MHGU - Meritage Hospitality

[DTEJD1997]

Hey all:

 

Here is another mini-micro-nano cap that I have a position in.  It has pulled back somewhat lately...but I think it might still be interesting.

 

This company mainly owns a bunch of Wendy's restaurants.  Not very exciting...BUT some interesting things are going on here...a lot of franchisees are looking to sell out as they near retirement age, and MHGU is rolling them up.  When they buy a 1 or 2 or 3 unit operation, they do get some efficiencies.  They also have better access to debt funding than the typical small owner.

 

They also have some of their own concepts.  The primary one is "Twisted Rooster" which is a mid-level restaurant.  They seem to be having some good success with it.

 

They will also have a totally new restaurant called "Freighters" which is on the water, in downtown Port Huron.  Hence the name Freighters, as you see them sail by.

 

Almost forgot,  they own some undeveloped land in the Bahamas.  They were hoping to have it developed into a resort.  Obviously this land is worth something.  How much?  Who knows....strictly a "bonus" type item.  It could be significant in relation to the size of the company though.

 

MHGU is also cheap JUST based off their restaurant operations.  They are showing some good growth, and good cash flow.

 

This is also the second year that they have paid a special dividend, albeit a very small one...

 

My guess is that if they can keep up the momentum, they could be earning close to $1 share in a few years.

 

Any thoughts?

[WideMoat]

Quickly looked at this yesterday.  You are right that the stock price would be higher if they ever earned $1 p.s.  It is difficult for me to imagine the path by which they get there.

 

Today's company carries a lot of leverage (both long term debt and lease obligations) with middling operations.  There will be a significant increase in capex in the near future as they remodel the Wendy's restaurants per the new designs.  They have 17 (?) properties owned.  The last few sale-leasebacks have generated roughly 500k per store cash at close.

 

So, from where I sit, they will need cash in the near future, and they don't have a lot of ways to generate much at low cost.

[bookie71]

If they should hit their projection of 5.4 net, they will be very close to the !.00 per share.

It's worth a closer look, thanks for bringing it up.

[Guest notorious546]

the debt load scares me, it seems like the business model is ok though.

[Guest notorious546]

GRAND RAPIDS, Mich., June 08, 2016 (GLOBE NEWSWIRE) -- Meritage Hospitality Group Inc. (OTCQX:MHGU), one of the nation’s premier restaurant operators, today announced it has completed the acquisition of 8 Wendy’s restaurants located in the Oklahoma City designated market area. The Company also reported it has signed a definitive agreement to acquire an additional 10 Wendy’s in the Oklahoma City designated market area, with the transaction closing planned for late summer.

 

Chief Executive Officer Robert Schermer, Jr., stated, “We are very excited about the opportunity to expand our footprint west of the Mississippi river with a portfolio of Wendy’s restaurants which have a long operating history and a market area with new restaurant growth opportunity.  This transaction represents our fifteenth acquisition in the past five years and is consistent with our past acquisition underwriting criteria. We intend to immediately begin the integration of these 8 Wendy’s restaurants into our web-based operating & accounting systems platform with 10 additional Wendy’s to follow later this summer.”

 

The Company expects the 8 restaurant acquisition to add approximately $11.5 million in annual sales and be accretive to earnings. The transaction was funded with a combination of cash-on-hand and debt financing provided by Mercantile Bank.

 

The Company continues to make significant restaurant investments in 2016 with the renovation of 18 existing Wendy’s locations utilizing the new image activation design standards and developing new casual dining restaurants.  The Company also reported that it has withdrawn from a previous purchase agreement to acquire 19 casual dining restaurants and continues to seek Wendy’s and casual dining acquisition opportunities where the Company believes it can add value using its web-based operating and accounting systems.

[jawn619]

The company looks cheap on the surface, but if you capitalize the leases it becomes less interesting. Also don't like that capex has been above operating cash flow for a while, while making acquisitions.

[DTEJD1997]

The company looks cheap on the surface, but if you capitalize the leases it becomes less interesting. Also don't like that capex has been above operating cash flow for a while, while making acquisitions.

 

I very strongly suspect that the cap-ex is higher than the cash flow because they are doing "image activation" for their older Wendy's units.  They explain this in their latest investor presentation.

 

I think they have quite a niche, buying out small unit operators of Wendy's that want to retire OR who don't want to invest to upgrade the units.  They get them at about 6x cash flow before refurbishment.

 

The real trick is if the image activation actually lasts 5-6 years instead of 1-2 years.

