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RESTAURANT
MONITOR
R
FINANCE
Volume 30, Number 2 • Restaurant Finance Monitor, 2808 Anthony Lane South, Minneapolis, MN 55418 • ISSN #1061-382X
February 15, 2019
OUTLOOK
A Bulwark Sometimes Failing
Can a prosperous pizza delivery business build a mighty The challenge for Allison and his team is how do you keep
fortress around its customer base by adding more locations in the positive momentum in Domino’s going? Naturally,
a trade area? The digitally advanced Domino’s Pizza thinks I’m skeptical of corporate initiatives designed to make
so. They’ve even coined a name for their store expansion franchisees more money.
strategy and it’s called “fortressing.” Subway’s fortressing strategy—6,000 U.S. stores opened
“We are going to raise the bar,” says Domino’s CEO Ritch from 2007 to 2017—worked until it didn’t work. While
Allison, announcing the company’s aspirational development Subway was busy flooding the market with new stores,
goal during their recent investor day meeting—25,000 Jimmy John and Peter Cancro (Jersey Mike’s) picked their
stores around the world and $25 billion in sales by 2025. pocket by opening stores more than two times the volume.
Domino’s checked off the benefits of adding more stores: Subway has now closed over 1,100 low-volume stores in
closer proximity to the customer, more pay for hard-to-find the last year.
drivers, more carryout sales from higher-profile locations, Starbucks ramped up development in 2006, too, sometimes
quicker delivery times than the GrubHub and DoorDashers, placing two stores on a street corner. Two years later they
and franchisees that make more money on an enterprise basis. closed more than 600 stores, 8% of their store base.
Bill McClave, co-owner of Birchwood Resultants, a real Infill expansion may create complications for a franchisee
estate modeling firm that advises companies on location that’s spoiled by the digital success of the chain over the
strategy, explained to me that fortressing is really a market past decade.
optimization plan. That’s where a brand identifies the optimal
unit count and tries to maximize revenues by building new The culture of Domino’s is technology; more than half of its
stores and relocating others. McClave sees trial and frequency corporate employees are engaged in the practice. Its former
as benefits of better-located real estate. He told me many CEO talked about pizzas being delivered by autonomous
of Domino’s goals are achievable, “if they can successfully vehicles and drones while jokes were made about their drivers
shrink the trade area.” being members of the Jetsons. Building additional stores to
garner more carryout pizza sales seems so “dinosaur-ish.”
Paul Sill, CEO of CBRE Forum Analytics, a real estate
forecasting arm of the big commercial brokerage firm, One thing is for certain: Franchisee profitability will
describes the process of market optimization this way: “You determine whether fortressing is a success or failure. A
try to establish a baseline by studying how a brand has spaced typical franchisee investment model is geared to store-level
their units in the past and how ones located close together returns. A franchisee invests X in a new store and expects
are performing. Then you try to replicate the density on a to get Y back. Domino’s is asking franchisees to trust them;
national basis with minimal cannibalization.” that by building more stores closer to existing ones, their
per store average might go down, but they will make more
In a data-driven world, who could better identify new store
money overall. Corporate better be able to explain the math
locations or relocate existing ones than Domino’s? They
to their franchisees.
have millions of customer transactions from over 20 million
active loyalty customers and they’re one of the few QSR Subway’s CFO Dave Worrell told an audience at the
brands over the past decade that’s positively driven traffic. recent Restaurant Finance & Development Conference
Domino’s cites fortressing success in India, the U.K. and the sandwich chain became “damn efficient in opening
in Roanoke, Va. as it maps out plans for an additional locations,” but “had the issue of franchisee profitability.”
8,500 stores, 2,000 of which will be in the U.S. It hopes Veteran restaurant analyst and Boston Consulting Group’s
franchisees will pay forward their prosperity—average store- Allan Hickok sees “fortressing as a shiny new wrapper for
level EBITDA in the U.S. went from $49,000 per store in an age-old development maxim—If you build more units,
2008 to approximately $140,000 in 2018—by building sales per unit decreases, but aggregate market sales increase.”
more stores. Continued on the back page
© 2019 Restaurant
Page Finance
1 MonitorFINANCE SOURCES
First Midwest Grows Franchise Finance Portfolio of the company’s existing debt. Trinity was able to evaluate
over a dozen term sheets from lenders with attractive terms
They officially like working with restaurants: Merrilee and close the transaction inside of 30 days.
