Ark Restaurants (NASDAQ:ARKR) Q3 2020 Earnings Call

0:00 Greetings and welcome to ARC Restaurant's third quarter 2020 results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sonal Shah. Thank you. You may begin. Thank you, Operator. Good morning and thank you for joining us on our conference call for the third fiscal quarter end of June 27, 2020. My name is Sonal Shah and I'm General Counsel of ARC Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO, and Anthony Sirica, our Chief Financial Officer, Vinnie Pascal, our Chief Operating Officer.

0:52 For those of you who have not yet obtained a copy of our press release, It was issued over the news wires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arcrestaurants.com. Before we begin, however, I'd like to read the Safe Harbor Statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements and that these statements are not guarantees of future performance. and therefore undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial conditions. I'll now turn the call over to Michael.

1:46 Hi, everybody. So I'm going to call on Anthony first to explain What expenses were incurred in the June quarter during the absence of any operations of the restaurants by government closure? So, Anthony, why don't you give us an explanation of that? Right. So, obviously, the June quarter, a bunch of our restaurants were either closed for the entire quarter, some are still closed, as well as some... as noted in the press release, opened up at various times during the quarter. So we have gone through our P&Ls and identified costs associated with payroll and occupancy expenses at the restaurants from the closure date or the beginning of the quarter, which would be March 29th, through either the date they opened or through the end of the quarter if they haven't opened yet.

2:47 And That amounted to about approximately $2.3 million of costs related to payroll, rents, and inventory write-offs, things of that nature that we would not have incurred if we made the election to keep certain people at the restaurants on the payroll at reduced salaries while the properties were closed so we would be in a good position to reopen them quickly When we got the word from the various state and local governments With that, we did open a number of properties during the quarter As you can see in the release We opened our restaurants in Florida Rustic Inn, Shuckers, and JB's opened in mid-May The food courts at Tampa and Hollywood opened in early June Our operations at the New York, New York Resort and Casino in Vegas opened in, I believe, the second week of June Our Sequoia property in Washington, D.C. opened in early June And our Bryant Park and Rio Grande properties in New York opened in late June, on or around June 23rd or 24th Turning it over to you, Michael Yeah, and Alabama opened sometime in May as well Yes, Alabama opened in mid-May as well. And included in the $2.3 million, we have not included any corporate expenses

4:22 or salaries for the continuing corporate employees, although they're reduced levels, because we felt those were somewhat fixed. Correct. So the operations of these restaurants... Some of them went smoothly, some of them did not go smoothly. Two of our restaurants were closed for a period of time after they opened because they had COVID cases. It's somewhat confusing with the local health departments what the protocols are. They had not been well established. We felt if we had more than one or two COVID cases in a restaurant that we had to close them, get everybody tested.

5:10 continue testing until we had enough people with negative results to reopen. So Shuckers during this period of time was closed for I think a period of eight or nine days. Gulf Shores was closed for probably five or six days while that process took place. All of these restaurants are subject to and all the weeks that it's operated. It has recently been affected and the sales have declined as California experienced the spike in cases.

6:18 A lot of Vegas businesses drive in from California. The hotels are also experiencing cases. So it's in general a problem for volume at New York, New York. But so far we managed to be on the whole cash flow positive. Alabama has been cash flow positive despite closing Gulf Shores, which is the bigger generator for cash flow in Alabama, the two that we have in Alabama. Florida in general has been on the whole cash flow positive. JB's has been cash flow negative from the first day. That tends to have an older crowd and with the spikes in Florida, I think our customer base is more wary than they are at other restaurants. Strangely enough, the casinos, the two hard rock casinos in Hollywood and Tampa are doing quite well and Vine has been building every week.

7:30 It sort of goes against What we initially thought, we would have thought the casinos would not do as well as they're doing. We would have thought JB's with its location on the beach in Deerfield Beach and lots of outdoor tables and spectacular views and a restaurant that used to, prior to the pandemic, throw off $2 million in cash flow at an annual rate. We would have thought that would have done well. It is not, and I guess it has to do more with, as I said, our customer base. In Washington, D.C., Sequoia is doing a decent amount of volume because of its 600 outdoor seats on the Potomac River, so it's been an attraction.

