RUTH – THE BANKS ARE DRIVING THE PROCESS, AT THE EXPENSE OF THE SHAREHOLDERS.

The press release associated with RUTH’s recently completed sale lease-back transaction was a difficult one to read. Basically, Wells Fargo wants its money back and forced the company to use the cash proceeds from the sale leaseback to reduce the Company's outstanding debt balance on its revolving credit facility.

In the press release, the company said “the primary corporate objectives in the current environment is to maximize free cash flow and pay down debt, so that we can ensure maximum operating flexibility as well as remove any risk related to our debt covenant compliance.”

Unfortunately, the sale leaseback accomplished the exact opposite from what the company was trying to accomplish. The only way that this transaction provides more flexibility is that it might put off the company filing bankruptcy. Owning real estate and not paying rent is a much more conservative restaurant operating model. In the end, although the company may have reduced debt balance on its revolving credit facility, the overall leverage of the company did not change much. How ironic that the banks look at leases differently than debt.

You can surmise from all of this that Wells Fargo wants its money and is happy to spread the risk to a broader audience. Given the bind the company was in, I would expect that this transaction was dilutive to EPS. The weighted average interest rate on the company’s senior credit facility is 6.074%. The CAP rate on the sale leaseback is 8.45%. Clearly, Wells Fargo is getting its money back and it’s not in the best interest of shareholders.

Apparently there is still more work to do as the company goes on to say “In addition to several ongoing cost-cutting initiatives in the areas of supply chain, G&A, and restaurant level expenses, we believe monetizing some of the assets on our balance sheet is an effective means to reduce our leverage."

Accomplishing this task is going to be a tall order. From a G&A standpoint, there does not appear to be much fat to cut. Also, other than the recently acquired Mitchell’s Fish Market, RUTH owns the real estate under two more stores and the corporate campus in Florida. Needless to say, there are few, if any, buyers of restaurant assets that are going to give them a fair price.


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