Rojas, senior vice president with First Midwest Bank,
has been financing restaurants for 22 years, starting with Sell-side advisory
Bank One and financing McDonald’s franchisees, and then • Trinity served as the exclusive financial advisor to KorMex
venturing to other concepts. “I like the owner-operator Foods, a Taco Bell franchise with 72 restaurants in Texas,
model,” she said. “They are down to earth and they have a in the sale of the locations to Mas Restaurant Group. The
strong work ethic.” principals of KorMex were former Taco Bell executives before
becoming franchisees 20 years ago, reported Geno Orrico,
For her part, First Midwest’s Kara Symeonides, VP, feels at vice president of Trinity. “They grew their business and
home financing restaurant franchisees because “restaurants became leaders in the brand,” he said. The operator of the
are in my blood. My dad has owned restaurants his whole company will stay on and help Mas grow. “It’s in good hands
life. I worked in restaurants growing up, and I know the with the continuity of the operator” in place, Orrico said.
blood, sweat and tears that go into it.”
• Trinity represented Apple Gilroy and its affiliate, Apple
Rojas has built a team, which includes Symeonides (the two By the Bay, an Applebee’s franchisee with 13 restaurants
met when they worked together on franchise finance at MB in Northern California, in the sale of its restaurants and
Financial Bank), to take franchise finance to the next level related real estate to Apple Cal LLC, a division of Dallas-
there. Today, First Midwest has a $200 million portfolio based SSCP Management Inc., a long-time franchisee
of loans to franchisees of tier-one concepts they’ve booked of Applebee’s, as well as a franchisee of 47 Sonic Drive-In
in the first couple of years, and it is ramping up. locations and owner of the 15-unit Roy’s chain.
“We are looking to grow and will have a couple of new • In early 2018, Trinity assisted Porter Apple, an Applebee’s
concepts approved soon,” said Rojas. “By the end of the franchisee with eight Applebee’s restaurants in South Dakota,
year, we’ll be in all the tier-one concepts.” Iowa and Nebraska, in the sale of its restaurants and related
First Midwest Bank works with franchisees with assets to affiliates of Sasnak Management Corporation.
approximately five or more units, offering financing from $2 The consolidation of these stores by larger operators has
million on up to $30 million. They will finance acquisitions, helped advance the Applebee’s brand’s transition. Trinity
owner-occupied real estate, remodels and refinancings. They assisted the corporation by providing financial advisory
also participate in syndications with other lenders. services, including completing a systemwide franchisee
Rojas says their quick response time, 48 to 72 hours on analysis, coordinating store closure process, and assisting
whether or not the deal is approved, helps set them apart franchisees’ negotiations with their lenders.
from the pack, as well as their knowledge and background. For more information, contact Kevin Burke, managing
“It’s about our relationships, too,” says Symeonides. “We have director, at 310-268-8330 or email kburke@tcib.com.
great relationships with our franchisees, and know what is
going on with their business. We want to grow with them.” Verdad Brings Construction Management Company
Rojas, who started in the business in underwriting, says client Back Into the Fold
loyalty is partly due to the advice they give on transactions, Verdad Real Estate is now Verdad Real Estate &
and whether a deal is in the franchisee’s best interest. “We have Construction Services with the folding of Vertical
made our careers in this business,” Symeonides agreed, “and Construction back into Verdad.
they are built around franchise. Our reputations are, too.” Verdad was founded in 2009 as a full-service development
Both are pleased with the bank’s position on their group, company, with one of its focuses being on the restaurant
as it gives them runway to grow. “We’ve been highlighted industry and single-tenant development. As the principals
internally as an area of growth for the bank,” said Rojas. grew the business, they wanted to further serve their clients
“Our loan volume speaks volumes about our commitment, in a new way. In 2013, they founded Vertical as a separate
our experience, and our willingness to grow the portfolio construction division because they wanted to grow that
for the bank,” added Symeonides. For more information, portion of the business, including in areas like general
contact Merrilee Rojas at (708) 831-7537, or by email at contracting. Internally, they operated both businesses as one
merrilee.rojas@firstmidwest.com; or Kara Symeonides at team, while outside the company it began to appear they
(708) 831-7277, or at kara.symeonides@firstmidwest.com. were two separate companies with two different brands.