8:26 We have a new menu in there that we put in as we opened that seems to have gotten traction. But again, without events allowed and with indoor dining limited, without the help of the landlord, it's impossible to be cash flow positive. We think we're getting that help from the landlord, although at best it'll help us break even on cash flow That deal has not been finalized. Any deal we have with any landlord throughout the country is sort of on a temporary basis through December because we can't predict where the world is going to be beyond that if we can predict it even to December.

9:19 Bryan Park and El Rio Grande, both are restaurants in New York which have outdoor seating capacity. We are losing cash flow on both of them. We want to be open. The cash flow loss in El Rio Grande is moderate. The cash flow loss in Bryan Park, despite the number of outdoor seats we have, has been significant. We want to be open because we want to be a good citizen of the park, and the park has treated us very well. It's difficult to open a restaurant of that size when in full bloom it has a thousand seats.

10:05 You just can't open it with one or two people in the kitchen and a couple of people servicing customers at tables. It takes a lot of payroll to just get it open. Utility costs are high just to get it open. It cannot make money. Again, we want to be open because it's the right thing to do for our landlord. All in all, there is cash flow prior to corporate overhead. There's positive cash flow prior to corporate overhead. Corporate overhead, I guess Anthony could tell me, but we're When the restaurants were closed, nobody in the company was allowed to make more than $50,000 at an annual rate. Once we got some cash flow and could demonstrate to ourselves that there would be cash flow from the restaurants to help mitigate corporate payroll, we increased everybody to roughly 65% of what they used to make, on the exception of making less than that.

11:17 We've worked hard on corporate expenses. Our health insurance costs, we were able to renew at a lower rate, and that'll save us significant money over the year. We switched carriers. Our benefit package actually improved. The network is... More robust. So we think we managed to do a good thing at a lower cost. We're just looking at everything we can look at. We will not make money in the December quarter. If anything, it will negatively impact the amount of cash we have on our balance sheet because we have deposits for people that are Planning Christmas parties, you know, that's not going to happen.

12:16 Events are going to be limited to a small number of people if they're allowed at all. Indoor seating in New York will be de minimis to what our capacities could be. Social distancing will limit the number of seats we can have at any of our New York restaurants. We are not open at Clyde's because we have no outdoor seating. Indoor seating in New York is not allowed. Same thing with Robert at the Museum of Harden Design. And the museum is closed. We expect those restaurants to open up in mid-September, but again with reduced seating. Anthony, why don't you explain the value or lack of value of PPP money and what we do?

13:08 Right, so we applied for and received approximately $15 million of Paycheck Protection Program loans under the CARES Act. I would say two-thirds of that money came in on April 30th or May 1st, and the balance of the money came in between mid-May and the end of May. The way the current regs are written, you have 24 weeks from the date that you received the money to spend the money. So, for instance, in a situation like Robert or Clyde's, where we received the money on May 1st, the restaurants aren't even open yet. And we don't even know if they'll get open by the time the 24 weeks expires. So at that point, we have to make a business decision.

13:55 If the rules are not changed as to whether we return the money or keep the money at a 1% two-year loan, But that we would have to discuss with our bank because we have certain lending capacity with them that we want to maintain. So that is the difficulty with many of these loans where either the restaurants, the properties aren't open and we cannot spend the money or they're open in a situation like Bryant Park and the revenues are so low that we can't even incur the payroll to get it above 60%, which is the requirement for forgiveness, in order to be able to have the loan forgiven.

14:41 So again, another situation, Brian Park, where the rents, the base rents, which we'll talk to the landlord about, but if the current base rents, we would never be able to spend 60% of the money on payroll to offset the base rent in order to have the loan forgiven. So we would again have to make a business decision and talk to our bank as to what we would do with these funds, whether we turn them or take them as a loan at 1%. There are certain restaurants, Gulf Shores being one of them, where the EPP money will be converted into a grant. Las Vegas will be probably converted, most of it, into a grant.

15:28 You know... There are a handful who will get a grant, and that will help our balance sheet in the end because those restaurants are cash flow positive. They didn't need BP money to be cash flow positive, and we're able to spend it according to the formula that the government laid out. So there will be money granted. Of the $15 million, Anthony, take a guess, $5 million to $8 million will be granted? Yeah. I would say at least seven to eight, hopefully more. Yeah, so that'll help our balance sheet. The big problem becomes, you know, other than the unknown and how the virus will be either contained or not contained over the winter months, that's an unknown.