 

Of course, I foolishly sold after only quadrupling my money.  Should have stuck around and made 8x....

[Guest notorious546]

Anyone have information on the Class A & B Preferred shares? It looks like class A is owned by management and B is publicly owned (~41 holders as of last quarter).

 

How can i find out what the dividends are for each of these shares? I see on the retained earning statement 657,564 of dividends paid and 885,520 of preferred shares in total (29,520 A+856,000 B). If i simply divide the numbers and annualize for the year i get 2.97/share. That puts the current yield at ~15%. I dont think this is right as we don't have the rate of dividend being paid for each class. Class A or B could be higher/lower.

 

anyone help out?

[Guest notorious546]

according to my brokerage its $0.80/share for the B shares. at last trade of 19.69 its a ~4.1% yield.

[premfan]

The company looks cheap on the surface, but if you capitalize the leases it becomes less interesting. Also don't like that capex has been above operating cash flow for a while, while making acquisitions.

 

I very strongly suspect that the cap-ex is higher than the cash flow because they are doing "image activation" for their older Wendy's units.  They explain this in their latest investor presentation.

 

I think they have quite a niche, buying out small unit operators of Wendy's that want to retire OR who don't want to invest to upgrade the units.  They get them at about 6x cash flow before refurbishment.

 

The real trick is if the image activation actually lasts 5-6 years instead of 1-2 years.

 

Of course, I foolishly sold after only quadrupling my money.  Should have stuck around and made 8x....

 

Management is great.  Amazing execution.  The business is poor low GM.  Interesting company to follow. A long term thesis would be consolidation of 20 percent of all units.  This would bring maturity to 1,200-1,500 units.  I believe they are just under 200 currently. Could be long runway. That said, the low GM is a problem + possible wage increases. That said, robots will be used if needed. Which might cause some local community upheaval. Good company to follow. 

[DTEJD1997]

according to my brokerage its $0.80/share for the B shares. at last trade of 19.69 its a ~4.1% yield.

 

I am shocked that this is trading at this high a level....

 

Par-Value is $10/share.  These things are callable at not much more than that.  If these things get called in the next few years, a buyer could be looking at a HUGE loss...

[merkhet]

according to my brokerage its $0.80/share for the B shares. at last trade of 19.69 its a ~4.1% yield.

 

I am shocked that this is trading at this high a level....

 

Par-Value is $10/share.  These things are callable at not much more than that.  If these things get called in the next few years, a buyer could be looking at a HUGE loss...

 

Aren't they convertible to common shares @ $5.57 per share? So each preferred share should be worth 1.79 common shares. The call provision requires providing 15 days notice, so why wouldn't a preferred shareholder just convert once you get the notice?

[Guest notorious546]

according to my brokerage its $0.80/share for the B shares. at last trade of 19.69 its a ~4.1% yield.

 

I am shocked that this is trading at this high a level....

 

Par-Value is $10/share.  These things are callable at not much more than that.  If these things get called in the next few years, a buyer could be looking at a HUGE loss...

 

Aren't they convertible to common shares @ $5.57 per share? So each preferred share should be worth 1.79 common shares. The call provision requires providing 15 days notice, so why wouldn't a preferred shareholder just convert once you get the notice?

 

where did you find the conversion rate? i'm new to otc stocks and having some difficulty finding info.

[merkhet]

It's in the annual report. http://www.meritagehospitality.com/getattachment/Investor-Relations/Fiscal-2015-Annual-Report-2016-03-21.pdf.aspx

[NoCalledStrikes]

Interesting note in the OK City Wendy's purchase press release that "the Company also reported that it has withdrawn from a previous purchase agreement to acquire 19 casual dining restaurants and continues to seek Wendy’s and casual dining acquisition opportunities where the Company believes it can add value using its web-based operating and accounting systems."

 

My initial take is favorable since I prefer the company buy Wendy's over casual dining restaurants anyway since my thesis for MGHU is dependent on the company growing by practices it has already perfected, and I like the fact that the company has the discipline to walk away from deals on occasion. Still, the ability to expand the non-QSR side of the operation would greatly expand Meritage's growth potential as the company implied in its May BI presentation that Wendy's will ultimately put a limit on the number of Wendy's stores they can own. If anybody knows the back story on why the casual dining deal went south, I'd be interested to hear it.

