My Biggest Competition

My Biggest Competition

I have been getting up earlier and earlier lately. Everyone is different and different things work for different people, but I’m actively discovering what works best for me in order to maximize my efficiency, productivity, and impact I have on the world around me. I’ve found that when I get up really early, I am extremely productive; more productive than I am late at night. So, I’ve decided to get up earlier and get more done.

One morning, I woke up in the pitch black darkness of the morning, collected my things, and headed to the gym. The roads were a ghost town.

Barreling down the barren highway, I felt like I was Will Smith in I Am Legend. I was only reminded of reality when a random pair of headlights would break the horizon. Then, in an instant, I would be alone on the road again. I got to the gym, organized my things, and hopped on the treadmill. I began my run and about 10 minutes in, I took a look around the gym that is part of my office building.

There was no one around.

The lights were only half on and I couldn’t figure out how to get them working, so I ran in dim light. Even the janitors had not yet arrived as far as I could tell. As I continued running, I looked at the treadmill to my left. There was no one running on it. The treadmill to my right? That one was empty too. I realized I’m not racing anyone on this perpetual hamster wheel except for myself.

In that moment I came to a realization:

  • I am my own worst enemy
  • I am my only competition
  • I am my limits

Replace “I” with “You” and you have a statement very relevant to your own situation. There’s no progress in comparing yourself to others. Everyone has their own limits and you don’t know any of your competition any more than you know yourself. If you take the time, you can get to know the ins and outs of yourself, but there comes a limit to how much you can know about your competition.

One important point is:

you don’t know what their limits are.

When you measure yourself to others, all you do is limit your progress. Who is to say their limit is your limit? When you compare yourself to your competition you accept their limit as your own. What about when you compete only with yourself? When you compete only with yourself, your limits disappear. I had been waking up before the sun even realized today was here. No one was on the road with me. No one was running next to me on the treadmill. I had no one to push me; no one to compare myself to.

I had to push myself. I was my only competition.

That’s when I realized something else:

That is how you stay miles ahead of your competition.

I’ve done more before my competition opened their eyes than they may do all morning. Now, I am sure there are plenty of people surpassing my own limits out there, but the point is, what would happen if I did gauge my limits by others? What if I did gauge my limits by someone who has yet to show up?

What if I waited to work out until they arrived?

Maybe they aren’t even pushing their limits. Or perhaps they think they’re already at their limits. You can’t know your limits until you push yourself. And that should be your biggest take away from this post:

YOU have to push your limits.

YOU have to drive you.

No one else will push you where you need to be. Stop letting everyone else’s limits limit yourself. Find your own limits…then push them…then break them…you’ll soon find that your potential is limitless, but only if you look past all the limits everyone else has built for you.

  • Define your own limits, then set out to prove them wrong. Let everyone else sleep on their dreams.
  • You go out there and make them happen.

Why Invest in Restaurant Net-Leased Assets

Why Invest in Restaurant Net-Leased Assets

There are plenty of investment options to choose from in the single-tenant net-leased sector and they all come with their own pros and cons. Drug Stores tend to be on high traffic hard corners backed by solid credit, but house a large box with a cash flow stream to match that may be difficult to replace if it ever became vacant. Dollar Stores come with great credit, but often times in tertiary markets. The auto sector can provide higher returns and high rents for specialty buildings, but can also be on odd shaped parcels with their own potential environmental concerns, while banks can provide the same high rents for a specialty building backed by excellent credit, but tout the same replace-ability issue if they ever became vacant.

So Why Invest in Restaurant Net-Leased Assets?

The variety of price points paired with long-term leases, rental increases, and well-known popular brand name concepts make the restaurant sector especially attractive to investors. Many 1031 exchange buyers look to the sector for a passive place to park their money because many of the factors just named provide a certain sense of security and perceived safety in an investment world riddled with risk. A few years ago the market was labeled one of the biggest peak markets we have seen in the past 10 years, which rang true. Since 2015, cap rates for restaurant net-leased properties have continued to compress, further than most other net-leased sectors, stabilizing on average somewhere between 50-65 basis points lower than other similar net-leased assets. Because of the high demand and increased equity in these types of investments, corporations and franchisees operating business on these parcels of real estate have been actively taking advantage of the market by accessing the built up equity under their operations through sale-leasebacks and using the proceeds to grow into more units, remodel existing units, and pay down debt among other things. In an environment where investment supply is limited, the additional deal inventory is driving transactional velocity even further for the many selling investors who then become 1031 exchange buyers.

