At the beginning of June 2020, Luby’s announced that post its strategic review, the Board had decided to sell off its operating divisions and assets and distribute the net proceeds to shareholders.
Upon first glance, Luby’s does not look like an attractive investment proposition, however, it has a substantial Real Estate Portfolio that was recently appraised for ~US$210m as well as a high margin franchise operation that could be worth US$40m. After adjusting the value of the Real Estate portfolio based on the County tax appraised values and local comps, I believe once all debts and lease obligations are repaid, the sales process could generate enough proceeds to pay shareholders up to US$2.50 per share, representing potential upside of >60%.
Finally, the shareholder base gives me increased confidence that we should be treated fairly, with the management team owning over 30% and Jeff Gramm’s Bandera Partners owning another 10%.
70% of last appraisal, approx. $180 per square foot
Some remaining profitable sites
NAV per share:
Expected cash burn:
Based on estimates below
Adj. NAV per share:
Key Risks & Concerns
I have a number of concerns with this investment, so if anybody reading this has experience with the company, management or any insight at all, I’d be very appreciative of it. Until I can get further comfort around the below, this will only be a small position.
- Real Estate Value
- The portfolio is predominantly their own restaurants. With all the stress on the industry due to COVID-19, there is likely to be an increased supply of properties for sale in this space, and a lack of demand from budding restaurateurs to start new businesses. Therefore, the prices they are able to achieve could be much lower than my estimate.
- I looked at the locations for many of their owned properties, and they seem to be well located, creating the possibility for them to be repurposed – but this requires further investment from the new owner, and therefore, a lower purchase price.
- Cash Burn
- As of early June, 31 of their Luby’s Cafeteria’s and 8 of their Fuddruckers were operating – generating weekly sales of approximately 75% of the pre-pandemic levels
- This represents 40% of their Luby’s locations and 29% of their Fuddruckers. They said 59 franchisees were operating, which is about 60% of the total in operating as at Nov-19.
- If we apply these percentages to the quarter ending March 20 sales numbers we get the following:
March 2020 Quarterly Sales
Current Quarterly Run-Rate
- On the cost side, I will assume variable costs remain variable (cost of food etc.). They made the comment that 50% of General & Admin staff were placed on furlough, and remaining staff had their salaries reduced by 50%. Therefore, I get the following cost base:
March 2020 Quarterly Figure
Current Quarterly Run-Rate
Cost of Food
Remains @ 28% of sales
50% furloughed and remaining halved
Assume 30% reduction
Assume 30% reduction
Therefore, they are potentially burning $10m per quarter. However, given the insider ownership, if they are burning this much cash, I think it’s likely they will seek to put the business into hibernation mode as quickly as possible to prevent further value erosion.
If we assume a “worst case scenario” would be this level of cash burn for 4 quarters, my estimated NAV would reduce by $40m and equate to roughly $1.45 (around the current share price).
- The company has a meaningful debt load at ~$50m gross
- The more concerning part is the creditor is not a normal bank, but a shrewd credit investor – MSD Partners (Michael Dell’s family office)
- This makes covenants more important, as they are less likely to be lenient then a normal bank
- Maturity: December 2023
- But they have a $10m amortisation amount due in Dec-20
- Liquidity of at least $3m at the end of each quarter
- Asset Coverage ratio of at least 2.5:1.0
- Asset Coverage Ratio = Value of Mortgaged Properties / Term Loan + Revolver
- Any proceeds from Asset disposals must first go toward retiring the outstanding debt
- The Credit Agreement can be found here https://www.sec.gov/Archives/edgar/data/16099/000119312518349903/d636171dex101.htm
- As this is somewhat of a melting ice cube, the longer it takes for them to sell the assets off, the lower the asset value that will be available for distribution to shareholders
- However, as I said before, given the alignment with management, they are highly incentivised to move as quickly as possible
History & Background
Luby’s operates two fast casual dining chains:
- Luby’s Cafeteria: founded in 1947 in San Antonio, serves great tasting, home-style meals, at an excellent price point in a Cafeteria format
- 78 locations, mostly in Texas
- Fuddruckers: founded in 1980, serves premium burgers in a lively atmosphere
- 139 location (41 company owned)
The company has been publicly traded since 1982 and originally was a great performer. However, in the early 2000’s the company was struggling under too much debt and declining same-store-sales.
