Fertitta’s plan: Trim, borrow, adapt
Virus has CEO of Landry’s taking drastic steps
Tilman Fertitta poured himself his favorite drink, a Tito’s and soda with a splash of cranberry juice, before stepping into the boardroom next to his office where about 50 of his company’s top executives were waiting to hear his plan for operating during the coronavirus pandemic.
It was the afternoon of March 17, and what was about to happen seemed inconceivable.
Landry’s Inc., Fertitta’s global hospitality company, was having its best year ever. The Houstonbased company had just completed several acquisitions and had another big deal in play.
Fertitta, the boisterous Texas businessman who in the 1980s took a single suburban Houston restaurant and parlayed it into a multibillion-dollar hospitality conglomerate, was facing a reversal of fortunes the likes of which he and those around him could never imagine. He was about to shut down every dining room, every gaming table and every amusement park ride in the Landry’s portfolio.
As COVID-19 cases mounted
and Americans were being told to stay home, the company’s luxury hotels were rapidly emptying out and the Houston Rockets, the NBA team Fertitta had paid $2.2 billion for less than three years earlier, had just suspended its season.
With drink in hand, he addressed his top brass.
“For the first time in 40 years running this company, I’m having a drink at work because this is the hardest, most painful thing I’ve had to do,” he said, before announcing that the company would furlough tens of thousands of employees.
“If surviving is possible,” Fertitta said that day, “we will survive.”
Survival meant that the 62-yearold billionaire had to take drastic steps to position his company to ride out the pandemic. He furloughed 45,000 employees — nearly 75 percent of his workforce — and borrowed $300 million, agreeing to pay lenders close to 13 percent interest on the money.
Landry’s had enough cash going into the crisis to last through the end of the summer should the shutdown go that long. The $300 million, which was raised by the New York investment bank Jefferies Financial Group, was essentially an extra insurance policy should Fertitta’s properties remain closed through the end of the year.
“He’s doing exactly what the top operator would do,” said Jefferies CEO Rich Handler. “Tilman made sure he did everything possible that if, God forbid, this goes longer than the summer and throughout the rest of the year, he still has the staying power to keep his company intact so he can rehire all of his people.”
Fertitta and Handler have a long-standing relationship. They have partnered in two so-called blank check companies, raising a combined $566 million for future investments. Jefferies was the lead financial adviser in Fertitta’s recent acquisition of the upscale Del Frisco’s steakhouse chain.
“In the event he’s able to come out a lot sooner,” Handler said, “he’ll have dry powder to play offense again.”
“We’re very concerned that we could lose more money by bringing in all the labor and only being able to do 25 percent. There’s a business decision to this also.” Tilman Fertitta, CEO of Landry’s Inc.
Aggressive growth halted
Offense has been Fertitta’s prevailing growth strategy. The Galveston native, who has an estimated net worth of $4.9 billion, according to Forbes, has acquired the majority of his more than 60 hospitality brands racking up loads of debt and waiting for the right time to pounce.
In the last six months, Landry’s has purchased several chains out of bankruptcy: the Palm, Cadillac Ranch, Houlihan’s and Restaurants Unlimited Holding Corp. The company’s biggest recent acquisition was Del Frisco’s, which it purchased in November from Greenwich, Conn.-based private equity firm L Catterton in a deal estimated to be north of $300 million.
The timing was not ideal.
With the closures, Landry’s, which also owns five Golden Nugget casinos, is losing a little more than $2 million a day, Fertitta said. Hundreds of its restaurants have closed. Those still open are doing a limited takeout business. Not one is making a profit.
Landry’s was one of the first large hospitality companies to announce massive furloughs. With an annual payroll of $1.5 billion, there was no choice but to slash staff, Fertitta said in an interview. If it hadn’t, none of its employees would have a job to come back to when the world opened back up.
Focus on survival
Right now, it’s all about survival. Fertitta is confident his company can stay on track if his properties can begin opening in the coming months. But he knows consumers will be timid initially.
“Honestly, one of our biggest fears is we’re open and no one comes,” he said.
That worry is being put to the test, as some states are allowing restaurants to open at 25 percent capacity.
Landry’s has opened restaurants in Georgia, and many are open or expected to open in Texas per Gov. Greg Abbott’s phased reopening plan. But the reopening process isn’t as simple as turning on the lights and restocking the coolers. And there’s no guarantee of success.
“We’re very concerned that we could lose more money by bringing in all the labor and only being able to do 25 percent,” Fertitta said. “There’s a business decision to this also.”
Division heads will primarily make the calls on what to open. Fertitta said he wants his employees and his customers to be comfortable, and some may not be ready to come back.
Fertitta said Landry’s has been planning for what the return will look like. The restaurants will likely offer a limited selection of items. All menus will be printed on paper.