Investors also choose to place their money in the restaurant sector because it has been perceived to be somewhat recession proof. “Recession-proof” is stated with a grain of salt as the more high-end casual dining segment may take a hit when the economy is down and consumers have less money in discretionary spending, but ultimately people need to eat. While some casual dining concepts are recently struggling, due to changing consumer preferences, they are working to increase their sales by changing up business models, implementing new technologies, and utilizing delivery and online ordering services. The overall sentiment in the marketplace is that “most of them will figure it out”. The casual dining segment provides some benefits over the QSR segment in that the price points tend to be higher since the footprints are larger and rent per square foot remains fairly the same. However, the segment provides risk in that lower discretionary spending could hurt a higher end casual concept during a downturn. That is why many investors look to the quick service restaurant segment as a hedge against the inherent risk of recession. Many QSR concepts have a focus on a cheap and fast food offering that can feed an entire family for a very reasonable price. Even concepts with middle of the road average ticket prices ebb and flow through the ups and downs of the market. In addition, the industry as a whole provides jobs at fairly cheap labor, which remain a necessity in a downed economy.

Then there are the core aspects of real estate to consider. Most restaurant sites provide the benefit of adhering to many of the core retail necessities when it comes to desirable core real estate. Restaurants tend to be located on hard corners with frontage on high traffic corridors. They tend to have strong parking ratios in high density metro markets on parcels with great ingress/egress. Restaurants simply tend to be on good core real estate sites. If the restaurant were ever to leave, these aspects of the remaining real estate could provide you with more options to redevelop the property than a small specialty building such as a quick lube oil change facility might provide.

There is also the tenant base and the market for restaurants in general. Although investment supply in general is lacking compared to the large pool of buyers out there, compared to other sectors, restaurant inventory is in plenty supply and has transactional velocity over most other triple net property segments. Restaurants tend to be a high demand asset sector, which bodes well for owners when it comes time to exit or exchange their investment. Why is the restaurant sector in such high demand? Well when it comes to restaurants, you have a plethora of well established strong credit tenants. You also have two sub-segments of QSR and Casual Dining, which together provide a very wide range of price points, business models, and rent structures. An investor choosing an investment in the restaurant segment is like throwing a kid into a candy store full of different gum ball machines and saying,

“Which type of gum ball would you like to receive every month?”

You can also find a wide range of risk and return. You have corporate credit grade investments that could trade for as low as 3% or 4% cap rates, while also having the upside of taking on smaller operators or franchisees with similar lease terms but at double the returns or higher. With these smaller operators and franchisees comes the opportunity for even an unsophisticated landlord to structure a blend and extend for added value. Smaller operators have the flexibility to get creative in their holdings, operations, and business growth opposed to some of the larger corporate structures that stick by strict policies and standards. There are numerous reasons to invest in the restaurant sector and any investor building a diversified portfolio of net-leased investments would be wise to include a healthy number of restaurant assets into their mix.

The downsides? The downsides include all the many risks associated with any real estate investment. Each tenant, lease, property, and market has its own inherent risks, challenges, and pressure points to watch out for. I would encourage you to use the information you gather here to your advantage, but also seek advice from your trusted real estate advisor to ensure you understand the intricacies of each deal, how they might affect your investment decisions, and to gain a comprehensive understanding of all your options when it comes to your long-term investment strategy.

If you have any specific questions regarding an asset, a concept, or your current investment situation, feel free to reach out to me directly at 813-387-4796 as I welcome the opportunity to help you in any way that makes sense for you.

 

Checkers and Rally’s: Leveraging Modular Development

Checkers and Rally’s: Leveraging Modular Development

Checkers is one of the largest double drive thru chains in the United States. Having served hamburgers, hotdogs, French fries and milkshakes since 1986, Checkers today is headquartered in Tampa, Florida and operates over 850 locations in 29 states. Rally’s, a similar concept out of Louisville, Kentucky, was purchased by Checkers in 1999. Since the acquisition, Rally’s has began adopting design from Checkers and the two concepts look virtually identical aside from the name on their signs.

Despite construction costs ticking up and some concepts pulling back on development, Checkers is pushing forward hard. Checkers is slated for a future 30 new locations in the D.C. area; a future 30 new locations in Houston; With over 60 locations around its headquarters in Tampa, even franchisees local to Tampa Bay are still growing.

