flow between now and the end of the year, the company could have over $22M in cash on the balance sheet and only $30M in debt.

VERY ATTRACTIVE VALUATION

Without taking into account the potential value created by the company’s ownership in the Meadowlands, the company is trading at a significant discount to its peers.

As we discussed above, we think the company can generate between $14M and $16M in EBITDA on a normalized basis. If we assume the company receives the expected $4M in tax refunds (no free cash flow over the next 6 months) and $5M in PPP loans are forgiven as expected, the company’s net debt should be around $8M. This would bring the total enterprise value to about $57M. As a reminder, this valuation does not include the $5.1M investment in the Meadowlands that is generating zero cash flow, any future annual distributions from the Meadowlands, the approval of a casino at the Meadowlands, the value of Ark’s concession at the Meadowlands or the monetization of land under certain restaurant properties.

Based on our estimate of normalized annual results, the EV/EBITDA valuation of Ark is approximately 4.5X, very low for a restaurant company with a strong balance sheet, demonstrated cash flow generation and predictable growth opportunities. For example, J. Alexander’s (JAX) a company that we view as a peer, is currently being taken private at an implied EV/EBITDA of 8.7X. The range of multiples used in the fairness opinion ranged from 7X-13X. This acquisition multiple implies Ark could be worth nearly $30 per share as a standalone restaurant company. This also means investors are getting a free call option on any value creation the company could achieve on the Meadowlands being granted a casino license, as well as the opportunity to monetize real estate under certain restaurants.

Without the Meadowlands, ARKR could be worth approximately double the current price. A casino at the Meadowlands could generate another $10-$20 per share in value depending on how the company’s portion of the cash obligation for the casino and restaurants is structured.

While the company is not immune to the macro factors that are impacting all restaurant companies to various degrees, we believe there is no other publicly traded restaurant stock that provides investors so many unique opportunities to create value.

CONCLUSION: Provided at the beginning of this article

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