 

http://www.meritagehospitality.com/getattachment/Investor-Relations/Meritage-Reports-8-Wendy-s-in-Oklahoma-City-2016-06-08.pdf.aspx

[ThanksAndYouAreWelcome]

Has anyone done work on what depreciation, and therefore earnings, is for Meritage? You expect this from growth + acq co, but clearly a big disconnect between actual capital and depreciation. Also, is there decent rules of thumb to use for returns & implied multiples for acquisitions? Does mgmt. have any stated hurdle rates or communicated what they define as 'accretive'?

 

Also, is anyone else a bit concerned the financials are not audited by one of the big 4? Clearly mgmt. holds a lot of stock, but I'm still trying to determine truly how aligned the company is with minority public shareholders... Any comments / color would be greatly appreciated.

[bookie71]

I have a large position in this company and am GLAD it isn't one of the big 4.  Maybe it is because I always worked at small firms and know that most do a much better job on smaller clients.  MHGU could be getting large enough to consider changing, but I don't think it is a game changer. Remember it sued to be the big 8 until there was all the audit failures from doing p_ _s poor work.

 

[Aman1]

I'm not involved in MHGU (and have never been), it's been in my "to do" pile for a while after having skimmed through a presentation and *loved* the underlying story. Things that stand out as most pressing in terms of needing answers:

 

1) Material levels of options oustanding (both through the prefs and stock options) - adds around 20% to share count and impacts valuation multiples quite materially. Understanding appetite for further dilution (including pref issuance) I think is important here:

 

2) Leases and off balance sheet financing appears to be material and needs to be reviewed more closesly, again particularly with regards to appetite for future use.

 

Points 1 & 2 are both important on a forward looking basis as with a glut of Wendy's likely to come to the marekt in the next 3 years (and need material capex spend to modernise), understanding how much levers 1 & 2 could be pulled - with one impacting equity dilution and the other impacting financial leverage / risk in the structure - is in some respects the detail that is more important to understand than the underlying thesis, which is actually pretty straightforward.

 

3) Obviously capex is running at elevated levels to support the growth strategy, but finding a clear way to measure the RoC of this capex is critical to confirm the business model works longer term.

 

Anyway, as the entry point here hasn't been *amazing* since I looked at it earlier this year, just "okay" (at first blush), I've not really bothered to put too much time into this name so far as have other things to occupy my time. Might come back to it if something materially changes.

[Guest notorious546]

GRAND RAPIDS, Mich., Aug. 10, 2016 (GLOBE NEWSWIRE) --

 

Meritage Hospitality Group Inc. (OTCQX:MHGU), one of the nation’s premier restaurant operators, today announced it has completed the acquisition of 10 Wendy’s restaurants located in the Oklahoma City area, bringing the Company’s total to 18 Wendy’s restaurants in the greater Oklahoma City market area. 

 

Chief Executive Officer Robert Schermer, Jr., stated, “We are excited about the opportunity to continue expanding our footprint in the Oklahoma City area with a seasoned portfolio of Wendy’s restaurants.  This transaction represents our sixteenth Wendy’s acquisition in the past five years and is consistent with our investment criteria. We intend to immediately begin the integration of these Wendy’s restaurants into the Company’s unique web-based operating & accounting systems platform, followed by an extensive remodeling program” added Schermer.

 

The Company expects the 10 restaurants acquisition to add approximately $13.8 million in annual sales and be accretive to earnings. The transaction was funded with a combination of cash-on-hand and debt financing.

 

The Company continues to make significant capital improvements in its restaurants with the renovation and opening of approximately 15 to 18 Wendy’s locations scheduled for completion in 2016. The Company continues to seek acquisition opportunities where management believes it can add-value using in-house development expertise and unique web-based operating and accounting systems.

[SmallCap]

I was a very interested shareholder roughly back in the 05-07 time frame. I felt it wasn't appreciated by the market because there were few comps and the diversity of it's parts didn't make sense to many people.

 

I was also interested because I live very close to the HQ. So I attended two of the annual meetings and what I saw there made me lose interest in the company and I ended up selling my position for a very small profit and I stopped paying close attention.

 

What I saw there was a great deal of avoidance in answering direct questions. I walked away unimpressed with the leadership. Nothing clear or blatant but the avoidance and their attitudes gave me pause.

 

As well the fact that this fast food restaurant operator, owned but didn't have a plan for their Caribbean  real estate holdings really made me wonder why they would own it. is it a excuse for corporate trips?

 

one thing I will add is that their new owned restaurant the crooked goose which is located around the corner from their HQ is a good restaurant and has been a supporter of many good things in the community, which is awesome but I don't know how they plan to grow that concept.