Just recently, they decided to bring the construction
Trinity Completes Capital Raise For Popeye’s management back into Verdad itself, as they realized they
Franchisee; Sell-Side on Various Deals were missing out on certain efficiencies, and there seemed
Investment banking firm Trinity Capital completed a to be some confusion in the marketplace. This will allow
debt-placement for the 2018 Popeyes franchisee of the year, them to communicate they are full-service developer.
Emad and Ali Lakhany. The multi-unit Popeye’s franchisee “We will continue to provide that turnkey, entitlement
operates restaurants in Texas and completed an acquisition solution for clients. In some cases we’ll act as the general
that allowed them to grow their business. Financing was contractor,” said Jason Keen, founder of the company. “On
provided by BBVA Compass and included the refinancing the real estate side, we’ll provide site selection and project
Page 2management” as always. Welch and Poppe Join Auspex Capital
Many developers outsource construction, and manage as a Auspex Capital, a boutique investment banking firm
general contractor, he said. “We have 95 people on our team. specializing in the restaurant industry, recently announced
We are actually doing the work and it stays with us. We are that franchise finance veterans Tammy Welch and Chris
not counting on a third party to do the work.” For instance, Poppe have joined the Auspex team as Senior Vice Presidents.
some development companies outsource architectural
services. Verdad has architects on staff, he reports. Welch and Poppe will be responsible for executing key aspects
of the company’s growth plan by unlocking opportunities
At times, “we don’t make money on the construction,” across the major restaurant brands throughout the United
he added. “The deals are just that tight. There has to be States, the company said.
some type of cost controls, and we have the ability to do
construction to make the numbers work” for the clients. A 25-year franchise industry professional, Welch brings to
her position a track record of developing and executing new
They’ve recently started acquiring shopping centers, which business, most recently as a Senior Vice President at City
is a good fit for the company, Keen said. Several of the National Bank and previously in the same role at GE Capital.
acquisitions have pad site opportunities, which dovetails
well for their single-tenant clientele. Poppe has 21 years of experience in franchise finance,
including roles as a Senior Vice President at City National
“It will also create opportunities to redevelop some of those Bank and as a Vice President at GE Capital.
pad sites for existing clients,” said Keen. “If there is a mom
and pop store in there, we have the ability to help them Welch and Poppe will be based in the firm’s Bellevue,
with an exit strategy and bring in a more credible tenant.” Wash., office. Welch can be reached at 206-409-8724 and
twelch@auspexcapital.com, and Poppe at 206-390-2092
The return of the construction management arm to Verdad and cpoppe@auspexcapital.com.
and the shopping center acquisitions all have provided the
opportunity for Keen and team to provide more and better Koss RE Seeks Restaurant Tenants for Centers
opportunities to their clients, he said.
In the Koss Real Estate portfolio, the highest concentration
“We paid a lot of tuition to get to the company we have. It’s of restaurant properties they own are those that are single-
personal to us,” he said. “If we let someone down, money tenant, both high end and chains. Michael Koss, president
is not the motivator for us. We don’t like to miss a date, and chairman of the firm, has been in real estate since 1975,
or go over budget. We do take it personally. We have the but is also familiar with the challenges of the restaurant
right resources internally to manage these processes.” For business. He was a restaurant owner at the early age of
more information, contact Beau Barkerding, business 24, growing to three locations before he turned restaurant
development, at 504-577-2016, or at beau@verdad.com. operations over to his son years later. Koss turned his
attention to Koss Real Estate and acquiring and developing
C Squared Announces Recent Transaction Closings commercial properties.
