Friday, September 18, 2020

Lubys: Asset Heavy Restaurant Business Opts for Liquidation

Luby's (LUB) is a small restaurant business based out of Houston, TX.  Currently, they operate two restaurant chains (previously a third, Jimmy Buffett themed "Cheeseburger in Paradise", all of which are now closed), the namesake "Luby's Cafeteria", a Texas comfort food buffet chain and "Fuddruckers", a fast casual burger concept that is partially franchised but has seen better days.  Luby's also has a contract food service business that caters their cafeteria style menu to hospitals, senior housing facilities, sports arenas, etc.  Luby's has struggled as their concepts are a bit stale (maybe that's being kind), mature, and operate in hyper competitive market segments like Fuddruckers with burgers.  Luby's has been treading water for several years -- management has reshuffled some senior leaders and fought off a proxy contest (from Jeff Gramm, author of Dear Chairman), but none of the turnaround plans really came to fruition.  Then of course, covid hit and suddenly going out to a buffet/cafeteria style restaurant like the namesake Luby's sounds pretty unappealing or simply impossible due to local shutdowns.

Last year, Luby's commenced an effort to explore strategic alternatives, but on September 8th the company kicked up the effort by formally announcing they were pursuing a liquidation (requiring shareholder approval) by selling their operations and assets in several transactions, then returning the proceeds to shareholders along the way.  Disclosed in the announcement, possibly to convince shareholders to vote for the liquidation, management announced an estimated distribution amount:
While no assurances can be given, the Company currently estimates, assuming the sale of its assets pursuant to its monetization strategy, that it could make aggregate liquidating distributions to stockholders of between approximately $92 million and $123 million (approximately $3.00 and $4.00 per share of common stock, respectively, based on 30,752,470 shares of common stock outstanding as of September 2, 2020)
The stock trades for $2.35 today.

Luby's is a throwback to the old world, they own much of the real estate for their restaurant locations versus leasing them, that's where most of the value is in the liquidation.  They've even previously considered selling the restaurant operations and converting to a REIT at one point.  In the proxy statement they've disclosed the current post-covid value of the real estate (they've hired two separate real estate appraisers):
As of August 26, 2020, we owned 69 properties, consisting of the underlying land and buildings thereon, most of which operate, or have operated in the past, Luby’s Cafeterias and/or Fuddruckers operations. The estimated value of those properties as of August 26, 2020, was $191.5 million.
Hidden Value Blog did a nice write-up on the situation a few months ago and did more diligence than me on the underlying real estate portfolio in order to validate the company's appraisal, worth a read.  Most of the real estate is in Texas, which should hold up fairly well, major cities like Houston, San Antonio and Dallas all annually rank near the top of job growth and new home construction.

The company has ~$63.7MM of gross debt, $10MM of which is a PPP loan that will likely be forgiven by the government.  Without giving value to the restaurant operating entities or on the downside expenses regarding the liquidation, the value of the real estate is potentially worth just over the top end range of $4/share.  There's reason to believe that management might be understating the distribution range, in the background section of the proxy statement, Luby's financial advisor presented the following range on 7/20:
Duff & Phelps noted a reference range of aggregate potential liquidation proceeds available to holders of Luby’s common stock from $127.0 million to $172.1 million or $4.15 to $5.62 per share of Luby’s common stock, based on an estimated 30,625,470 shares of common stock outstanding and the Company’s estimates of value for its owned real estate.
Later in the proxy, its mentioned that the Duff & Phelps estimate didn't reflect the current real estate portfolio, but that seems odd since any real estate sales in the interim would be netted off against net debt.  Or it could just be a financial advisor telling a management team what it wants to hear.

Timing and the duration of a liquidation are always a big risk, these take twice as long to wrap up as you'd think, especially the last puff which can be frustrating if you're late to the situation.  However in this instance, much of the distributions will likely take place in the next 6-12 months as the company has been in active discussions on each of the assets for months.  It is mentioned a few times in the proxy that the distribution estimation is based on actual indications of interest for each asset, reading the tea leaves, it seems likely we'll see significant asset sales in the near term.  I wouldn't be surprised to wake up and see news that Franchise Group (FRG, still long) was buying Fuddruckers after their failed attempt to buy another struggling chain in Red Robin (RRGB) last year.

