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Multi-Unit Restaurant Chains Need to Revisit Real Estate Amid Inflation, Other Pressures, A&G Real Estate Partners

April 15, 2022, 07:32 AM
Filed Under: Real Estate

The right real estate moves can drive higher value for buyers, sellers and operators of multi-unit restaurant companies, said participants in a March 31 Restaurant Finance Monitor webinar sponsored by A&G Real Estate Partners.

During the hourlong panel (“Creating Enterprise Value Through Real Estate”), three experts in restaurant portfolio optimization, investment banking/M&A and real estate law offered tips on doing a deep dive into leased and owned properties amid the “new normal” of today’s restaurant industry.

Panelist Joe McKeska, senior managing director and leader of the restaurant industry practice at A&G, described that landscape as one of shifting consumer behavior and higher costs for food, store construction, labor and rents. “In some cases, we are seeing rents that are at or above where they were pre-pandemic in 2019,” McKeska told moderator John Hamburger, president of Restaurant Finance Monitor.

Those pressures make it even more important for chains to scrutinize every location and lease, as well as their overall real estate strategy, McKeska said. By conducting such portfolio reviews,  restaurant companies can uncover opportunities to drive efficiency and create value. “You should do a deep dive into variables like rents relative to market, occupancy costs as a percentage of sales and new restaurant growth prospects,” he said.

Store down-sizing, McKeska noted, is the type of opportunity that could come into focus after conducting such an exploration. “Today, because of mobile ordering and delivery, a pizza chain may be able to operate with 10 or 15 seats and 800- to 1,200-square-foot units instead of building 4,000- or 5,000-foot restaurants with 40 or 60 seats,” he said.

But some strategic responses—such as adding the likes of patios, drive-through lanes and to-go parking spaces—may not be viable at every location, noted panelist Jonathan L. Neville, partner and co-chair of the retail real estate team at Arnall Golden Gregory, LLP. “It is a challenge to deal with those locations that cannot be easily converted into what the consumer needs now,” he said. “You may have to take a look at subletting or relocating if you really cannot get that patio.”

In addition to improving day-to-day performance, such moves can drive higher value for sellers and buyers of multi-unit restaurant businesses, noted panelist Greg Grambling, who specializes in food retail and restaurant investment banking as a Solomon Partners managing director. For example, a buyer could conduct extensive due diligence into an acquisition target’s leased and owned real estate, then execute on a plan to rationalize the portfolio after close. For its part, a seller could secure a higher price by dealing with problem locations and leases in advance.

McKeska added that having a solid, go-forward growth strategy could also bolster M&A value. “People want to know that they’re not just buying a static restaurant chain,” he said. “They want that ability to grow both topline and bottom-line revenue over the long-term.”

In revisiting their real estate, Grambling noted, companies may want to start thinking harder about the potential implications of inflation. Moving forward, the investment banker explained, buyers will think twice about snapping up companies that have too many variable costs in their leases, fearing they will be subject to inflation. “As a potential seller, you can generate leverage and value by acting now to make more of those costs less CPI-dependent, whether that be rent, CAM or certain lease terms,” Grambling advised.

The panelists also suggested revisiting poorly negotiated leases; consolidating stores to ease the effects of the labor shortage; and pulling the trigger on remodels now to avoid even higher costs for such work in the future. “While it might be painful to accept those lower returns on remodels at current costs, you also don’t want to neglect taking care of your existing fleet,” McKeska said. “You could just be putting off the inevitable.”

But wheeling and dealing with landlords will be required to pull off many of these suggestions. Neville, the veteran real estate attorney, emphasized potential points of leverage for restaurants. “Maybe it is giving back an exclusive that you don’t need,” he said. “For example, the company used to sell pizza and wings but now it just sells wings. By giving up that pizza exclusive, you could get a higher tenant improvement allowance or some other concession from the landlord.”

The full webinar is available here.

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