Disclosure: One of us owns this. The author of this piece does not.
To state the painfully obvious, COVID-19 has been hard for a lot of businesses and especially businesses like restaurants. It has caused a lot of failures and follies and individuals to throw in the proverbial towel. One of those businesses is Luby’s Inc.. But when a real-estate-rich restaurant chain decides enough is enough how much are those buildings worth today? In Luby’s case, management says $3-4/share (vs $2.60-2.90 recently). Some say more! Some say a lot less..
A Bit of Background
Luby's, Inc. provides restaurant services in the United States. It operates through five segments: Luby’s restaurants, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations, and Culinary Contract Services. The company operates casual dining restaurants; and offers culinary contract services.
Pre-COVID the Company was already having a bit of an identity crisis when they announced in September 2019 “the formation of a new Board Special Committee and provided an update on several on-going initiatives, strategic operational plans and measures to right-size its corporate overhead.” See here - http://www.lubysinc.com/investors/news/files/LUB%20-Release-9-10-2019.pdf
On June 3rd 2020 the Company announced it was formally throwing in the towel when it “announced it will immediately pursue the sale of its operating divisions and assets, including its real estate assets, and distribute the net proceeds to stockholders after payment of debt and other obligations. During the sale process, certain of the Company’s restaurants will remain open to continue serving our guests.” -
http://www.lubysinc.com/investors/news/files/LubysPressRelease-6-3-2020-Final.pdf
The Wind Up
Here we go! Shareholders approved the wind up plan on November 10th - http://www.lubysinc.com/investors/news/files/Lubys-Press-Release-11-10-2020.pdf
Now there is a lot of information that they disclose in the proxy to shareholders that you should read through if you are interested in this, but for our purposes we will be moving on - https://www.sec.gov/Archives/edgar/data/16099/000121390020030326/0001213900-20-030326-index.htm
Some key points for discussion:
“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 (p8)”
“We estimate, assuming the sale of our assets pursuant to our monetization strategy, we could make aggregate liquidating distributions to stockholders, including any pre-effective date liquidating distributions, ranging between approximately $92 million to $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.”
Their latest balance sheet is as follows:
Now the core value of the company is the owned real estate. Based on a valuation in the summer they think everything is worth $191.5MM (though you have to be careful of the date they’re using; there have been some post Q2 sales you should adjust for). This compares to a depreciated book value of $104MM and undepreciated (i.e. cash cost) of $249MM. Probably reasonable, or is it?
Valuing in a COVID-World.
On top of untold health and financial damage COVID-19 is making, it is also making it hard to value certain assets. What is a special purpose-built restaurant building worth today? What about in a year? Adding into the fun is lower rates, which is making it easier to finance real estate (depending on the lender’s views of COVID of course).
First up, Seeking Alpha did a piece – “After carefully reviewing the Company’s acquisitions and the real estate in Texas, in my view, $1.85 per share is a reasonable liquidation value.” https://seekingalpha.com/article/4375197-lubys-real-liquidation-value-points-to-stock-price-downside
Hidden Value did a piece in June (pre-Company release) estimating the NAV per share at $2.80, and adj NAV of $2.15 including some cash burn. It also includes a nice gut check of individual properties. https://hiddenvalue.blog/2020/06/26/lubys-nyselub/
But it’s Boom Times Baby!
But deals are still getting done COVID be damned! In the middle of all of this pessimism comes along deals like Inspire Brands bid for Dunkin’ Brands for US$11.3 billion. Chad Finkelstein did a good opinion piece on this - https://www.theglobeandmail.com/business/commentary/article-the-wave-of-restaurant-chain-mergers-and-acquisitions-in-canada-is/
We have seen enthusiasm for deals ourselves, most notably covered in our recent piece of Front Yard Residential Corp. Their original sale blew up due to COVID-19 but now are getting bought out above their pre-COVID valuation! http://www.canadianvalueinvestors.com/home/2020/10/20/front-yard-residential-corp-nyse-resi-a-quick-crisis-case-study
Free money helps (or at least borrowing for very low single digit percentage points).
One of us decided to buy but this author is staying on the sidelines for two key related issues: Even if you can get comfort with the valuation (say it comes in at the top end of the range), it is challenging to move these types of assets in this COVID market. A rushed sale could lead to lower realized values and conversely more patience means more cash burn to wind things up. To counter that, a bull will say (rightly) that the valuation range provided by management was done mid-COVID and the Company’s entire sale process has been going on during COVID, and so expectations should take that into account. With a bit of scuttlebutt and footwork you might be able to get that range a bit more narrow and a bit more certain. Good luck!