Ark Restaurants (ARKR): Progress With Long-Anticipated Casino Catalyst?
The odds of a Meadowlands Casino are improving, and that's good news for ARKR stock.
Shares in Ark Restaurants (ARKR) have been the subject of renewed attention as of late. Recent attention has had little to do with the company’s smattering of restaurants across the country, and more to do with Ark’s 7.4% stake in The Meadowlands, a harness race track located just outside New York City, in East Rutherford, NJ.
Speculation is heating up that, despite many years of discussion about it, not to mention a failed 2016 referendum on the issue, that New Jersey is going to expand casino gambling beyond Atlantic City, and allow for the licensing of a full-fledged casino in North Jersey, with The Meadowlands a top contender to obtain the license.
To say such a development would move the needle for ARKR stock is an understatement, but is it worthwhile to enter a position today, as shares pull back after recently hitting a 52-week high? Perhaps so, for several key reasons I’ll explain below.
Ark Restaurants: Background
Based in New York City, Ark Restaurants is, as its name suggests, a restaurant operator. A somewhat quirky publicly-traded company, Ark at its start in the 1980s was a New York City-focused restaurant operator, but today owns/operates just two in the Big Apple, following the recent closure of a third NYC restaurant, El Rio Grande.
During the 1990s and 2000s, Ark expanded beyond NYC, and today these locations make up the bulk of its operating business. Ark operates restaurants in Washington, D.C, Florida, and Alabama, and operates restaurants and food concessions at gaming properties, namely the New York, New York Casino Hotel in Las Vegas, as well as at The Meadowlands.
Ark also is majority owner/managing partner of food court operations at the Hard Rock Hollywood and Hard Rock Tampa casinos, but as discussed in Ark’s recent 10-K filing, Hard Rock and Ark agreed to terminate the Tampa lease last November, with the Ark-managed partnership set to receive a $5.5 million termination payment. 65% of this, or $3.575 million, will go to Ark.
Recent Performance
As seen in the company’s latest financials, Ark’s operating business is not doing so hot right now. Over the past few fiscal years, revenue has been flat, all while expenses have soared due to labor and food cost inflation. Since FY2022, EBITDA has nearly halved, from $14.2 million to $7.2 million.
Take a listen to Ark’s latest post-earnings conference call, and it’s hard to be confident that the situation is going to improve anytime soon. On the call, CEO and founder Michael Weinstein mentioned how issues like rising labor costs are stabilizing, but provided little in the way of insight into how the company stands to improve profitability at its existing locations.
As for new locations/concepts, Weinstein also offered little insight, stating “Not very much to say in the way of new business that we're trying to put on our books. We've been looking at a few things. We've had some negotiations. Nothing fruitful has happened. We continue to look.”
That said, while results and prospects for Ark’s legacy operations hardly set the world on fire, commentary on the call regarding The Meadowlands does help to explain why investors have been placing their bets on ARKR stock as of late.
ARKR Stock: Casino Catalyst Comes Back With a Vengeance
There’s been talk about a casino expansion at The Meadowlands for decades. What’s held it back thus far has been successful lobbying from Atlantic City casino owners. However, while plenty have burned before by arguing “this time it’s different,” this time there may truly be a different outcome when it comes to the North Jersey casino question.
When it comes to regional competition, Atlantic City is not just cooked, but well done. There are now casinos all over the mid-Atlantic. In the New York City metro area, two racetracks (Yonkers and Aqueduct) already have thousands of slot machines, and the State of New York is in the process of awarding 3 full casino licenses.
New Jersey is becoming less worried about a possible Meadowlands Casino cannibalizing Atlantic City, and more worried that full casinos in New York, with slots and table games, will hoover up gambling dollars New Jerseyans would typically take down the shore.
That’s not all. Back at the time of the 2016 referendum, Meadowlands majority owner Jeff Gural made a deal to partner with Hard Rock, if a casino project was approved. Although Hard Rock is also participating in one of the New York City casino bids, considering said bid continues to experience setbacks, at best Hard Rock’s NYC bid is a dark horse contender.
Assuming other operators win the licenses, Hard Rock, looking to counter the impact of NYC casinos on its Atlantic City property, may become more willing to throw its weight behind efforts to lobby for a Meadowlands Casino.
Hence, I’m inclined to believe Weinstein’s promising statement on the earnings call regarding Meadowlands Casino. Per Weinstein, New Jersey’s legislature is likely to take another look at legalizing a casino at “The Big M,” once New York announces the winning bidders, which is expected to happen by the end of this year.
Although the casino catalyst remains a long-shot, the odds of it happening are improving. Shares are already up nearly 40% in recent weeks because of this. Further progress could drive additional moves higher, given how a Meadowlands Casino could be boon for Ark, in more ways than one.
If Meadowlands Casino Approved, ARKR Could Triple, Even Quadruple in Price
At current prices, Ark Restaurants has a market cap of $49.6 million. Per the balance sheet, there is $10.3 million cash on hand. Outside of $5.2 million in outstanding notes payable, the company has zero long-term debt, but does have $90.6 million in current and long-term operating lease liabilities.
