Description

Thesis

Luby’s is in the midst of a voluntary liquidation and its equity currently trades at a valuation of ~$87mm ($2.81 /share), but we think the equity is worth ~$141mm ($4.52 /share), which equates to the shares trading at 62% of intrinsic value on a levered basis (54% on an unlevered basis) and offers a ~89% IRR to a cash flow weighted average duration of just under 1 year.

Our ~$141mm valuation of Luby’s equity is comprised of seven components:

1. +$36.6mm in cash
2. +$69.2mm in real estate (24 restaurant properties located in Texas)
3. +$19.9mm for the notes owed (and liabilities assumed) by Luby’s Restaurant Corporation, the buyer of Luby’s Cafeteria brand and 35 operating locations (stated adjusted aggregate consideration from the sale is ~$28.4 million)
4. +$12.4mm for the secured notes owed by Black Titan Franchise Systems LLC, the buyer of Fuddruckers brand and franchise business (total face value of $15.5mm; coupon ranges from 5% to 15%; maturity dates range from 12/31/27 to 1/15/30)
5. +$14.2mm for its culinary contract services business
6. +$0mm for the remaining restaurant operations (22 locations of Luby’s and 6 locations of Fuddruckers)
7. -$11.3mm for wind-down costs

We estimate a cash flow weighted average duration for this voluntary liquidation of just under 1 year. The timing of cash returns will be primarily driven by 1) the timing of the sale of the remaining 24 properties, and 2) the timing of the sale of the debt instruments that were received as consideration for the sale of Luby’s and Fuddruckers restaurant operations. Our timing estimate generally aligns with management’s statement in the FY 2021 10-K that they expect the “liquidation [will be] substantially complete by June 30, 2022”.

We think this opportunity exists because after 10+ years of the market valuing Luby’s as a struggling restaurant operation, we think the market does not fully appreciate the value of the underlying real estate value to be realized via near-term sales. Additionally, we think the market looks heavily to management’s estimated future liquidating distributions value which is currently $3.00 per share. Management’s estimates from the commencement of the liquidation process have proven conservative, and we think management’s current estimate continues to be conservative. Furthermore, the company is small (with a poison pill with a ~10% threshold), has no sell-side coverage, no longer does earnings calls, etc.

We view the primary risk to our base case valuation to be that the debt instruments received as consideration for the completed Luby’s and Fuddruckers restaurant operation sales, become impaired to a much greater extent than the 20-30% discount we have applied to them.

Notwithstanding the risks to our base case valuation, we think the probability that intrinsic value ends up much lower than the current share price is quite low. In our low case, where Luby’s value consists of $36.6mm in cash; $50.3mm in real estate (tax appraised value); $0 of proceeds from the sale to Luby’s Restaurant Corporation; $9.3mm of value for the Black Titan Franchise Systems Note (60% of face value); $7.1mm for the culinary business (2.0x pre-COVID LTM EBITDA); and $12mm of wind-down costs; Luby’s shares would be worth ~$2.93 per share. Consequently, we think Luby’s equity has little fundamental downside from the current price and thus offers a very asymmetric investment opportunity.

Background on Liquidation Process

On June 3, 2020, Luby’s announced that it will pursue a sale of its operations and assets and distribute net proceeds to stockholders.

On September 8, 2020, Luby’s Board adopted a Plan of Liquidation; the initial estimated aggregate liquidating distributions was $3.00-$4.00 per share (equivalent of $1.00-$2.00 today after adjusting for the $2/share dividend paid in November 2021).

As of November 24, 2020 Luby’s owned 65 properties; operated 60 Luby’s cafeterias and 24 Fuddruckers restaurants; had 71 franchised Fuddruckers restaurants; and had a Culinary Contract Services business which had 26 contracts.

On June 17, 2021, Luby’s announced that it had sold the remaining Fuddruckers franchise to an affiliate of Nicholas Perkins for $18.5mm of value “(most of which will be derived from the purchaser's issuance of a note to Luby's and assumption of certain liabilities)".

On June 21, 2021, Luby's announced it had agreed to sell 32 Luby's restaurant stores (but not the underlying real estate) for $28.7mm in value "(all but a nominal amount of which will be derived from the purchaser's assumption of Luby's liabilities and the purchaser's issuance of notes to Luby's)". When the transaction closed on September 1, 2021, 35 stores were sold instead of the initially announced 32 stores. The aggregate consideration amount was updated from $28.7mm to $28.4mm when the Company filed their FY 2021 10-K in November 2021.

On September 3, 2021, Luby's announced that it has sold 26 properties for $88mm in cash (all of which were Luby's Cafeterias and were leased to the buyer of the 35 Luby's restaurants) to Store Capital. This transaction closed on September 30, 2021.

On October 1, 2021, the company issued a press release announcing the closing of the sale of the 26 properties, and that also provided an increased estimate for future liquidating distributions of $4.89 per share (up from $4.13).

On October 13, 2021, Luby's issued a press release announcing its first liquidating distribution of $2.00 per share payable on November 1, 2021.

