The company exited bankruptcy on January 17, 2013 with a plan to sell assets, reduce debt, and shed underperforming sites. Even with the exit there is a lack of clarity for investors but I believe this overhang will disappear in the next 6-12 months. Investors today can purchase STRZ at a 29% FCF yield that has strong real estate assets ready to be monetized.
Background
Star Buffet is a rare investment because there is a margin of safety in the balance sheet and ongoing cash flows. Both of these are hidden because audited financial statements have not been released since exiting bankruptcy. Looking at various documents I will try to reconstruct the balance sheet and where we stand today. My estimates are from PACER Doc 267, 113, post confirmation sheets, discussions with management and estimates.
Upon exiting Ch. 11 STRZ had these approximate liabilities:
Loans owed to Wells Fargo: $5.77 million
Other mortgage debts: $5.09 million
Robert Wheaton Loan: $1.99 million
Robert Wheaton Exit Loan: $300,000
Unsecured Creditors: $2.0 million
Property Tax & Admin: $2.5 million
Total Liabilities To Be Paid Down: $17.65 million, of which $13.15 million is interest bearing debt.
The company planned to sell 10 properties and use the proceeds to pay down liabilities. Below is a table showing these sites. If these restaurants are sold at marketed value they would cover most of the major liabilities listed above. Whether or not they'll actually get the marketed value is a point for debate, but we do know that the company sold two sites and shut down three K-Bob sites.
Table 1. Marketed Value of Sites for Sale or Sold
|
Property
|
City
|
State
|
Marketed
Value
|
|
HomeTown
Buffet
|
Yuma
|
AZ
|
$
1,950,000
|
|
HomeTown
Buffet
|
Scottsdale
|
AZ
|
$
2,250,000
|
|
Buddy
Freddy's
|
Plant
City
|
FL
|
$
2,500,000
|
|
Whistle
Junction
|
Titusville
|
FL
|
$
1,800,000
|
|
South
Daytona
|
FL
|
$
1,350,000
|
|
|
Ocala
|
FL
|
$ 650,000
|
|
|
4Bs
|
Kissimmee
|
FL
|
$
1,400,000
|
|
4Bs
|
Hudson
|
FL
|
$ 750,000
|
|
4Bs
|
Jacksonville
|
FL
|
$ 950,000
|
|
4Bs
|
Layton
|
UT
|
$
2,250,000
|
|
Not
Marketed
|
|||
|
4Bs
|
Sierra Vista
|
AZ
|
|
|
Total
|
$
15,850,000
|
On May 31, 2013 the company announced that they sold a JJ North's Country Buffet in Yuma, Arizona. The proceeds were used to pay back Wells Fargo. Again, there was no indication for a final sale amount. And again, we can look at the Post Confirmation Report to get an idea of the final amount. In the Q2 2013 Post Confirmation Report (Doc 431) STRZ reports making a payment of $1,296,673 in the current quarter and $2,328,746 paid to date.
These amounts and the creditor paid(Wells Fargo) have been confirmed by management, which means the site at Yuma, AZ received 66% of the marketed value ($1.296M paid, marketed for $1.95 million in Table 1). The remaining distributions total $5,511,643, according to the Q2 Post Confirmation report. This is the remaining Wells Fargo loans and the unsecured creditors. While we know the marketed value for the remaining properties it is probably overstated significantly.
Conservative Property Sales
As expected, each property has a wide variance of traffic, nearby attractions, upkeep, and most importantly, potential. It should be clear from the Yuma, AZ sale that marketed value is optimistic. Below we can see valuations for individual properties.
Scottsdale, AZ: Marketed for $2.25 million
This is a 14,960 square foot (SF) facility on 1.55 acres of land. It was sold in 2001 for $1.7 million and has been assessed for $1.319 million, which seems to be a conservative estimate.
Sale Estimate: $1.319 million or 58% of marketed value.
Plant City, FL: Marketed for $2.5 million
This Buddy Freddy's is a 8,552 SF building being offered at $292/SF. It is being offered as a sale-leaseback at a 9% cap rate. An owner could come in and enjoy a 10 year lease on the property. I believe the long lease life, performing restaurant, and high cap rate make this marketed value reasonable. Restaurants like Ruby Tuesday have been able to sell off sites at less than 7% cap rates(obviously not a great comparable but puts us in the right direction). To be conservative I will cut the offered rate by 10%, implying a cap rate of 10%.