Restaurant investment bank C Squared Advisors announced “When we acquire a property, we want to be sure it has
the following recent transaction closings: desirability,” Koss says. “Is it on a corner, what are the
Recapitalization: VIM Holdings, Inc., one of the largest demographics, the traffics counts? Does it have good co-
franchisees in the 300-unit First Watch system, recapitalized tenancy? Does it have the possibility of a drive through?”
its existing debt facilities and secured expansion financing He looks for restaurant tenants with good credit, and “our
for 2019 and 2020. Huntington National Bank provided perception of the quality of the tenant,” he said.
the financing. VIM, led by Bob Frame and restaurant
entrepreneur and beverage consultant Jeff Schenk, has While Koss is looking for restaurant properties nationwide,
expanded aggressively in North Carolina. they have acquired shopping centers in southern California
and Phoenix. In 1985, he began developing Malibu Country
Seller advisory: The family and estate of John Shanks, Mart, to name one project, maintaining a mix of upscale
a former managing partner of Fourjay, LLC, a 48-unit tenants, including restaurants. It isn’t easy to run shopping
Wendy’s franchisee headquartered in Memphis, Tenn., centers, as they have been challenged as of late, he says.
recently sold their interest to the majority owner of the
company. C Squared reviewed various alternatives with “I think shopping centers are going to continue to be
the family before electing to sell to the majority owner, confronted with increasing competition from the Internet,
and is also managing a review and partial disposition of which is contributing to the lessening of retail in America,”
the family’s real estate holdings as part their estate plans. Koss states. He buys properties that include a good mix
of services, like computer repair, medical and dental and
Recapitalization: Calhoun Management Corporation, massage. Restaurants are of specific interest to him because
a 60-unit Wendy’s franchisee in Clemson, SC, extended its restaurants “are a draw to the centers. Most shopping center
existing credit facility with City National Bank and secured owners are trying to attract more restaurants. They seem to
development and remodeling capital for its 2019 projects. be impervious to the Internet.” For more information on
For more information, contact Carty Davis, partner, at Koss Real Estate, contact Michael Koss at 310-720-2075,
910-528-1931, or by email at carty@c2advisorygroup.com. or at MichaelKoss@KossFinancial.com.
Page 3FINANCE SOURCES
FranBizNetwork Sells Round Table Pizza Locations First-time restaurant owner Rehet, LLC, with help from NFS,
Franchise brokerage FranBizNetwork recently announced purchased two Fatburger/Buffalo’s Cafe combo restaurant
the sale of three Round Table Pizza locations in the Spokane, in Washington state from Bernardout Enterprises, LLC,
Wash. area from JAW Inc., Jety Inc. & Apple Pie Inc. to who retired and divested from the brand.
The Extra Cheese LLC. Although the stores had steady For more information, contact President Jerry Thissen at
sales growth, it was difficult to find a buyer in the Spokane 949-428-0481 or at jt@nationalfranchisesales.com
area who met the franchisor’s landlord and lender minimum
qualifications. FBN identified a potential buyer from Issenberg & Britti Offer Net Lease Sales Expertise
Southern California with both the financial resources and Ronnie S. Issenberg and Gabriel (Gabe) Britti have racked up
operational background to purchase the restaurants. impressive stats in the net lease sales market. Since teaming
The purchase was financed via an SBA loan provided up 11 years ago, the Issenberg & Britti Group at Marcus
by Rick Pak at United Business Bank. Although the & Millichap has closed on the sale of over 700 properties
loan went smoothly, the transaction had hurdles when with a combined valued that surpassed the $2 billion mark.
it came to lease assignments, said Carter Asefi, CEO of The duo has capitalized on the surge in buyer demand for
FranBizNetwork. Issues arose with third parties including triple net lease assets over the past several years. “We tell a lot
licensing boards requesting changes to the lease and of our QSR clients that this is a once-in-a-generation market,”
assignments from landlords, but FBN was able to negotiate says Issenberg, SVP, investments and senior director of the
the lease assignments at each location, ensuring compliance National Retail Group at Marcus & Millichap in Miami.
with current ABC requirements and obtaining sufficient “Just a few years ago we had zero interest rates, and I think
terms to meet lender requirements, he reported. For more everyone would agree that we won’t see that for another 20
information, contact Emily Burns, principal, at emily@ or 30 years—unless there is a big hiccup,” he says.
franbiznetwork.com, or at 925-391-2726.