On November 19, 2021, Luby’s filed its 10-K which provided incremental detail on the consideration received from the recent asset sales and also increased the estimated future liquidating distributions to $3.00 per share ($5.00 before the $2/share dividend)

Valuation – Real Estate

The company currently owns 24 properties. We believe we have identified 23 of the 24 remaining properties in the table below. Note that for the property we have yet to identify, we have used the average of the 23 identified properties as placeholder metrics.

We value these 24 remaining properties at 1.45x tax appraised value which equates to $72.9mm of gross proceeds or $69.2mm of net proceeds (assuming ~5% transaction fees). This also equates to $293 per SQF (excl. the 2 vacant lots). We think 1.45x tax appraised value (and ~$293/SQF) is reasonable as a result of 1) the recent 26 property sale which we believe took place at 1.68x tax appraised value and at $313 per SQF, and 2) the recent 4 “subsequent events” property sale which we believe took place at 1.63x tax appraised value and at $314 per SQF. We also believe our valuation generally comports with prior publicly disclosed valuations of the portfolio at that time less subsequent sale proceeds plus estimated subsequent price appreciation.

Sale of 26 Properties to Store Capital (Announced 9/3/21; Closed 9/30/21)

On September 3, 2021, Luby’s announced that they had entered an agreement to sell 26 properties to Store Capital for gross proceeds of $88.0mm.

From the various disclosures, we think we have identified the 26 properties sold to Store Capital in the table below.

Given our methodology, we think the 26-property sale to Store Capital transaction earlier this year equates to 1.68x tax appraised value and $313 per SQF.

Recent Sale of 4 Properties

In the FY 2021 10-K, the company disclosed in its “Subsequent Events” footnote that: “Subsequent to August 25, 2021, in addition to the properties sold to Store Capital, we sold four other properties for cash consideration of approximately $13.0 million.”

Below are the 4 properties we think are the properties sold subsequent to year end.

So far, we have seen warranty deeds filed for 5901 South Hulen and 13400 San Pedro, but the other 2 properties at 7511 FM and 11023 Shadow Creek have not yet been confirmed by public records, but are included as part of our list of the 4 properties sold because their LoopNet listings recently changed to state that they were no longer listed for sale. Note that 8511 Tesoro Drive, listed in the table that details the remaining 24 properties, has also had its LoopNet listing recently changed to state it is no longer listed for sale. Of the 3 properties with their LoopNet listings recently taken down, we decided to place the one with the smallest tax appraised value (8511 Tesoro) in the retained properties list.

Assuming we have correctly identified the 4 recently sold properties, the sale price equates to 1.63x tax appraised value and ~$314 per SQF.

Valuation – Note owed by Luby’s Restaurant Corporation, the Buyer of Luby’s Restaurant Operations at 35 Locations

On August 26, 2021, the company sold the Luby’s Cafeteria brand and 35 operating locations to Luby’s Restaurant Corporation (a newly-formed affiliate of Calvin Gin).

Details on the nature of the consideration received are sparse. Below is the disclosure from the 10-K which updates some of the prior 8-K/10-Q disclosure, but still leaves many questions unanswered as to the details of the consideration received.

“Subsequent to the end of fiscal year 2021, on August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party for an adjusted aggregate consideration of approximately $28.4 million which includes the assumption of certain liabilities and the issuance of notes to us. There can be no assurance that we will realize or receive full value of such consideration. The net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation at August 25, 2021 at a discounted rate that represents the amount we expect to receive upon liquidation.”

We haircut the $28.4mm of stated proceeds by 30% (an admittedly crude and arbitrary number) to adjust for the uncertainty around the details of the consideration received as a result of poor disclosure (e.g., we do not know how much of the $28.4mm is debt vs. liabilities assumed; we do not know the coupon or maturity date on the debt; etc.), and the possibility of future impairment. As a result, we value this asset at $19.9mm in our base case.

Valuation – Secured Promissory Notes owed by Black Titan Franchise Systems LLC (Buyer of Fuddruckers Brand and Franchise Business)

On August 6, 2021, the company sold the Fuddruckers franchise brand (with ~70 franchised locations) to Black Titan Franchise Systems LLC (an affiliate of Nicholas M. Perkins and Black Titan Holdings, LLC, who previously acquired 13 franchise locations).

While the initial press release estimated proceeds to Luby’s of “approximately $18.5 million of value (most of which will be derived from the purchaser’s issuance of a note to Luby’s and assumption of certain liabilities)”, we get more refined detail from the latest 10-K which states:

“The buyer of the Fuddruckers brand and franchise business has executed and delivered secured promissory notes in the aggregate amount of $15.5 million. The notes bear interest at rates ranging from 5% to 15% per annum and are scheduled to mature between December 31, 2027 and January 15, 2030. Under the liquidation basis of accounting, the secured promissory notes have been included in the consolidated statement of net assets at a discounted rate that represents the amount we currently expect to receive upon liquidation of the notes.”

We haircut the face value of the $15.5mm face value of notes by 20% (again an arbitrary number, but modestly better than the Luby’s haircut as we feel a bit better about these assets and we have a bit more disclosure) to reflect a potentially below market coupon on the debt (we do not know the weighted average coupon or weighted average maturity date). As a result, we value the Secured Promissory Notes owed by Black Titan Franchise Systems LLC at $12.4mm in our base case.