What is enabling the company to pursue such aggressive expansion? A big factor seems to be the modular design they are using for their new construction. Modular construction involves an off-site process where buildings are constructed under a controlled environment. Although the same codes and standards employed under traditional construction are adhered to throughout the process, the construction can be completed in half the time. The buildings are built in sections, which are then put together like Legos, on site. Not only can the buildings be built in half the time, but modular buildings are typically stronger than conventional construction since each portion of the building is built with its own structural integrity to withstand the stress of travel. The process also includes a number of other benefits including safe and secure storage of construction materials, reducing site disruption from weather or pedestrian traffic, and reduced waste for a more sustainable construction process. With the new prototype designed by Checkers, building each modular location ends up being 20% cheaper in addition to being much faster. With the nimble flexibility of popping a location up faster to avoid “dead rent” periods and a cheaper upfront capital injection for new locations, it is allowing Checkers corporate and franchisees the opportunity to expand into denser, higher rent, competitive markets where barriers to entry are high. Another model includes Checkers re-using shipping containers for constructing their new prototype, which is also both cost effective and sustainable.

As a real estate investor, this can be good news if you are eyeing Checkers as an investment, which tends to have a higher cap rate when compared to other concepts in the QSR sector. It can build confidence around an investment into Checkers as a tenant, who appears to be making shifts in technology to take advantage of the evolving landscape, while also adapting in ways that are allowing them to expand the concept and capture more market share. Like anything else, investors should also be aware of the risks associated with these deals. The Checkers prototype can go as small as an 800 square foot building, while the average QSR concept operates in 2,800 square feet. This can present a potential metric of risk to watch. The average unit sales volume for Checkers was around $970,000 in 2016; about the same volume as the average KFC ($999,500), Captain D’s ($1.04MM), and Arby’s ($1.07MM), but operating with a building square footage almost 2,000 square feet smaller than the other above referenced concepts. This can equate to a higher rent per square foot paid by Checkers; a high rent per square foot in markets that are generally lower income areas where the Checkers concept thrives.

Why is this a potential pressure point?

The average rent per square foot paid by QSR concepts was $35 per square foot in 2016, while Checkers, on average, was paying $47 per square foot in rent with an average square footage in 2016 of 1,800 SF. That rent per square foot could be inflated even further with their 800-1,000 SF prototype design. I have seen investors purchase new construction Checkers locations and after a few years, Checkers had decided to vacate. While Checkers may still be paying their rent obligation in these scenarios, the realization may set in that replacing $40-$50 PSF in rent will be impossible in a market where the average rents may be as low as $10-$15 per square foot gross due to the demographics and household income capacity. Now, with the new smaller footprint and an aggressive campaign to secure urban locations by getting competitive with rent, some new Checkers leases are approaching $80-$100 per square foot in rent. These very well may be slam dunk locations and great investments, but it cannot be argued that these deals also bring exposure to risk in rent sustainability. Pair that risk with the fact that Checkers is one of the few concepts that can develop on 0.25 acres of land, which does not provide many future opportunities for redevelopment, and the risk in these deals must be weighed accordingly.

All in all, there are positive things happening for Checkers as a concept as they remain bullish on further expansion. Investors looking to take a dive into the concept should look at every deal on a case by case basis. If you have a deal you are currently looking at and determining how to underwrite the deal to hedge against risk, but also remain aggressive in securing the asset for purchase, I am happy to walk through the details of the deal with you and help you determine your best strategic move. As always, I’m available to help wherever it makes the most sense for you.

 

 

Management VS. Leadership

Management VS. Leadership

Management versus leadership has been a long time battle between efficiency/status quo and growth/forward motion. There are many blogs and gurus out there that dive deep into the battle and define the differences to each, but I think there are two key differences that inherently separate the leaders from the managers.

To explain more about what I mean above, let me say that Management is simply about maintaining the status quo. If a process works, don’t change it. Instead, you strive to keep it working like an oiled machine and that means managing the process to limit as much change as you can. The thing is, change is the nemesis of management. Seeing as change is inevitable, management becomes this reactive decision to revert any change back to the state of the oiled machine.

An employee leaves; find a replacement. A machine breaks down; fix it as soon as possible. If someone disrupts the status quo by doing something different, you have to get rid of them. You don’t want different; you want normal. You want consistent production and you’ve found a proven process. The problem with this is that a proven process has been proven for that point in time, but over time, change will be inevitable, and that proven process can very well turn into a proven disaster. This kind of management mindset simply halts any and all growth, making the process a ticking time bomb for failure.

Now management is also inevitable. We have to manage processes and businesses for them to maintain a state that will launch them into further success, but my point is that it is things that need to be managed; not people.

Things should be managed…People should be led.