Sale Estimate: $2.25 million or 90% of marketed value.
Titusville, FL: Marketed for $1.8 million
This is a vacant 10,811 SF former Whistle Junction. It is being offered at a 7.2% cap rate ($129,600 NOI). Titusville has unemployment in excess of 8%. As a general rule of thumb I think local cap rates should be higher than local unemployment rates. There are two other restaurants being sold in the area for $115/SF and $136/SF. These are smaller but to be conservative I will assume that this Whistle Junction gets sold at $125/SF, the average of the two other restaurants.
Sale Estimate: $1.35 million or 75% of marketed value.
South Daytona, FL: Marketed for $1.35 million
This is a 11,414 SF ($118/SF) site leased by Ocean Buffet Inc until 2021. It is being offered at an 8.5% cap rate (implied NOI of $113,900). When judged against local $/SF and cap rates, this Ocean Buffet seems fairly priced. To be conservative I will assume it gets sold at a 10% cap rate.
Sale Estimate: $1.13 million or 83% of marketed value.
Ocala, FL: Marketed for $650,000
This is currently leased as El Azteca at a 7.27% cap rate and there are two years left on the lease. It is difficult to predict whether or not the lease gets renewed and I believe it is likely that a buyer will wait for a new lease in hand before moving forward. To be conservative I will assume it gets sold at a 10% cap rate.
Sale Estimate: $472,000 or 72% of marketed value.
Kissimmee, FL: Marketed for $1.4 million
This is a 9,888 SF vacant restaurant that has been reduced to $800,000. Clearly there is not a lot of value in this property besides the land and redevelopment potential. I will assume that it ultimately gets sold for $500,000, which is simply a large haircut to the current sale price.
Sale Estimate: $500,000 or 35% of marketed value.
Hudson, FL: Marketed for $750,000
This is not a gem of a property, but there is 9,367 SF on 2.8 acres ready for redevelopment. When a flier says "Make Your Best Offer!" I think it is safe to assume that the best offer ends up being quite low. I will assume that this gets sold for $375,000.
Sale Estimate: $375,000 or 50% of marketed value.
Jacksonville, FL: Marketed for $950,000
This site was bought from SBI leasing in 2012 and converted to a Dollar General. The site was bought by Millennium Venture Group who paid $500,000.
Actual Sale: $500,000 or 52% of marketed value.
Layton, UT: Marketed for $2.25 million
This is a 9,934 SF former Hometown Buffet. Data is rather sparse in the Layton, UT area so I will make an educated guess. They offered this for lease at $10K/month, $120,000/year. At a 10% cap rate that would be $1.2 million. A cap rate like that is significantly higher than other cap rates in the area, so I think it is conservative.
Sale Estimate: $1.2 million or 53% of marketed valued.
The table on the next page summarizes the values for each location. It should be stressed that there is no precision in these calculations. In this case though we don't need GPS coordinates, simply a compass telling us which way is north.
Table 2. Dichotomy Capital's pricing for STRZ properties listed in the bankruptcy proceedings
|
City
|
State
|
Realistic/Actual Price
Sold For
|
|
|
Yuma
|
AZ
|
$1,296,000
|
SOLD
|
|
Scottsdale
|
AZ
|
$1,319,000
|
|
|
Plant City
|
FL
|
$2,250,000
|
|
|
Titusville
|
FL
|
$1,350,000
|
|
|
So. Daytona
|
FL
|
$1,130,000
|
|
|
Ocala
|
FL
|
$472,000
|
|
|
Kissimmee
|
FL
|
$500,000
|
SOLD
|
|
Hudson
|
FL
|
$375,000
|
|
|
Jacksonville
|
FL
|
$500,000
|
|
|
Layton
|
UT
|
$1,200,000
|
|
|
Total
|
$10,392,000
|
||
|
Marketed
Value
|
$15,850,000
|
||
|
%
of Marketed Value
|
66%
|
||
While it certainly looks suspicious, I did not set out to arrive at a 66% sale value(which is equal to the Yuma, AZ sale). In any case it seems reasonable that the end sale prices will be between 60-70% of marketed value. No matter what the sales end up at they must be used to pay down the mortgage debt.