When factored into Ark’s enterprise value, these operating leases create a scenario where ARKR appears richly priced. Adding the operating lease figure and notes payable to market cap, then subtracting the cash position, we get an enterprise value of around $135.1 million.
Against TTM EBITDA of $7.2 million, this means ARKR is trading at around a 18.8x EBITDA multiple. That may sound pricey, but it’s in line with the current valuations of similar publicly-traded restaurant stocks, such as Meritage Hospitality (MHGU) and The ONE Group Hospitality (STKS).
Furthermore, taking these out of the calculation, we get an implied EV/EBITDA ratio of 6.4x, which one can argue would be a fair price for Ark’s existing restaurant operations. This ratio could also help us estimate how much more Ark could be worth, if the Meadowlands Casino expansion goes through.
As mentioned above, approval of a Meadowlands Casino could benefit ARKR, in more ways than one. First of course, if such a development happens, the value of Ark’s 7.4% stake, on the books for $6.55 million, would undoubtedly rise substantially. It’s unclear whether Ark will cash out its investment if a casino is approved, or if it will roll over its equity into the new project, perhaps even participating in capital calls for the $2 billion project.
Irrespective of which scenario plays out, however, I assume that the market will react strongly, maybe even overreact, to Meadowlands Casino approval with ARKR. It may just well be enough to cause shares to double from current price levels.
Alongside a possible windfall for its relatively small investment in Meadowlands, there’s also the fact that Ark has the exclusive right to any casino-related expansion of food and beverage operations at Meadowlands. As Sophon Capital Management mentioned in a recent tweet, such an expansion could increase Ark’s EBITDA by as much as $15 million.
In other words, resulting in a tripling of Ark’s EBITDA from present levels. This is assuming current operations continue to be stagnant. Add in possible proceeds from selling its Meadowlands stake, and ultimately this potential catalyst, if it plays out in real life, could result in ARKR stock tripling, if not quadrupling, in price.
High Risk, High Reward, but the Potential Downside Not So Severe
It goes without saying that, if there’s little movement with a Meadowlands Casino project in 2026, recent gains are likely to reverse course. ARKR, at $13.75 per share today, could fall back into the single-digits.
Yet beyond sizing a position to account for this elevated risk, consider that the downside with ARKR may not be as massive as it seems. Even if a busted casino catalyst is coupled with other negative developments, such as further deterioration in operating performance, this could be mitigated by additional factors.
For instance, remember that the company has several million dollars coming to it shortly, following the termination of the Hard Rock Tampa food court lease. While not certain, perhaps it’s possible a similar scenario will play out at Ark’s other food court location at the Hard Rock Hollywood.
Even more uncertain, but food for thought: what if Ark figures out a way to have MGM Resorts buy out its New York, New York food concession? This could result in Ark receiving financial proceeds that outweigh the loss of future cash flows from these operations.
Also, Ark owns the real estate at 4 of its restaurant locations, two in Florida and two in Alabama. These properties are on the books for $18.4 million.
Assuming a 7% cap rate, (a conservative estimate, given the low cap rates many NNN-leased restaurant properties are going for), a sale leaseback would reduce EBITDA by $1.3 million, but unlock a figure equal to around 37% of ARKR’s current market cap. Ark could distribute these proceeds as a special dividend, or maybe even use it as means to finance a management buyout of the company.
Much like similar enterprises operating multiple one-off restaurants, like Lettuce Entertain You Enterprises and Great American Restaurants, Ark makes more sense as a privately-held business than a public company. Even if Ark decides not to go private, an infusion of capital could go a long way to re-focus business on what works.
As Weinstein also mentioned on the conference call, Ark’s Original Oyster Houses in Alabama have been the company’s “most consistently good performing venue.” While the prospect of a New York restaurant impresario pivoting his business towards Gulf Coast seafood restaurant sounds like fodder for a “fish out of water” comedy, it may just well make more economic sense to do so.
Bottom Line on ARKR Stock
Don’t get me wrong. I’m not bullish on ARKR, because I believe a “Florabama” pivot will turn this ship around. It’s all about the Meadowslands catalyst. While investors bullish on Ark in 2016, and even earlier, were burned by buying in due to this factor, given what’s playing out in New York, the stars for this catalyst may be finally aligning.
I’ve profited from owning ARKR in the past. I bought in during the height of Covid lockdowns, laying out a Covid reopening-focused bull case for it on Seeking Alpha. I cashed out sometime in 2022 or 2023, can’t remember exactly when. Hats off to Sophon Capital Management for getting me back into this stock. I hadn’t looked into the situation since selling, and Sophon’s recent tweet brought to my attention the big potential here.
I have entered a small position, but given it’ll be nearly a year before the Meadowlands catalyst (possibly) begins to play out, I anticipate opportunity to build a larger position, on further weakness.