There are many aspects to leadership, but I believe that the two staples of leadership are Culture and Empowerment:

Culture

Culture is a large part of job satisfaction and employee retention. Imagine you’re in a workplace where you are yelled at all day for everything you’re doing wrong and never praised for the things you do right. Imagine you’re working day to day in fear that you may lose your job, watching the seconds hand on the clock tick by waiting to clock out and go home, and you’re forced to put your hand up in the air so your manager can come by and give you permission to use the restroom.

Now imagine you’re praised for the things you do well and given constructive criticism on what you can do better. You’re not yelled at, but instead you brainstorm together about how we all could improve the process. You work day to day towards a long-term goal you resonate with and you know as long as you resonate with that goal, there’s a spot for you in the organization. You don’t need to clock in or clock out because you’re motivated to be there every day. You get there early and leave late because you want to; not because you have to. And you don’t need permission to use the bathroom, leave to pick up your kids, or take a Friday off while family is in town because you’re trusted to get your job done and you will work on a Sunday evening if you have to because you realize trust is a two way street.

That’s the difference culture can make in an environment. Although possible, it’s extremely difficult for leadership to persevere through a managing culture. Future leaders become stifled, agitated, are not fulfilled, and leave. The work environment becomes stagnate and stale, employee retention becomes a struggle, and no one leaves work with a smile. The root of most organizational issues begin in culture (which is strongly related to communication and vice versa). Create a leadership friendly culture and your organization will not only maintain it’s successful status quo, but also jump on any growth opportunities that become available.

Empowerment

You have to empower your employees or your partners to be leaders themselves. You have to trust that they are aligned with your mission (which starts with a culture), because if they are aligned with your mission, they will make the moves to keep you going in the right direction. They may not do everything exactly as you would have done, but there are a million ways to get from one place to another. When you empower your employees, you give them a sense of ownership. This isn’t simply your project that they are working on…Now it becomes their project as well. Not everyone likes to be a leader or lead others, but everyone likes to be empowered to bring creative ideas to the table. This empowerment, in turn, will likely inspire the future leaders of your organization to take a leadership role by instinct; by necessity. They will catapult themselves into it because that’s their calling and that’s what’s necessary for the group to attain it’s goals.

Maybe I will get into management versus leadership more in depth in future posts, but to keep it simple, we have to start by implementing these two things before we can even begin to think about shifting from a management focused organization to a leadership focused organization. Create a culture that empowers your employees to be leaders because they will start to empower their subordinates to be leaders in their own way. An organization of leaders will always accomplish more than an organization of employees.

I encourage anyone interested in learning more about culture to read Tribes by Seth Godin. It’s a very simple and easy read, but it packs in a lot of great information about culture and the implications of managing versus leading.

If nothing else, just remember:

Things should be managed. People should be led.

Restaurant Development, Construction Costs, and Sustainable Expansion in Casual Dining

Restaurant Development, Construction Costs, and Sustainable Expansion in Casual Dining

The restaurant sector continues to grow aggressively. From new trendy concepts popping up and gaining traction to well-established concepts expanding into other markets in order to capture more market share, restaurants remain bullish on development. Sometimes, however, more isn’t always better. When it comes to scaling any business, from franchisees just getting off the ground to well-established corporate structures, it is important to understand your bandwidth and how to scale under the premise of sustainability versus blind and rapid expansion that can lead to disaster. BJ’s Restaurants, Inc. is a prime example of this philosophy and how sometimes taking what seems like a step back can be a wise move toward a future two steps forward.

BJ’s Restaurants, Inc. is an American restaurant concept that operates under names such as BJ’s Restaurant and Brewhouse, BJ’s Pizza & Grill, and BJ’s Restaurant & Brewery. The first BJ’s concept opened in Orange County, California back in 1978 and in 2017, BJ’s Restaurants, Inc. plans to add 10 locations totaling 197 restaurants operated in 24 states across the nation.

Developing 10 locations in 2017 is light compared to the 17 locations that were developed two years ago. Plans for 2018 are even lighter. According to Nation’s Restaurant News (NRN), CEO Greg Trojan plans to add six more stores next year, stating, “The slower pace of expansion has allowed us to focus operationally on many new initiatives…It’s helped drive more management tenure, adding more local knowledge and team familiarity to our sales-building efforts.”