16:24 And our revenues are, you know, largely unknown, too. in New York because of that. I think in the South and in Vegas, the governors are not going to close those facilities. In the South, especially, you know, in Florida especially, if they are going to have a season, which usually begins, you know, Christmas week and lasts until Mother's Day, if cases are, you know, contained, and people are willing to fly and vacation in Florida, we should see revenues in Florida increase. But it's a week-to-week situation. And, you know, again, in New York, we only have outdoor seats. In Washington, D.C., basically outdoor seats.

17:17 If it rains one day, you know, or two days, or we have a hurricane like we had last week, which affects the Northeast, you know, these revenues and cash flows become... Unpredictable. We hope Florida has a season. We hope progress is made on the virus. We're very encouraged by what happens in the two casinos in Florida. Our business just seems to be increasing every week. We would expect, once you get out of the heat of August in Las Vegas, revenues to increase. That would be additional cash flow. But I can assure you, with all of these unknowns, we're staying around.

18:06 A balance sheet is strong enough to withstand this. Our bank has been very cooperative, and it's not a deteriorating situation. In my view, it's going to be an improving situation as we get further and further away from that. from these months. With that, I'm happy to answer any questions. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please.

18:55 What we've told for questions. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. It appears there are no questions. At this point, I'd like to turn the call over to Michael Weinstein for closing comments. Oh, excuse me. We had someone jump into the queue. We do have a question from Steve Olson, a private investor. Please proceed with your question. Good morning. Thanks for taking my questions.

19:42 Can you just run quickly over the current debt balances, cash, you know, net debt as of the end of June? Anthony? Yes, including the PPP loans, we have $45.5 million of debt, and we have $21 million of cash. Okay. I'd like to break in here. A lot of that debt, roughly $20 million, was created by our purchasing... JB's on the Beach, Chuckers, and the two restaurants in Alabama, which came with the land and the buildings.

20:31 We're our own landlord there. So that $20 million of that is specific almost to the real estate. We essentially created Rustic Inn, for instance, which is our best one of them. of the four, but Skull Shores is not far behind. We bought Rustic Inn for $7.5 million when it was earning $1.5 million. Pre-pandemic, it was earning $3.5 million. We believe that given current interest rates on a sale leaseback, we could give up $1 million of rent and probably get 12, 13 million dollars for that property.

21:25 Michael, can I just jump in one second? The total balance on those loans is now about 13 million after they've been amortizing for a number of years? Yeah, they've been amortized down dramatically. So because of the way we acquired those, that value doesn't really show on our balance sheet. in a way that's easily understandable. But we can unlock with purchase leaseback, sale leaseback, a significant amount of money. So that's sort of a fallback plan.

22:13 During the last couple of months, we've been busy and not really investigating that. But cap rates are very favorable right now. Now, the tax benefit that was booked in the quarter, will some of that be eligible to be refunded in cash for prior taxes paid, or is that just an adjustment to kind of deferred tax account on the balance sheet? No, we'll be filing carryback claims, you know, Back to, I think, 14 or 15, I forget. It's 15, Anthony. I think we missed 14. Yeah, I mean, the tax, well, I don't know if we missed it yet.

23:00 But anyway, we'll be filing carryback claims, and we expect to get refunds, you know, somewhere in the range of a million and a half, two and a half million dollars. On the Meadowlands investment, last quarter the 10Q referenced that an impairment analysis was done and it was determined that the fair market value exceeded the carrying value, so no impairment charge was necessary. Is that analysis done quarterly? It did not appear in this quarter that any impairment charge was taken. So if you could just kind of comment about the Meadowlands investment and then kind of relating to that investment, the The mobile sports betting, was that a one-time fee that joint venture got?

23:48 Or will future years, will money be coming into that joint venture? I understand we're just an investor in that entity. But will that entity get additional cash from the mobile sports betting? All right. So I'm remiss in not having... had any dialogue with you on this call about Meadowlands. So thank you for the question and it gives me an opportunity to tell you where we think we are. We're somewhere around on a fully diluted basis now, an 8% holder of interest in the LLC that is the new Meadowlands racetrack. And we have You know, in the mid $5 million investment in it.