In 2001, Chris and Harris Pappas, a pair of extremely successful restaurant entrepreneurs, stepped in to help save the company through a $10m convertible note. They also took on the roles of CEO and COO. A major restructuring occurred over the next 2 years, involving assets sales etc. to get the debt to a manageable level. They initially had great success, with sales bottoming in 2003 before returning to growth and the balance sheet being back to a net cash position by 2006.
Then the GFC hit, and sales declined by 23% from 2007 to 2010. They managed to keep the business cash flow positive throughout this period, and in 2010 they paid $61m to acquire Fuddruckers out of Bankruptcy. This took them from a net cash position to net debt.
The company looked to be doing well, but in 2012 margins started coming under pressure as they pushed on with expansion. Since then, same-store-sales have turned negative, the company took on more debt and things have spiralled – culminating in what is now essentially a liquidation.
Real Estate Portfolio
Property Appraisal from 2019 Annual Report
Number of Properties
Leased to Fuddruckers Franchisees:
Non-operating held for sale:
To “sense check” these numbers, I looked up a selection of the Luby’s locations via the local county appraiser:
So the average Luby’s Cafeteria site is ~10,500 square feet, with amble on-site parking, a low “land utilisation” level and an average appraised value of ~$210 per square foot.
If we compare this to the appraised value in the annual report we get:
- Appraised value: $154m
- Number of properties: 52
- Estimated square feet per property: 10,500
- Implied total square feet: 546,000
- Appraised value per square foot: $282
So the appraised value is ~30% higher than the tax values on average – which doesn’t seem unreasonable.
The final check is to look at what similar properties are currently for sale in their markets:
5002 Columbia Ave
1719 N Fitzhugh Ave
436 Southerwestern Blvd
410 W Elmore Ave
3910 W Camp Wisdom Rd
3132 W Miller Rd
2904 S Ervay St
1001 Robbie Mince Way
2600 Forest Ln
1201 Myrtle Ave
6190 Doniphan Dr
9567 Dyer St
1387 George Dieter Dr
6930 Alameda Ave
8045 N Sam Houston Pky W
14297 Stuebner Airline Rd
22210 Loop 494
234 E 39th st
816 Montana St
718 E Tidwell Rd
16485 Imperial Valley Dr
519 Shepherd Dr
2111 S 2nd St
4325 N Cage Blvd
901 S Jackson Rd
11221 Perrin Beitel Rd
9035 Huebner Rd
12030 Bandera Rd
250 Enrique M Barrera Pkwy
801 W Russell Pl
4615 W Commerce St
13719 W Interstate 10
2010 N Loop 1604 E
2618 Fredericksburg Rd
10127 Coachlight St
7003 Bandera Rd
The overall average and median are $283 and $202.
Based on this data, a price of $200 per square foot seems like a reasonable guess, which is pretty close to the tax assessed value average. This implies a ~30% discount to the appraised values in the 2019 Annual Report, and forms the basis for my estimate in my NAV calculation.
While the number of franchised stores has declined somewhat in recent years, from 110 in 2014 to 102 last year, the average sales per store has steadily increased – which shows that the underlying franchisee’s may be doing ok.
The EBITDA from franchised operations, which should be a good estimate of pre-tax free cash flow, has consistently been around $5m p.a. since 2013. An 8X multiple of this seems about right to be, which is where I get my $40m valuation.
Luby’s isn’t a no brainer, and as such I’ve only made a very small bet thus far. However, it does seem to present a decent margin of safety, with a lot needed to go wrong (big hair cut to RE appraisal + material cash burn) for it to result in a permanent loss of capital. So I think it could be worth a punt.
As mentioned earlier, I’d really welcome views as I’m not overly familiar with the industry, geography or brands in this situation.
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