Recent trends in development has caused construction costs to rise, which has made a number of developers think twice about how to make the numbers work. Net-leased development in general remains the key driver of overall retail construction, accounting for more than 46 million square feet of the 60.4 million square feet delivered over the past year. Single tenant construction has averaged 45 million square feet over the past three years. Developers have been focused on net-lease property development amid labor market strength and extremely low unemployment. According to Marcus & Millichap’s Net-Leased Research Report for Fall of 2017, builders have been constructing projects favoring single tenant concepts, particularly in the quick-service restaurant, pharmacy  and dollar-store segments. Further, net-leased deliveries have accounted for more than 80 percent of retail development since 2009, up from below 70 percent before the recession. According to the Turner Building Cost Index—which measures costs in the non-residential building construction market in the United States— the third quarter 2017 index increased to a value of 1044, which is a 1.26% increase from the second quarter 2017 and a 4.92% annual increase from the third quarter 2016. In fact, costs all around have seemed to tick up a bit as the restaurant sector has been heating up, employment has improved, and supply and demand plays its part in the sector.

construction costsConstruction_Producer_Price_Indexes_Aug2016-1

Although these rising costs have played into some of the slowing development of certain concepts, it also appears that the top level management at BJ’s Restaurants, Inc. simply has a strong understanding of their bandwidth and capacity for growth. By taking a step back and slowing development, they are allowing themselves to settle into their new stores giving those stores an opportunity to mature and build steam. Just like everything else, there is an ebb and flow to growth. It is no wonder that cap rates for real estate assets backed by the publicly traded company have compressed in the recent past. Based on our research data, the average cap rate for BJ’s occupied property in the past 12 months has been 5.27%, while the average BJ’s leased property is on the market at a 5.00% cap rate. Compare that to the average cap rate across full-service restaurants for the past 12 months: 5.79%. The graph below highlights the 2016 average cap rate across a number of the top casual dining concepts in the sector.

Average Cap Rate - Casual Dining

That means BJ’s occupied property has performed over 50 basis points more aggressive than the average full-service nationally recognized brand. That is impressive. Many investors have expressed concern for the full-service casual dining sector as a whole. With many concepts failing to meet sales expectations and consumer preferences changing, some investors worry that the casual dining sector is disappearing altogether; however, as consumer preferences continue to demand customer experience, there is opportunity for the casual dining sector to evolve with consumers and technology in a way that is bound to keep the industry alive. Many champion leaders of the industry are already taking a proactive approach to these consumer changes adopting new technologies, catering to more take out and delivery services, while providing guests with the offerings and experiences they desire in order to get ahead of this evolution and remain relevant. Both QSR and Casual Dining real estate tends to adhere to certain core characteristics; main thoroughfare traffic, hard corners, visibility, ingress/egress, strong parking ratio, etc.

The fact is, from a real estate standpoint, the casual dining sector also provides investors with many benefits over quick service restaurant concepts:

  • Generally Larger Parcel Size for Future Development
  • Larger Building Footprint
  • Higher Guest Ticket Prices Equate to Higher Sales Volume Per Unit
  • Higher Guest Volume and Sales Equate to Higher Rental Figures
  • Larger Price Points to Place, Build, and Leverage Equity

The disappearance of the entire sector would eliminate an entire tier of investments from both a price point and a cash flow stance. Ultimately, there is inherent value in the experience the casual dining sector provides consumers from a social environment to the variety and quality of food it can provide over quick service concepts.

Do I expect the sector to disappear?

No.

Do I expect the sector to evolve?

That is inevitable.

Investors would be wise to identify these front-runner brands, such as BJ’s Restaurants, and opposed to avoiding the sector altogether, invest in concepts that are up and coming in addition to scaling in a sustainable way.

If you are an investor interested in taking advantage of some of the up and coming concepts in the casual dining sector, I am happy to share my insights and help you find a deal that meets your investment criteria. Whether you are looking to invest in the sector, gauge your current holdings, or build a strategy around how to maximize the value of your assets, I welcome the opportunity to learn more about your individual situation and what I can do to help.

Burger King: Corporate Owned to Franchise Run Investments

Burger King: Corporate Owned to Franchise Run Investments

Burger King has been part of quite the wild ride. As an income producing property investment, it can be considered one of the most popular options because of the attractive lease structures, experienced franchisees and powerhouse institutional parent backing. When looking to identify solid net-leased investments that also have upside, Burger King may be worth a strong look, but first let us start with a quick history lesson on how the concept has grown to what it is today.

It was 1953 when Keith Kramer and Matthew Burns built a stove called the “Insta-Broiler”. Living in Jacksonville, they were searching for a restaurant concept and settled on a burger joint called “Insta-Burger King”. After James McLamore, a student at Cornell, visited the hamburger stand operated by the McDonald’s brothers, he and his fellow classmate David Edgerton bought an Insta-Burger King franchise in Miami. By 1961, Burger King had begun expansion across the United States becoming famous for their signature burger, The Whopper. Just six years later in 1967, Pillsbury purchased the concept for a whopping $18 million and with Pillsbury’s support had the means to scale their operation becoming the second largest burger chain in existence, only behind McDonald’s.