24:42 The early years when we had that investment, we had to pony up some money for our share of the losses. That has not been the case in sports betting. The sports betting deals were done by Jeff Corral, who's, you know, the... and the general partner in this. In the case of FanDuel, they paid a $7.5 million one-time fee and a $7.5 million advance of profits. The way the deal works is after expenses, the Meadowlands is a 50% partner in the profits.

25:35 MetaLands immediately became the I think the largest venue in the United States for sports betting. It certainly does multiples of what all the casinos in Atlantic City are doing in terms of sports betting. There was also internet betting deals and we get a percentage of the cash flow of that and so the FanDuel deal is ongoing, but there was an advance of $7.5 million that will, I think, be used up in the first two years. The internet stuff, I'm not sure of the cash flows there, but we're a continuing partner of that. The Meadowlands became cash flow positive pre-pandemic, and then, you know, all of a sudden there are no sports.

26:33 But there's still betting going on, and so I think the Meadowlands, you know, probably is, you know, a little bit above break-even in terms of cash flow. The situation is that Murphy has stated publicly, you know, the state is, you know, in dire straits, and he would like to see a casino in the north. The The temperature for that will increase once New York has downstate casinos. They're due to come online or the license is due to be issued in December 2023, but there has been an interesting development in terms of how we perceive the timeline in that Cuomo has not allowed the upstate casinos to be open.

27:29 and the upstate casinos have said, listen, we got open, you're killing us and if you open, let us open the covenant that you gave us when we built these things that you won't open downstate until December 2023, we're willing to allow that covenant to expire and you can give out licenses right now as long as you allow us to open. So if that were to happen, the timeline when New Jersey would all of a sudden see populations going to Yonkers and Aqueduct for casino experiences might hasten the time period by which there's a casino in the north.

28:15 We do not have an exclusive in terms of that the Meadowlands racetrack will be the site, but it's the only site that has... Presently has gaming in the north. It's the only site that is insulated from neighborhoods that might object and have legal opposition to it. And it's the only site that has all the environmental credentials that it needs. And it's the only site that you don't have to build. I mean, we can, within a month, have slot machines installed. in the building. So it was designed to be a casino and it would be the phase one of a casino that Hard Rock would be the operator of.

29:05 They're a partner in it. So, you know, not that we remain calm about it, but I think the timeline may have been accelerated as to when this thing could become a casino. Last quarter, the 10Q disclosed the investment of about $500,000 in three restaurants in Ohio. Can you talk a little bit more about this project and opportunity? I know you've discussed it previously, so it seems like it's moving along. It's not moving along. So Easton, Ohio, is one of the most highly productive restaurants.

29:50 Malls, for lack of a better word, in the country. There are 52 restaurants in that project, many in the small, but you do have Cheesecake and Smith-Wilensky and P.F. Chang's, etc. And the developer came to us and basically, who I've known for many years, said, Michael, these restaurants, the project, the Easton Town restaurant, Center is 20 years old. And he said, some of our leases are expiring. We're very unhappy with the quality of the product. There's nothing that generates enthusiasm in these 52 restaurants.

30:36 Leases are coming due. We don't want to renew them. Would you help us redevelop conceptually what these restaurants should be? And we made a deal to start out with three. That deal, we invested $500,000 of which some $200,000 is the responsibility of the Eastern Town Center. But we fronted the money. They have recently sent us a check back for half of it because the project is on hold until We get a better outlook about how Eastern Town Center is doing. By the way, it's doing better than the developer thought it would do during this period, but it's still not back to where it was.

31:32 Quite frankly, we just put everything on hold because we don't want to infringe upon our cash right now until we get a better outlook for the company. We still talk to the developer every other week, I think, and the developer still wants to go ahead eventually, but right now they're on hold as well. I mean, they're only collecting something like 40% to 50% of the rents, so it's hard to imagine it's a big development company, but they're having cash problems in terms of developing products. New relationships and I think at this point they don't want to start anything where they have to make a substantial tenant improvement allowance.