Valuation – Culinary Contract Services Business

The Culinary Contract Services business provides food, beverage, and catering services to clients at the clients’ locations. Clients generally include healthcare facilities (hospitals, medical centers, surgical centers, senior living facilities, etc.), sport stadiums, corporate dining clients, and sales through retail grocery stores. This business consists of 26 contracts/locations with the majority located in the Houston area.

We value this business using its $3.55mm of trailing 12-month EBITDA as of 12/18/19 which is the last LTM period available prior to COVID. We think using pre-Covid LTM EBITDA is appropriate as we think the earnings power of this business has likely fully recovered given the nature of the business, and given what we can see from the trajectory of the recovery of the business in 2020 (the last quarter with disclosed CCS EBITDA is FY Q4 ’20 which ended on 8/26/20 and by this time EBITDA had already bounced back to 80% of the prior year period).

We value this business at 4.0x its pre-COVID LTM EBITDA or ~$14.2mm. We selected 4.0x EBITDA after giving consideration to the business requiring almost no capex and the business being high ROIC, but offset by the fact that it is a small business that is not currently growing. Our base case valuation equates to about a 25% pre-Covid unlevered free cash flow yield.

Valuation – Remaining Restaurant Operations

Luby’s still owns and operates the Luby’s Cafeteria restaurant operations at 22 locations (14 managed by Luby’s and another 8 managed by Luby’s Restaurant Corporation pursuant to a management agreement). Additionally, Luby’s still owns the Fuddruckers restaurant operations at 6 locations.

We find valuing these remaining restaurant operations difficult given a general lack of information, and while we can imagine a scenario where there is modest positive value, we can also imagine a scenario where there is modest negative value, and hence we call it a wash and ascribe no value to these remaining restaurant operations in our base case.

Valuation – Wind-down Costs

We utilize managements estimate for wind-down costs (see “Liability for estimated costs in excess of estimated receipts during liquidation” on the balance sheet dated 8/25/21 in the latest 10-K) as we think the $11.3mm is a reasonable estimate given the scope of the operations and assets remaining to be wound up and given how this estimate has trended so far in the liquidation process.

Taxes

As of 8/25/21, Luby’s has $27.8mm of net tax assets excluding the valuation allowance. At tax rates of 21-25%, the tax asset suggests somewhere between $111mm and $132mm of gains in book value that would not be subject to income tax. Unfortunately, we do not know the book value of the assets as of 8/25/21 that corresponds with the net tax asset disclosure and which would need to be added to the $111-$132mm untaxed gain figure to be able to estimate total proceeds that could be generated before taxable gains begin as of 8/25/21.

If one takes a similar approach but for the end of FY 2020, we can estimate total proceeds that can be generated before income taxes on gains start to kick-in as of 8/26/20. The book value of equity on 8/26/20 was $73.6mm. Adding the $73.6mm of book value of equity to the implied gain not subject to income tax at that time of $118-$140mm ($29.5mm of net tax asset excl. allowance at 21-25% tax rates) suggests Luby’s could generate $192mm to $214mm of total proceeds as of 8/26/20 before income tax started acting as a drag on additional sale proceeds.

Our base case valuation would result in Luby’s generating ~$203mm in future proceeds as of 8/26/20 (i.e., our current base case valuation of ~$141mm before deducting the ~$62mm used to fund the $2.00 per share dividend paid on 11/1/21), which is close to the middle of the range of the 8/26/20 tax attributes analysis in the proceeding paragraph, and consequently we do not think there will be much tax drag if our base case valuation is realized.

Conclusion

We think Luby’s equity at $2.81 per share is a very attractive investment as it is trading at 62% of levered intrinsic value and 54% of unlevered intrinsic value, and we estimate an IRR of 89% (just under 1 year cash flow weighted duration) in our base case while we think there is very limited downside as our low case valuation is $2.93 per share.

Disclaimer

The views expressed herein are for informational purposes only, and are not intended to be, and should not be, relied upon as an investment recommendation in connection with any investment decision for any purpose or for legal, accounting or tax advice.  This information does not constitute an offer to sell, or the solicitation of an offer to buy, any security.  The author makes no representation as to the accuracy or correctness of the information contained herein and expressly disclaims any liability to any person from relying on such information.  The information and views contained herein are provided as of the date this summary was posted and present the views of an investor that currently holds a long position in the company’s securities.  The author has no obligation to update any of the information provided herein.  The author reserves the right, in light of, among other factors, its ongoing evaluation of the company’s financial condition, business, operations and prospects, the market price of the company’s stock, conditions in the securities markets generally, general economic and industry conditions, its business objectives and other relevant factors, at any time, to decide to purchase, sell, or engage in any other transaction involving, the company’s securities as it deems appropriate.   Past performance is neither indicative nor a guarantee of future results.  There can be no assurance that an investment in the company will be profitable or that the assumptions regarding future events and situations will materialize or prove correct. 

Catalyst

The continued liquidation of the company results in increases to management’s estimated liquidation value, and then ultimately cash distributions from asset sale proceeds.