 

Just so you know I haven't read their annual reports in a few years so I am posting this without all the data.

[Guest notorious546]

I was a very interested shareholder roughly back in the 05-07 time frame. I felt it wasn't appreciated by the market because there were few comps and the diversity of it's parts didn't make sense to many people.

 

I was also interested because I live very close to the HQ. So I attended two of the annual meetings and what I saw there made me lose interest in the company and I ended up selling my position for a very small profit and I stopped paying close attention.

 

What I saw there was a great deal of avoidance in answering direct questions. I walked away unimpressed with the leadership. Nothing clear or blatant but the avoidance and their attitudes gave me pause.

 

As well the fact that this fast food restaurant operator, owned but didn't have a plan for their Caribbean  real estate holdings really made me wonder why they would own it. is it a excuse for corporate trips?

 

one thing I will add is that their new owned restaurant the crooked goose which is located around the corner from their HQ is a good restaurant and has been a supporter of many good things in the community, which is awesome but I don't know how they plan to grow that concept.

 

Just so you know I haven't read their annual reports in a few years so I am posting this without all the data.

 

any examples on what questions were askes and what the responses were. i realize its been a decent amount of time and well our memory only works so well. thanks for the commentary anywho.

[Guest notorious546]

Meritage Reports Definitive Agreements to Acquire 69 Wendy’s Restaurants Located Across Five States

Thursday, February 09, 2017 06:50:00 PM (GMT)

 

GRAND RAPIDS, Mich., Feb. 09, 2017 (GLOBE NEWSWIRE) -- Meritage Hospitality Group Inc. (OTCQX:MHGU), one of the nation’s premier restaurant operators, today announced it has entered into three independent definitive asset purchase agreements to acquire a total of 69 Wendy’s restaurants located in the Midwest and Mid-Atlantic states. The transactions are subject to customary due diligence and standard approvals. The three transactions are scheduled to be completed during the first and second quarters of 2017.

 

Chief Executive Officer Robert Schermer, Jr., stated, “We are inspired by the opportunity to expand our Wendy’s footprint into these new market areas. The consummation of these three transactions will represent the completion of nineteen Wendy’s acquisitions in the past eight years and are consistent with our stated investment strategy of 'profitable growth' within the Wendy’s franchise system. We intend to systematically integrate each of these Wendy’s restaurants into our unique web-based operating & accounting platform, followed by a long-term remodeling program designed to modernize the Wendy’s restaurants and enhance the guest experience. We look forward to welcoming the addition of 2,100 new employees to Meritage this spring,” added Schermer.

 

The Company expects the 69 restaurants to add approximately $90 million in annual sales and be accretive to earnings.

 

Company 2017 Outlook: Robust Sales & Earnings Growth Ahead

 

The Company’s initial 2017 financial targets will be updated at the end of the second quarter to reflect the impact of the acquisitions, which we anticipate will be accretive to sales and earnings growth going forward.

 

Meritage Hospitality Group is one of the nation’s premier restaurant operators, with 181 restaurants in operation located in Florida, Georgia, Michigan, North Carolina, South Carolina, Ohio, Oklahoma and Virginia. Meritage is headquartered in Grand Rapids, Michigan, operating with a workforce of approximately 6,200 employees. The Company has approximately 5.9 million (basic) common shares outstanding. The Company’s public filings can be viewed at www.otcqx.com, under the stock symbol MHGU, or the Company’s website www.meritagehospitality.com.

[ScottHall]

Meritage Reports Definitive Agreements to Acquire 69 Wendy’s Restaurants Located Across Five States

Thursday, February 09, 2017 06:50:00 PM (GMT)

 

GRAND RAPIDS, Mich., Feb. 09, 2017 (GLOBE NEWSWIRE) -- Meritage Hospitality Group Inc. (OTCQX:MHGU), one of the nation’s premier restaurant operators, today announced it has entered into three independent definitive asset purchase agreements to acquire a total of 69 Wendy’s restaurants located in the Midwest and Mid-Atlantic states. The transactions are subject to customary due diligence and standard approvals. The three transactions are scheduled to be completed during the first and second quarters of 2017.