32:26 So that's on hold. There are other opportunities that I'm having a meeting tonight with a company that has many projects nationally that have restaurants in them that are not going to reopen. and they're looking to do something with us to, you know, get them tenanted. What those deals could be at this point, I'm not sure, but, you know, essentially we're not going to be putting up money to, you know, to be a lessee in any space. We prefer to be a buyer like we were in Rustic and Shuckers in Alabama.

33:13 and be our own landlord. And if we're going to spend money, that's where it's going to be spent. But there are opportunities, I think, where, you know, developers are in trouble. They don't have viable tenancy anymore in their restaurants. And a lot of them are closing. So there may be opportunities for us to manage facilities and other developments. But, you know, all of that, you know, Subject to what happens with this virus. And we're not rushing to expand. Right. You know, I understand that, but there might be, you know, opportunities to opportunistically add some units without incurring additional, you know, GNA expenses and using your expertise.

34:07 We think so. We think so. Yeah. But there's a risk. Generally, in those deals, unless a landlord is going to do something that they're not used to doing, which is making investment in working capital losses beyond kind of improvements, you can lose a lot of money before this all turns around. So it's difficult for everybody. We know two things. We believe it's not mythology. We believe this deep in our hearts. After 9-11, I said to everybody, I made this speech twice. After 9-11 and during 2008-2009, another time we suspended the dividend until we got our footing back. I said, look, we have great assets.

35:10 They've been very productive in the past. They'll be productive again. We just got to get through this timeline. And that's what I believe here. And so, you know, we've got to be constantly looking to say, what's this balance sheet look like? How many months or years of runway do we have? and we have a lot of runway now with our balance sheet and I'm not going to impair that right now. So any deal we do to expand would have to be a deal that we do not impair that balance sheet or we do a deal where we make a commitment that at some time in the future when conditions are better that we'll be would be in a position to do the deal.

36:06 But right now, everything's dangerous. Honestly, everything's dangerous. Would you calculate the cash burn for the quarter in the $3 million to $4 million range? Well, the $4.5 million, whatever the cash burn was in the current quarter, was exacerbated by us just being closed everywhere. It was helped by the fact that nobody in the company was allowed to make more than $50,000. You're talking about, in one case, four salaries at corporate with bonuses went from $3 million to $200,000. Our managers, some of whom make...

37:04 Vegas, he's in the mid six figures. Most of our managers are in the mid 200,000. Everybody was taken down to $50,000. Our managers, our chefs, everybody sacrificed. I'm not trying to be a person handing out propaganda here. Thank you and best of luck. Appreciate all the efforts. Thank you. Roger Lipton with Lipton Financial Services And the rest will probably be returned.

38:33 You think you'll return it rather than hang on? It's cheap money, 1% money. Yeah, but we have a bank to deal with. Right, right. And it's only a two-year amortization. I know they changed it to five years, but the five years with the loans made after June 5th, I believe, and These banks are not cooperating and changing the paperwork from two to five years currently. Right, right. So recognizing there's a lot of moving parts here and anything can happen day to day. Right now, I mean, as we sit here today, what's sort of the monthly cash burn if it is burning? It's not that much. Anthony?

39:18 I'm still waiting to finalize the July P&L, but I think it's probably about 200,000 a month, say. Right, right. Okay. All right. You know, as you say, you never can tell what next week brings. Right. The vaccination, the vaccine could help a lot and all that. And, you know, just back when the towers were burning, you know, who would have ever thought that new towers would be built and people would rent space on the top of those buildings, you know? Yeah, that's true. So never say never. We'll get a new mayor, and this city will come back. All right, Michael, good job. This is a strange world. We'll do our best here, so good work.

40:07 Thank you so much, Roger. Thank you. There are no further questions at this time. At this point, I'd like to turn the call back over to Michael Weinstein for closing comments. All right, I hope we got... The answers you need into your hands, but we're always available. I'm happy if anybody has questions to give you my cell number. It's 646-322-9197. If I don't have the answer, I'll merge us in with Anthony and we'll get you the answers you need. Again, 646-322-9197. Other than that, we'll see you tomorrow. This concludes today's conference call. You may disconnect your lines at this time, and we thank you for your participation.