Deleveraging
Enterprise value comes in at $17.08 million ($6.75M market cap + 13.15M debt minus $2.82M for the three properties already sold). EV/EBITDA is 4.9X (17.08/3.5) and shareholder accretion is simple: keep paying down debt by selling real estate and generating FCF. The eight sites that were listed have a marketed value of $10.6 million and I estimate that they will generate proceeds of $8.59 million. The table below shows what equity value would look like if the company is valued strictly at 4.9X EV/EBITDA and the real estate sales are used to pay down debt. There are other sites that will be sold too but were not discussed as a potential site, i.e. the Sierra Vista site. I have not included any other sales like the Sierra Vista site to be conservative.
Table 2. EV/EBITDA table after Real Estate Sales
|
%
of Marketed Value Realized
|
||||
|
In '000's
|
Current
|
50%
|
75%
|
90%
|
|
Debt Paid Off
|
---
|
$
6,950
|
$
10,425
|
$
12,510
|
|
Enterprise Value
|
$
17,080
|
$
17,080
|
$
17,080
|
$
17,080
|
|
Equity Value 4.9X EV/EBITDA
|
$
6,750
|
$
13,700
|
$
17,175
|
$
19,260
|
|
Per Share
|
$
2.10
|
$
4.26
|
$
5.35
|
$
5.99
|
Even if we apply a large haircut to the marketed real estate values and assume that they sell for 50%, at a constant 4.9X EV/EBITDA the company has a per share value of $4.26. The obvious concern though is what happens if they don't sell the restaurants? If large real estate plays like Sears and JC Penny have taught us anything, commercial real estate takes time, patience, and several plans. Ignoring the fact that STRZ is a different animal and Amazon has yet to displace buffet restaurants, investors can still bank on robust cash flow from the operating business.
Ongoing Cash Flows
To keep this simple Doc 113 shows expected cash flows. The projections seem reasonable and work off the assumption that in 2013 the company will generate $39 million in revenues, $3.5 million in EBITDA and $2.0 million in FCF(basic definition) from 37 total sites. Compared to the last four years this EBITDA and FCF expectation seem in-line. Right now the company has 3.213 million shares outstanding, for a current market cap of $6.75 million($2.10/share). The company is being valued at 3.4X FCF which is very cheap no matter how you slice and dice it.
One risk is that all of this cash flow is very concentrated. Casa Bonita generated $7.3 million of the company's revenue and $1.467 million of the firms operating profit in 2012(total operating profit was $1.74 million in 2012). If something goes awry in Denver the company is simply a bunch of barely profitable restaurants and some real estate. After discussions with management I am confident that Casa Bonita is performing well and the estimates presented in court documents are proving accurate. At today's price they don't have to be spot on, just in the ballpark. Obviously the next big step is the release of financial statements.
When are updated financial statements going to be released?
This is the million dollar question and is probably the reason why shares have languished in the low 2's since exiting bankruptcy. According to management financials will be released once the auditors sign off on all liabilities. After filing bankruptcy creditors came out of the woodworks(they always do) and filed multiple claims. This resulted in numerous redundant liabilities. Management insists, and I believe, that these will end up right around the level declared in the court documents, $2.0 million. Right now they are a little over $6 million, which seems like a lot but just a few months ago these stood at $14 million. Nothing changed between then and now, but this process takes time. I sincerely doubt that the court would have approved a unsecured number that was 7X off the real value.
Once the auditors and the company reconcile liability differences I expected financials to be released. I expect this to happen in the next three months.
Conclusion
Star Buffet is a compelling investment opportunity today and has a greater margin of safety today than it did when it exited bankruptcy, despite almost no price movement. The sale of multiple properties, continued cash flows, and aligned management has set shares up for material appreciation. I believe the current overhang is due to investors not clearly valuing the company due to a lack of audited financials. While this is a concern now, once these statements are released the company should emerge as a robust cash flow generator that is selling off real estate.
Investors today can win in several ways and can sleep easily at night knowing that the company is selling at a 29% FCF yield and is selling off restaurants to deleverage. With the forced use of cash flows and asset sales the margin of safety is clear for a patient investor.
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