At his casinos, blackjack tables may allow only a few players at a time. Employees, and perhaps customers, will be required to wear masks. Slot machines will be taped up to ensure social distancing.
Cash flow and debt
Landry’s generated $4 billion in revenue last year with $750 million in earnings before interest, taxes, depreciation and amortization, Fertitta said. Capital expenditures were $200 million, and the company had $300 million in free cash flow. At the same time, he said , Landry’s paid $250 million in interest to service close to $5 billion in debt.
Credit-rating agencies have taken note. On April 9, Moody’s Investors Service downgraded Fertitta’s company, citing earnings and cash flow pressures due to the pandemic and uncertainty around how long its restaurants and casinos will remain closed.
Fertitta was nevertheless able to tap the $300 million arranged through Jefferies.
“He’ll have a huge interest bill in the next couple of years, but at least he can sleep safely at night knowing that the company is on more secure financial footing now and isn’t suddenly going to run out of cash,” said Will Caiger-Smith, associate editor of Debtwire, a news and data service focusing on the debt market.
Investors’ willingness to continue to capitalize a highly leveraged company speaks to Fertitta’s ability to perform, according to people who have worked with him.
“If you talk to 10 investment bankers, they’d all say the same thing. He’s a talented guy. He’s got the best brands,” said David Jacquin,
managing director for investment bank North Point Advisors in San Francisco. “He has a track record for delivering on his promises.”
Diversified tastes
Since founding the company in 1980, Fertitta has built a diversified restaurant portfolio that includes such brands as Joe’s Crab Shack, Rainforest Cafe, Saltgrass Steakhouse, Bubba Gump Shrimp Co. and McCormick & Schmick’s. In recent years he’s brought more high-end steakhouses into the fold. It is a product mix that could prove challenging during the recovery.
While steakhouses thrive during a strong economy, especially in Houston where corporate expense accounts can pay for a multitude of $50 steaks and $200 bottles of wine, the one industry that can move the needle here is in trouble.
“The oil business is dead,” said David Littwitz, a Houston restaurant broker and consultant. “And nobody is here for conventions. All that business is gone.”
Fertitta’s casinos are also down for the time being.
Almost 1,000 casinos in 43 states are closed in response to the coronavirus, and many gaming companies have furloughed 90 percent of their workers, said Howard Stutz, executive editor of CDC Gaming Reports, a gaming industry trade publication.
March gaming revenue at Golden Nugget in Lake Charles, La., the closest Fertitta-owned casino to Houston, fell nearly 59 percent from a year ago to about $12 million, according to the Louisiana Gaming Control Board. The casino was open just 16 days in March. His other casino properties experienced similar declines.
March revenue at the Golden Nugget in Atlantic City fell by $10.6 million, or 60 percent over the previous year, according to the New Jersey Division of Gaming Enforcement. Overall gaming revenue in coastal Mississippi, home to another Nugget property, fell a combined $56.9 million, or 46 percent, data from the Mississippi Gaming Commission show. Revenue figures for other locations in Las Vegas and Laughlin, Nev., were not immediately available.
Sports gamble
The return of professional sports is also unclear. COVID-19 shut down the NBA March 11, but the league said recently that players might be able to start training again, though at limited capacities. The league’s No. 1 concern is that players and fans are safe, Fertitta said.
To be sure, his basketball franchise has faced financial setbacks. The Rockets organization, which is separate from Landry’s, is expected to lose as much as $25 million per year in sponsorship income from Chinese and multinational companies following general manager Daryl Morey’s show of support on Twitter last fall for pro-democracy protesters in Hong Kong.
Fertitta’s largest NBA expense is payroll. The Rockets’ salaries this season total $130 million, but the league said beginning May 15, players would receive a 25 percent pay cut.
For Landry’s employees facing financial hardships, Fertitta has been offering help. The company is providing takeout meals to furloughed workers out of a former Willie G’s restaurant on Post Oak Boulevard, just down from his Galleria-area headquarters and showpiece Post Oak Hotel at Uptown.
The Fertitta family also recently put $1 million into a relief fund to offer financial support to employees in need. Landry’s vendors and others are also adding to the pot, he said, pulling out a $25,000 check the company had just received from a family trust.
To the 25 or so retailers that lease space from Landry’s in company-owned real estate, Fertitta said he hasn’t sought rent from any of them.
“I haven’t even deferred,” he said. “I just abated because they don’t have any money.”
His philosophy is that everyone should share in the pain during this crisis. Landry’s isn’t seeking federal stimulus assistance, even though the company said it is eligible. And as a tenant itself in hundreds of buildings across the country, the company has been trying to negotiate with each of its landlords.
“I feel like I owe them something and I feel like they owe me something. I’ve always been a good tenant. I’ve always paid my rent,” Fertitta said. “This is a meteor that hit the United States and the world, and we all need to feel some pain.”