I've participated in a few liquidations over the years, the only time it worked out poorly for me is NYRT, in that instance an activist came in with overly lofty projections in order to win over shareholders so they could earn management and incentive fees.  Here the liquidation is more of a white flag, management has been in place for two decades and should have a sense of the value of their assets, they also own 30% of the shares and thus aligned to get maximum value within a reasonable time frame.

Disclosure: I own shares of LUB

14 comments:

  1. New filing from Christopher Pappas (CEO), gives a little more credibility to the distribution range if the CEO is willing to make a bid for certain assets, presumably he knows where each is marked in the $3-4 math: https://www.sec.gov/Archives/edgar/data/16099/000119312520249254/d18536dsc13da.htm

    On September 11, 2020, the Company and C. Pappas, in his individual capacity, executed and delivered a customary confidentiality agreement (the “Confidentiality Agreement”), which Confidentiality Agreement permits C. Pappas and his representatives to have access to certain confidential information of the Company in connection with C. Pappas’ evaluation of whether or not to submit a proposal to acquire in a negotiated transaction any of the Company Assets (a “Possible Transaction”). As of the date of this Amendment No. 13 to Schedule 13D, C. Pappas has not determined if he or a group of which he is a member will submit to the Company a proposal or proposals regarding a Possible Transaction

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  2. I've been looking at MITT prefs lately: a questionably (despite Angelo Gordon's involvement) -managed hybrid MREIT which nearly went bust in March. They lost nearly 90% of BV at the worst, and of course because of their funding model had to realize a significant portion of it. Book has recovered lately, helped by better marks and some minor ATM selling above book into a briefly irrational market. There's ballpark $90-$100 million common equity, deficiencies have been cured and recourse funding slashed.

    They are still thinly funded and have already proved that management isn't great. Pref divs haven't been paid this year and in the last call they said they will not be paid "for the foreseeable future." As with most prefs, holders get 2 board seats with 6 quarters of non-payment, so needless to say they have an incentive to get payments restarted by the middle of next year. I suspect the recent lightly-subscribed pref for common exchange offer was an attempt to bring down the liability (not GAAP-recognized as a liability) of accumulated pref div, and to reduce what is now effectively expensive if otherwise attractive funding.

    For MITT-A, if you subtract the accumulated ~$1.50/sh in unpaid, you are getting a cash yield of ~$14.5% if/when payments restart. There's ~$290mm face of prefs+accum divs and, like I said, ~$90-100 million of common equity below that--not the best cushion, but one that seems to be growing modestly. I am sure liquidity concerns trump everything right now, but I wouldn't be surprised by another exchange offer with better terms or--best case scenario--"the foreseeable future" being before pref holders get board seats. That would move price back to face for over 50% appreciation in addition to the yield. If that happens in, say 3-5 years, your IRR is lower, of course, though still attractive.

    My best bet is for some further exchange or purchase offer for the prefs for some higher but still discounted price, probably as part of some comprehensive growth-enabling refi. AG might also sell the REIT, which would present a problem because COC doesn't have any redemption requirement and the buyer might like having a perpetual "free" capital source. I think the sale would be in part for reputation reasons, though, and AG might not want the hit of screwing pref holders.

    A lot to handicap here, but my early impulse is that these will be close to money-good in the non-infinite future (hey, if XAN can get it done...) and the black box and near-meltdown present a good opportunity. Dunno if it's your thing but.

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    1. Thanks ADL! This is my thing, I've had MITT on a watchlist of mREITs that I monitor from afar but I'll dig into now that you've mentioned it.

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    2. Cool! I think the prefs are def the place to be there vs common, if there's any place to be at all...will let you know if I get any insight beyond my blab above as I do a bit more work.