Cap rates have continued to compress in strong markets and
Unbridled Capital Provides Sell-Side Advisory major MSAs due to interest from 1031 investors, as well
Restaurant finance advisory firm Unbridled Capital as West Coast investors who recognize they can buy net
recently provided sell-side advisory to the following: lease assets anywhere in the country. “We have seen a little
slippage in cap rates in secondary and tertiary markets, but
• High Plains Pizza sold 82 Pizza Hut restaurants in in strong markets competition and low interest rates have
Montana, Wyoming, Utah, Colorado, Kansas, Oklahoma continued to keep these cap rates compressed,” says Britti.
and Texas to existing franchisee Grand Mere Capital,
which is led by Mike Cherney. Both graduates of the University of Miami, Issenberg and
Britti took different paths into real estate. Issenberg started
• Mass Burgers and related entities recently sold 13 Five buying multifamily properties in 1998 while he was working
Guys restaurants around Boston, Mass. to Mass 5G LLC. at Sysco Food Services. “I was handling a lot of transactions
• Taco Bell franchisee Dan Lewis and family sold three and got a bug for real estate investing,” he says. In 2005, he
Taco Bell locations in Lodi, Calif. to existing Taco Bell left his senior management position to go into commercial
franchisees Dave Engen and Brent Flynn of Engen real estate full time as a broker at Marcus & Millichap.
Ventures. Notably, Dan’s father Fred Lewis started out as Working at Sysco gave Issenberg insight in clients’ back-
a gas station owner, met Burt Baskin and Irv Robbins, and of-the-house operations, which helps when evaluating sale-
later became a Baskin Robbins franchisees in 1956. He later leaseback proposals.
became a Taco Bell franchisee in 1967. For more information
on Unbridled Capital, contact Rick Ormsby, managing Britti started as a college intern at Marcus & Millichap
director, at 502-252-6422, or at rick@unbridledcapital.com. working for Issenberg in 2007 and officially began as a broker
during his senior year. He worked his way up the ladder
NFS Closes Restaurant Deals into a partner spot and the I&B Group was formed in 2012.
Franchise brokerage National Franchise Sales (NFS) The I&B Group’s primary niche is brokering sale-leasebacks
conducted and completed the sale of the only four Burger with QSR operators across a variety of brands. The group
King restaurants in the state of Alaska, in which the brand also has worked on net lease transactions across property
and state could not be identified during marketing due to types, including convenience stores, gas stations, multi-
confidentiality issues when operating in a state like Alaska. tenant retail centers and even land development sites.
NFS was part of the franchisor negotiations with the buyer, One driving force behind operator decisions to do a sale-
HS&S Restaurants, Inc. who was new to the Burger King leaseback is taking money out of the real estate to fund
brand. Additionally, NFS was able to arrange creative renovations. Some franchisees will sell one or two properties
financing in order to meet the capital requirements of this to finance a remodeling program across multiple stores. And
logistically unique transaction. there is still opportunity for restaurants that want to do a
NFS also assisted Kamdhenu, LLC with the purchase of sale-leaseback. Because of low rates and still-compressed
their first restaurant franchise by the transferring of a Del cap rates, this is the time to have a properties evaluated for
Taco franchise in Northern California from RAD Concepts. those who might sell in the next five to seven years, says
The transfer was made possible partly by an additional lease Britti. For more information, contact Ronnie Issenberg at
term on an expiring lease that was negotiated by NFS. 786-566-1446 or rissenberg@marcusmillichap.com
Page 4Ideas for Financing an Emerging Franchise Concept
By Dennis Monroe that focuses on cash flow is that there is a definable exit
I am more convinced than ever that restaurant concepts strategy for the investors. If the stores have gotten to a
have to look at new and creative ways to spur growth. This certain point of maturity, they should have a much higher
is particularly true for franchise concepts. It seems like value than the initial investment and can be rolled up into
every franchisor I know is looking to access large multi-unit the concept company or sold to another franchisee.