 

Chief Executive Officer Robert Schermer, Jr., stated, “We are inspired by the opportunity to expand our Wendy’s footprint into these new market areas. The consummation of these three transactions will represent the completion of nineteen Wendy’s acquisitions in the past eight years and are consistent with our stated investment strategy of 'profitable growth' within the Wendy’s franchise system. We intend to systematically integrate each of these Wendy’s restaurants into our unique web-based operating & accounting platform, followed by a long-term remodeling program designed to modernize the Wendy’s restaurants and enhance the guest experience. We look forward to welcoming the addition of 2,100 new employees to Meritage this spring,” added Schermer.

 

The Company expects the 69 restaurants to add approximately $90 million in annual sales and be accretive to earnings.

 

Company 2017 Outlook: Robust Sales & Earnings Growth Ahead

 

The Company’s initial 2017 financial targets will be updated at the end of the second quarter to reflect the impact of the acquisitions, which we anticipate will be accretive to sales and earnings growth going forward.

 

Meritage Hospitality Group is one of the nation’s premier restaurant operators, with 181 restaurants in operation located in Florida, Georgia, Michigan, North Carolina, South Carolina, Ohio, Oklahoma and Virginia. Meritage is headquartered in Grand Rapids, Michigan, operating with a workforce of approximately 6,200 employees. The Company has approximately 5.9 million (basic) common shares outstanding. The Company’s public filings can be viewed at www.otcqx.com, under the stock symbol MHGU, or the Company’s website www.meritagehospitality.com.

 

That is a big deal. I bought some shares of these guys a while ago and am up about 4% after today's announcement. It looks like this will add nearly 50% to their sales overnight. If they can integrate it should be a home run, but I do worry they're not leaving themselves a ton of margin of safety here. Go big or go home, I guess?

[DTEJD1997]

Meritage Reports Definitive Agreements to Acquire 69 Wendy’s Restaurants Located Across Five States

Thursday, February 09, 2017 06:50:00 PM (GMT)

 

GRAND RAPIDS, Mich., Feb. 09, 2017 (GLOBE NEWSWIRE) -- Meritage Hospitality Group Inc. (OTCQX:MHGU), one of the nation’s premier restaurant operators, today announced it has entered into three independent definitive asset purchase agreements to acquire a total of 69 Wendy’s restaurants located in the Midwest and Mid-Atlantic states. The transactions are subject to customary due diligence and standard approvals. The three transactions are scheduled to be completed during the first and second quarters of 2017.

 

Chief Executive Officer Robert Schermer, Jr., stated, “We are inspired by the opportunity to expand our Wendy’s footprint into these new market areas. The consummation of these three transactions will represent the completion of nineteen Wendy’s acquisitions in the past eight years and are consistent with our stated investment strategy of 'profitable growth' within the Wendy’s franchise system. We intend to systematically integrate each of these Wendy’s restaurants into our unique web-based operating & accounting platform, followed by a long-term remodeling program designed to modernize the Wendy’s restaurants and enhance the guest experience. We look forward to welcoming the addition of 2,100 new employees to Meritage this spring,” added Schermer.

 

The Company expects the 69 restaurants to add approximately $90 million in annual sales and be accretive to earnings.

 

Company 2017 Outlook: Robust Sales & Earnings Growth Ahead

 

The Company’s initial 2017 financial targets will be updated at the end of the second quarter to reflect the impact of the acquisitions, which we anticipate will be accretive to sales and earnings growth going forward.

 

Meritage Hospitality Group is one of the nation’s premier restaurant operators, with 181 restaurants in operation located in Florida, Georgia, Michigan, North Carolina, South Carolina, Ohio, Oklahoma and Virginia. Meritage is headquartered in Grand Rapids, Michigan, operating with a workforce of approximately 6,200 employees. The Company has approximately 5.9 million (basic) common shares outstanding. The Company’s public filings can be viewed at www.otcqx.com, under the stock symbol MHGU, or the Company’s website www.meritagehospitality.com.

 

That is a big deal. I bought some shares of these guys a while ago and am up about 4% after today's announcement. It looks like this will add nearly 50% to their sales overnight. If they can integrate it should be a home run, but I do worry they're not leaving themselves a ton of margin of safety here. Go big or go home, I guess?

 

You can call me "Mr. Stupid" from now on....I bought these guys below $1.50/share and promptly sold out when they quadrupled in price in a few years.

 

Oh well, one of many lessons learned...

[PSDFinancier]

What is the right fully diluted share count? I see the ~6M basic shares outstanding, ~0.9M shares from preferred B, ~0.2M shares from preferred C, then ~0.7M of employee options and ~0.5M of directors options. So is the right diluted share count ~8.2M? That seems like a massive amount of dilution and I just wanted to make sure I'm reading this correctly.