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    3. A few thoughts, random order:

      * I agree the preferred does look more attractive than the common, curious why the common trades where it does? The company paid their deferred management fee in shares recently and gave an updated $3.10-$3.20 book value. I wonder how much more upside is left on the mark-to-market recovery? Just doing some basic math, I came up with $150MM+ different between fair value and face value, not sure where in between it'll land.

      * Now that the agency mortgages are gone, the credit risk of the remaining portfolio is pretty high, I'm more comfortable with this kind of stuff than most, but its predominately re-performing mortgages (essentially modified loans following the financial crisis) and some commercial stuff that looks a bit iffy in today's environment, a lot of hotel and retail. I don't know how to think about the cross currents of the recession and the obvious impacts it has to subprime-like borrowers alongside the increase in property values, demand for single family homes surging?

      * I do think the likely outcome is something similar to XAN, it's almost like a poorly performing mutual fund, you don't want it mucking up your website and performance figures, merge it away and pretend it never happened, never speak of it again. AG here likely sells it, it gets rebrand with the new managers name, etc.

      Need to noodle on it a bit more, but you're onto something with prefs, exchange offer does show some signs of life, its a living/breathing entity and not about to completely go under.

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    4. Yup, just what I was thinking. I am still trying to suss out whether there are any potential black holes in their remaining portfolio. Was amused to see EJF (vehicle of the "visionary" behind the old FBR before it split apart and got half-absorbed by RILY) buy a near-limit-size slice of the REIT. Not sure I'm willing to call this a good sign.

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    5. That's actually interesting, I know of EJF from a different strategy of their's that I find savvy, but not familiar with them from FBR/RILY

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  3. I haven't really followed Friedman since before FBCM became part of RILY (which I have owned since shortly after the Great American tie-up, and which I feel is a solid operation), but their merger/REITing/involvement in subprime/deREITing/demerger/reREITing (as AI today, w/only Billings affiliated now) is quite a 2-decade story.

    I think they're/he's very clever, just sometimes too clever (I myself am never the first, though I occasionally have to worry about the second). Good to hear he's doing good stuff still.

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  4. Interesting to see the stock languish at a time when the investment thesis seems to be strengthening - you have to think that the further we get away from the teeth of Covid crisis, the better the outcome on the Real Estate; the publicly traded Retail RE Reits would certainly imply this. Would love to hear your thoughts as well as whether you still have conviction in the idea.

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    1. I still own it, have traded around a little bit, selling above $3 and buying back below, but still the same level of conviction. The beauty or sometimes frustration with liquidations is they don't move with the market, hard to say if the investment thesis has really strengthened or not because the $3-4/share number is sort of a private market value versus the daily gyrations of the public markets. On the negative side here, I and maybe others thought there would be a major asset sale or two by this time, reading the proxy statement and how long this has been shopped, figured we would see something by now, so maybe the market is concerned about the squishiness of that $3-4 number?

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    2. I don't have a ton of experience with liquidations - do they normally bleed out the sales one by one (in this case you have both the locations and the operating businesses) as opposed to waiting for the total package? When you say 'major asset sale or two' were you referring to a batch of properties, or one of the business segments?

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    3. Usually there are 2-3 distributions and then kind of a final clean up one in the out years after it has gone into a non-traded liquidating trust. I tend to find that the money is made in the first big distribution, then after that it trades to like mid-teens IRR.

      And yeah, I thought they had sales lined up or at least closer to the finish line when I wrote this post, maybe not that we'd see the cash in our account, but at least some announced activity. Whether it would be a pool of real estate or the Fuddruckers franchise business, etc. But your initial point is valid too, maybe it benefits the ultimate distribution each day that they haven't sold anything and we're closer to the economy opening.

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  5. This morning's release is interesting. The 13 Restaurants grow their franchised Fuddruckers unit count by 20%. Presumably management wanted to get this deal done before selling the royalty stream. I have emailed asking whether any of the locations in question were on owned land.

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    1. Yeah I think that's right, probably the maximum value is to franchise the company owned restaurants and then sell it as pure franchised chain. I think most of the real estate is associated with the Luby's chain and not Fuddruckers.

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