Ark Restaurants: Lots Of Hidden Value + Low Liquidity + No Near-Term Catalyst = Excellent Opportunity For Patient Investors
10% free cash flow yield, 50% being returned as a dividend.
Acquisition of individual restaurants from retiring owners/operators is creating value that is not reflected in the balance sheet/market valuation of the company.
9% ownership in Meadowlands provides free option on the approval of a casino in northern New Jersey.
Operational improvements at remodeled Sequoia restaurant in Washington DC could provide additional improvement in cash flow.
CEO Michael Weinstein owns 27% of the company and is 76 years old. Insiders own 42%. Company rejected $22 per share offer in 2013.
Ark Restaurants
We continue to find small companies that do not screen well on a historical basis but are changing their business model in ways that could generate positive returns that are independent of stock market movements. Ark Restaurants (ARKR) is moving away from owning and operating restaurants under lease agreements and creating value by acquiring individual restaurants from retiring owners/operators. What follows is our analysis of the changes and how investors can benefit from them.
Quick Overview
Ark Restaurants is a unique public restaurant company. It operates large, unique restaurants (typically 200-1000 seats, Olive Gardens are about 250 seats) that are in landmark locations, such as Bryant Park in NYC and the Sequoia in Washington D.C. ARKR also manages restaurants in casinos in Vegas, Atlantic City, Florida and Connecticut. The company’s current restaurant acquisition strategy (four owner/operated restaurants for $31M over the last five years) avoids bidding competition by acquiring, for cash, restaurants and the land underneath from owners/operators looking to retire. They utilize their management expertise to improve operations, resulting in acquisition multiples of 2-4X cash flow. The ownership of the land provides long-term control of the location and option to monetize it in the future. The company pays approximately 50% of free cash flow as a dividend (5% yield). Insiders control 41% of the company’s stock and three institutions control another 20% making the stock highly illiquid, which we view as a positive. The company owns 9% of the Meadowlands racetrack in New Jersey, providing a free option on the eventual approval of a casino at the location.
Reasons for Change in Business Model
Over the last 4-5 years, the company has lost over $6M in EBITDA due to lease expirations that were either not renewed or were too cost-prohibitive to renew. The company has been replacing this lost cash flow by acquiring properties where they also own the buildings and the land (or have a 20+ year lease), eliminating this risk. Changes to minimum wage laws, especially in New York, have pressured payroll expenses and reduced the opportunities to grow in New York City. Payroll expenses as a percentage of revenue have increased from 31.9% in 2014 to 34.9% in 2019. We encourage investors to read the company’s conference calls and shareholder letters. CEO Michael Weinstein goes into great detail on how the lack of tip credits and other factors have harmed the company’s operations. The new acquisition strategy has helped the company