Because of the intense competition between the two burger concepts, Burger King franchise agreements were restructured to restrict franchisees from operating franchises in other chains, in addition to regulating how far away your stores were from your home in order to cut down on absentee ownership. With the continued growth of the Burger King brand, TPG Capital paired up with Goldman Sachs and Bain Capital to purchase the concept for $1.5 billion before its IPO in 2006, which generated $425 million in revenue. Then, in 2010, 3G Capital purchased the concept for $3.2 billion.

That is about when Burger King began shifting its business model to focus heavy on franchising. Burger King makes its money from primarily three revenue streams: Sales from corporate operated locations, Income from leasing owned property, and Revenue from Franchise fees. In 2011, Burger King had 1,395 company owned and operated locations, but in 2012 Burger King began selling off stores. In 2012, about 59 percent of Burger King’s revenue came from store sales and operations. One year later, only 8 percent of the company’s revenue was from operating stores. Burger King had sold 96 percent of all their stores to franchisees in order to focus more on branding, product development, and other support resources that would help franchisees find further success.

Quarterly-Revenues-2014-09-01-BK

Their philosophy became:

Let the franchisees do what they do best so we free up time to find new ways to make the concept better.

That is why today, an investment in a Burger King net-leased asset, even operated by a small franchisee, can be an extremely safe, stable, and attractive option. That is also why many of these Burger King assets demand aggressive cap rates compared to other concepts on the market. In 2016, the average cap rate across all Burger King investment sales was 6.04%, while the historical all-time average cap rate across the restaurant sector lands at about 7.12%. This data includes both long term leases and short term leases; both corporate backed leases and franchisee backed leases. The graph below shows the average cap rate across a number of quick service restaurant concepts. You will notice that Burger King offers investors a very competitive return compared to other concepts, but while also offering a very well established brand and operation.

avg cap rate qsr 2017 trailing 12 months

For a long-term lease (10-20 years remaining), that cap rate can compress 50-100 basis points. In 2017, there have been a number of fee-simple properties backed by small franchisees (5-unit to 20-unit guarantees) selling at cap rates from 5.08% to 5.59%. Although corporate backed leases will demand a more aggressive cap rate in most instances, the franchise and support structure employed by the Burger King concept has proven a successful business model for smaller franchisees and those investments continue to demand a very competitive cap rate because of it.

So where is the upside?

Burger King is moving towards and would prefer to have fewer, but larger franchisees. Fewer franchisees operating more stores means less micromanaging, fewer contacts to keep in front of, and economies of scale. Fewer operators obviously means fewer moving parts. That is why purchasing a store operated by a small franchisee could provide very attractive upside in the future. Because a small franchisee backed lease still offers stability of concept and a hedge against risk, it will still demand an aggressive cap rate; however, an investor would still be able to capture a higher return than purchasing a corporate backed lease, which exposes the investor to even smaller risk. Why wouldn’t you capture that higher return on a solid long-term net-leased asset, while also keeping in mind the potential upside in the future. If you purchase a property operated by a 5-unit franchisee and plan to hold for 10 years, the chances of that operator being acquired by a larger more regional franchisee are fairly strong. That means that by the time you are ready to revisit an exchange, you will likely have built up equity in rental increases, real estate appreciation, but most importantly an increased financial guarantee or at the very least a stronger operator behind your original guarantee. Now, when you decide to bring the property back to the market, you will be able to demand a more aggressive cap rate having a larger, stronger operator having taken over your location.

That’s the potential upside!

Although Corporate will still back leases, most Burger King locations are owned and operated by the franchisee and provide a lease guarantee to match. As an investor, this is a benefit because your tenant has significant skin in the game, while also operating under a proven concept with monster support from its corporate parent. You are able to secure a long-term passive net-leased asset, but with upside in the future acquisition from a larger regional franchisee. This is why even a property housing a small franchisee operating under the Burger King umbrella can demand extremely aggressive cap rates in the investment sales arena. These deals should not be overlooked by investors looking to purchase or exchange into a net-leased restaurant property.

For more detailed information regarding Burger King properties, franchisees, or lease language and how it can impact the value of your investments, feel free to contact me directly at 813-387-4796. I am working with property owners, restaurant operators, and developers on a regular basis to connect the dots around where they are today and what they are trying to accomplish in the future. Even if there is no immediate business, I welcome the opportunity to learn more about your current investment situation and what I can do to help you maximize the value of your assets.

