Ark Restaurants (ARKR) Stock: EV/EBITDA Of 4.8x And A Large Potential Kicker

Background

Ark Restaurants (NASDAQ:ARKR) has been publicly held since the 1980s, and I have followed it since then, periodically investing in it. My share ownership precedes Covid. It is noteworthy that the Company has never raised more equity capital since its IPO. Michael Weinstein, founder and CEO, has been in place throughout.

While Ark has, for better or worse, been an operator of “one off” venues, most of them large scale in terms of square footage and volumes, the lack of a “cookie cutter” model has inhibited steady expansion and consistent cash flow performance as well. At the same time, as shown in the tables below, the Company has been consistently profitable. While the stock has not performed well over the long term, dividends have been paid over many years (except at the heart of Covid and the ’08-’09 financial crisis), $1.40 to $1.76/share from 2004-2008, with a special dividend of $3.00 in 2007, $1.00/share from late ’09 to late ’19, $0.52/share (all annual numbers) as Covid has ended. It seems reasonable that if the recent trends continue, the $1.00/share annual rate could be put back in place in the near future, providing about a 5% annual yield at the current price. Long term shareholders have therefore not been shut out entirely, in spite of inconsistent performance of the stock.

The Company Today

As the table below shows, the Company today consists of a half dozen major venues, Las Vegas being the most important in terms of volume, followed in size by Florida, NYC, Alabama, DC and Atlantic City. It is most important to note that, while the Company continues to manage (and pursue additional) “one off” venues, current locations are well established, strongly recovering from Covid if they were affected, with apparently strong prospects going forward. Most importantly, perhaps because of dramatic success in several acquisitions purchased along with underlying land, that is the current predominant expansion strategy. While it is difficult to predict when opportunities will present themselves, the purchase of underlying real estate creates a predictable buildup of shareholder value in inflationary times, and the occupancy expenses are largely fixed over the long term.

On top of the current operating picture, which we will come back to, there is a major “kicker” in the ARKR story, namely their equity participation in the development of a major casino at the New Jersey Meadowlands racing venue.

The Meadowlands

In 2013, the company made a $4.2M investment in the New Meadowlands Racetrack LLC (NMR). This was done at the time to secure the operating rights for food & beverage service at that growing venue. Though primarily based on Ark’s reputation in the foodservice business, Ark negotiated the right to participate if and when a full-fledged casino was built there. Over time the company has increased its total investment to $5.1M for a 7.4% fully diluted stake in the whole project. The relationship has evolved over time so that, in addition to their right to participate in building a new casino, ARKR has 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. It is worth noting that Ark also has a relationship with the Hard Rock as the operator of food courts at two Hard Rock casinos in Florida.

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. 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, in 2021, agreed to legalize mobile sports betting, and are currently deep in discussions to allow one or more casinos in the NYC area. 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.

While this involvement in the Meadowlands was founded on Ark’s foodservice skillls, and Ark’s day to day management would always revolve around that area, their ten years’ worth of involvement has resulted in an opportunity to invest capital pro-rata with the casino owners. The possibility, discussed below, of selling that option, was far from a prominent thought years ago, but turns out to provide an unusual capital allocation opportunity.

The ultimate reward for Ark Restaurants shareholders would be the approval of a casino at the Meadowlands. As discussed above, the timing of such approval is uncertain, but seems to be getting closer. The following analysis shows the potential value creation that could occur for shareholders once that happens. Reasonable indications are that 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, in Atlantic City; far from the most desirable gambling venue these days.

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
• Per ARKR conference calls, outside investors have expressed interest in the project.

We believe there is at least a 50/50 chance that NMR buys out Ark’s equity interest, with Ark retaining foodservice opportunities at the site, to simplify the long term 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. Those values would amount to a broad range of $13/share to $38/share for Ark shareholders, net after debt on the project.

This range of values exclude the value of Ark’s right to manage the restaurants at the new casino, in which they will 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 an additional $17-$20/share.

Adding the two pieces together provides a very broad range of values between $30 and $58 per share. These are obviously very substantial possibilities, and are provided not as specific projections, but an indication that the Meadowlands involvement could provide one heck of a bonus to Ark’s shareholders.

Ark’s Operations, Historical, Most Recent, and the Prospects.

The table below provides the details of Ark’s operating history over the last ten years. Though variable, to be sure, the Company has invariably (except for ’20) generated an operating profit. In the course of it, the balance sheet has strengthened to the point where it is essentially debt free, net of cash.

We view Ark, as it emerges from Covid as being in a strong operating position, with all important venues either doing very well and/or strongly recovering (in NYC and DC) from Covid.

	Ark Restaurants, Inc.
Y/E Sept.	Revenue ($M)	Operating income ($M)
2012	138	10.0
2013	131	6.6
2014	139	7.6
2015	146	8.9
2016	151	7.8
2017	154	7.0
2018	160	5.0
2019	162	3.2
2020	106	-7.8
2021	132	6.2
2022	184	9.9

Click to enlarge

The most recent twelve months, shown below, ending September, 2022, show about $10M of operating income and $14M of EBITDA.

Also shown below is the full P&L. Adjusted EPS, after deducting the $0.66/share was $1.92. With the benefit of the $0.66, EPS would have been $2.58/share.

ARKR, at around $20/share is therefore trading at 10.4x trailing Adjusted (for PPP) EPS, with an Enterprise Value of about 4.8x trailing EBITDA.

Going Forward

Investors should be mostly interested in the future, while using history as a guidepost. With that in mind, while ARKR is statistically inexpensive, if current operations are in jeopardy the low multiples of EPS and EBITDA and even a renewed dividend over 5% would not be enticing.

However, the table early in this article shows the breakdown of revenues. Without going into great detail here, according to the most recent conference call (Ark Restaurants Corp. Q4 2022 Earnings Call Transcript)

the important revenue generators seem to be in good shape. Las Vegas leases have been renegotiated, without an expected deterioration of cash flow. Florida and Alabama are doing well, NYC and Washington, DC are steadily recovering from Covid. Atlantic City is of minimal concern. We, and numerous colleagues, have visited most of the important sites and invariably have had positive dining experiences. We therefore see no reason to quarrel with CEO, Michael Weinstein’s, comment on the conference call that “ I actually see the $14 million number (EBITDA) as a base”. We say “time will tell”, but there is no indication that this general level is in jeopardy in the foreseeable future. Weinstein also said “we have about $28 million, $29 million, in cash in the bank, 23 million in long-term debt….We’re in a strong position to make acquisitions.” T

The Balance Sheet

The table below shows the listing of notes, mostly as a result of acquisitions With something like $14M of EBITDA annually (a “base”, optimistically), and $28M in the bank as of 9/30/22, the “State of the Company” is strong.

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 year or so, 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 10.4x trailing 12 months’ normalized (for PPP) EPS and 4.8x TTM EBITDA. 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 current $0.52 annual dividend, could comfortably be renewed at the $1.00 annual rate within the next twelve months, providing a current yield on the order of 5%. 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.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.