Does The Guarantee On Your Restaurant Net Lease Have Upside or Downside?

Does The Guarantee On Your Restaurant Net Lease Have Upside or Downside?

One of the biggest metrics investors look at when purchasing a single-tenant net-leased asset is the guarantee behind the lease. It is a major factor in weighing risk vs. return when it comes to net-leased assets.

It can also be a major factor that is misunderstood or overlooked without careful investigation.

For example, let’s say you are considering the purchase of a Taco Bell net-leased asset:

You perform a quick Google search to discover that Taco Bell is S&P rated BB and operates 7,000 locations!

That is quite a strong concept!

Hold on…You also learn that Taco Bell is actually a subsidiary of Yum! Brands, which owns Taco Bell, KFC, and Pizza Hut comprising of over 43,000 locations!

That must be a risk-free investment then…

Well, not necessarily.

Thinking this is the best investment since sliced bread, you put the property under contract. During the due diligence period, you investigate the lease to learn that it is actually only guaranteed by an entity named “Taco Bell 5 FL Tacos, LLC”…

What does that mean?

Come to find out, the franchisee operating this Taco Bell only has 5 stores…and only ONE of their stores is backing this lease through the referenced entity…

It is easy to see how an investment backed by corporate Taco Bell holds drastically different risk factors than an investment backed by a 5-unit franchisee only offering a 1-unit guarantee on their lease. These are important risk factors that have significant impact on the values you can demand for your investment property and the return you can expect to yield from purchasing one of these properties.

These are also important factors that your broker/investment advisor should be making you aware of and helping you analyze, not only prior to a purchase, but prior to a contract for purchase.

With that in mind, existing guarantees can have upside or downside tied to the strength of what is backing the lease.

The typical rule of thumb in any investment is:

The Higher The Risk, The Higher The Return!

A corporate 20-year Taco Bell lease may sell for a 4.5% cap rate, while a 5-unit Taco Bell lease with just 3 years remaining might sell for an 8% cap rate. With a weaker guarantee or lesser lease term comes more inherent risk, but also more reward.

This can be especially true for your guarantee.

You may take on more risk purchasing the 5-unit franchisee backed lease, but what if a larger 200-unit operator is considering buying out that smaller franchise? If that 200-unit operator buys out your tenant and decides to guarantee the lease with the entire lot of their locations, you could easily gain 100-200 basis points worth of value overnight.

That is what some like to call upside.

KBP Foods, a large franchisee of Yum! Brands concepts, recently acquired 78 KFC locations. According to Nation’s Restaurant News (NRN), this was just one of many recent acquisitions that have helped the operator reach 530 locations in 20 states. One of those purchases was an acquisition as small as four locations in Lawrence and Topeka, Kansas. These units were purchased from franchisees and the investors owning the real estate under those operations must be popping the champagne right about now because their small franchise tenant just evolved into a powerhouse operator and one of the largest Yum! Brand franchisees in existence. Even without a change in the guarantee, the perception of now having a very strong operator can alone impact the value and equity of the investment.

My warning is that it can work in the opposite direction as well.

Part of KBP Food’s feeding frenzy in acquiring locations included 41 locations in Texas directly from Corporate KFC. This is not unexpected. Last year, Yum! Brands announced they would shift the ownership of their stores drastically into the hands of franchisees; taking their 10,000 corporate run stores and shrinking that number to fewer than 1,000 by the end of 2018, according to USA Today.

Those investors that had a corporate KFC lease just had a change of tenant…From Corporate run to franchisee run…overnight. While in some lease structures, the landlord is protected for the life of the lease, there is certainly downside when it is time to re-up and your new tenant has a fraction of the net-worth your previous tenant came to the table with. In the KBP Foods scenario, the downside in equity may not be as dramatic; a tenant shift from Corporate run location to a 530-unit operation, although a sure hit in the risk department, is still a pill you can swallow. Some leases, however, allow for corporate guarantees to revert to franchisee guarantees as small as 10 or fewer units…

That  is where there can be downside.

Which scenario strikes a chord with your current portfolio?

Do you have upside or downside?

If these are factors you actively consider when looking at deals, then you are ahead of the game and I would be happy to take you to the next level with the specialized insight I can provide. If you were unaware of these factors or fail to consider them on a regular basis, you and I should connect immediately.

Please reach out and I will make myself available.

I’m helping clients all over the Nation evaluate their upside/downside on a daily basis; analyzing property value, risk, and equity to help clients get clear on their options at any given time within the market and execute on a proactive strategy around these seemingly reactive assets. Feel free to reach out to me for more specific insight around your restaurant investments as I welcome the opportunity to help you do the same even if there is no immediate business to be had on the horizon.

Hurricanes Irma and Harvey: How Natural Disasters Can Impact the Market

Hurricanes Irma and Harvey: How Natural Disasters Can Impact the Market

I remember a few years ago, taking a phone call in front of our large conference room window. I was looking out at the downtown skyline of Tampa Bay, discussing deal points with a client on other end of the phone. Most of the office had cleared out to prepare for a brewing hurricane. The skies were blue and the sun was beaming, but grocery store parking lots were gridlocked as swarms of people flooded the aisles in search of water and canned goods. There was no indication that the storm would even continue heading our direction, but everyone was up in arms about being prepared for the worst. It turns out the Category 3 storm that was headed straight for us took a last minute detour and we maintained blue skies for the bulk of its passing.

Preparation, or non-preparation, becomes a double edged sword. Nine times out of ten, you will over prepare for a storm that never happens, but that one time you decide to overlook your preparations is when you will be hit the hardest. This year, hurricane season has been in full force. First it was Hurricane Harvey, which slammed coastal Texas with devastating power. Homes and businesses were flooded and cars were swept off the roads. The category 4 storm had 130 mph winds that ripped through the Texas coast overnight. At the end of it all there had been as much as 20 inches of rain in some places leaving over 300,000 people without power.

That type of devastation affects not only the residents, but the surrounding businesses, the infrastructure, and the real estate. Darden Restaurants, Inc., the parent company of a number of well known full-service restaurant brands such as Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and the newly acquired Cheddar’s Scratch Kitchen, reported the storm hurt same store sales and earnings in its fiscal first quarter. Between forced store closures, power outages, and other unfortunate circumstances, their earnings per share took a hit. The Cheddar’s Scratch Kitchen concept was hit particularly hard because of their strong presence in Texas according to Nation’s Restaurant News (NRN).

Hurricane Irma was expected to have a similar impact on Florida markets. With its last minute shift causing a direct hit on the entire state of Florida, there were many Florida markets that were hit hard as a result. The day after all the devastation, our team was out driving the market to help owners assess damages to their properties. Many of the coastal flood zones flooded some houses and businesses. Most of Tampa Bay, however, was able to weather the storm with minimal damage, although many businesses went without power for over a week in addition to having difficulty acquiring supplies to keep their doors open. Some businesses were raking in the sales and taking advantage of being the only restaurants open among some of the densest counties in Florida. One Taco Bell I visited was slammed with guests, but still struggling to save face in the wake of not being able to get the supplies they needed. A guest asking for a spork was met with a manager’s apologetic eyes:

“We don’t have anymore. I might have to go down the street and see if we can get some plastic forks from Publix”

Most of Central Florida, although arguably hit the worst, weathered the storm fairly well. Aside from debris and a few fallen trees paired with a massive loss of power, most structures stayed intact. Many of the restaurants maintaining power served to feed those residents who were going on 5 days without power in their homes.

Other Florida markets, however, were hit harder than they would have wished. South Florida markets on both coasts and everything in between were met with some tough times; properties flooded, power grids out for weeks, infrastructure ruined. Many markets are still working to recover their physical structures, not to mention swallowing the pill of lost sales during the times of closure. Franchisees have been forced to close doors on a number of stores and some have even abandoned specific locations that they deemed too much of a capital expense to get back up and running.

In terms of net-leased investment sales, these factors impacted the market there too. Some properties that were hit the hardest were actually under contract at the time of devastation. Many of the potential buyers in the midst of 1031 exchanges ended up dropping those contracts. We saw an influx of offers shifting from south Florida markets to West and Central Florida inventory we still had available. Investors were looking more critically at hedges against catastrophe than they had previously. In addition, a number of owners had never considered the potential risk of a natural disaster or at least never considered it a risk significant enough to impact their investment. Some owners have had to spend thousands to tens of thousands of dollars on repairs, while others made it out with little or no damage, but now have considered selling due to the increased perception of risk.

These storms have been eye opening for many people in a variety of ways, including the other side of the coin where there are many investors now looking hard at Florida markets trying to identify the opportunities to scoop up some of these properties that may suddenly have value to be added. At this point, most businesses are back up and running in most major markets, and while many are still recovering, everyone is working hard to move forward. Ultimately, though, it is amazing how resilient the market is. For every owner wanting to exit Florida markets for fear of the next natural disaster, there are three buyers looking to buy in the income tax free state.

The show must go on…but now it may just come with a higher price tag for flood insurance.