operators to drive growth. Unfortunately, to attract these Now let’s look at how to find investors and how to put this
kinds of operators, they must seed growth by allowing whole project together. The first thing to do is develop a
franchisees to purchase existing stores. Growth concepts pro forma business plan and have the necessary securities
often don’t have corporate stores to sell, since they generally documents drafted. The people who are most likely to invest
need their corporate stores as a source of cash flow to provide are going to be those who are familiar with the concept or
the infrastructure to keep growing. the company. These may be friends and family or those
Those challenges notwithstanding, there are techniques originally invested in the concept. The optimum size for most
that can be used to help systems grow by attracting both developments I’ve seen is a three-to-five-store development
franchisees and outside investors. One method that is tried area. More than that takes too long to grow and exit.
and true is when the promising company “seeds a market” Another approach I like, particularly in a franchise system,
with stores. Once those stores have matured or at least are joint ventures. You can take existing franchisees that
gotten to a point that you can see they’ll be successful, a may have some strong existing stores, but don’t have enough
company can look at franchising the stores and selling the funding for additional growth. These franchisees , and we’ve
development rights for the corresponding areas. done this with a number of concepts, are worth investing
Market “seeding” sounds great but what are the techniques in for future growth.
to accomplish this? What we’ve done in the past is to create a new entity funded
Let’s use the example of an emerging fast casual Asian by investors and, in part, by the franchisor and franchisee.
concept that locates primarily in strip centers and wants to There are certain accounting rules regarding consolidation
franchise. The footprint needs about 3,000 square feet or that need to be considered, however, this is the kind of
less, has unit volume of $1 million to $1.5 million dollars investment that certain investors like to be involved in. It
and has strong unit economics. provides a wonderful potential exit strategy, because the
franchisee, once the stores have matured, can probably find
The franchisor picks a number of development areas they financing by then and take out the investors and franchisor.
believe will be receptive to the concept. In most cases, if If, for some reason, the franchisee doesn’t want to acquire
the concept is a typical fast casual concept, it’s probably the stores completely, the franchisor could absorb them and
good to be in a major metropolitan area that has NFL or make them corporate stores.
NBA-type teams and has consumers that seem to be open
to emerging concepts. (One area I really like is Indianapolis, A third approach involves putting together a new unit
which seems to be a good location to try new concepts.) development financing program back-stopped by the
franchisor with a limited guaranty and remarketing
The key issue many fledgling franchisors have is funding agreement, or credit enhancement, thereby making funds
new development. Most emerging brands, whether they available to franchisees. This is something that was done
franchise or just want to have corporate-owned stores, don’t quite frequently in the past and has recently been revisited.
have the kind of resources to extensively develop new stores. The lender, with assistance from the franchisor, administers
But, with good unit economics and strong unit cash flow, the loans. Sometimes this type of program involves a slice
it’s possible to raise both debt and/or equity to develop a of mezzanine financing (high yield debt). The key here is
given area. that this type of funding for franchisees often has terms
better than they could obtain on their own.
The structure I generally recommend to fund new unit
development is with a private placement. Private placements With plenty of money available today, these three approaches
entail finding investors who are both interested in cash flow can be helpful for growth. They are thoroughly tested and
and knowledgable about your restaurant. These investors seem to work. As rates go up and the economy cools down,
are, in almost all cases, accredited investors, and with the these approaches may again help to jump-start and continue
liberalization of some of the securities laws, can readily be growth for the systems that may have temporarily stalled.
found to invest in these types of deals.
Dennis Monroe is chair of Monroe Moxness Berg, a law firm
Ultimately, the first approach is to sell existing company specializing in corporate finance, mergers and acquisitions, and
stores in conjunction with development rights to a potential concept growth for multi-unit restaurant operators. You can
franchisee, or use the private placement to entice investors reach him at (952) 885-5962, or at dmonroe@mmblawfirm.com.
to build new stores. The beauty of using a private placement
Page 5FINANCE INSIDER
Franchise companies that don’t allow franchisees to close Freddy’s Custard franchisees. Auspex Capital represented
losing stores is becoming a major issue in franchisor/ Tuohy and Roe. For more information, contact Chris
franchisee relationships. Burger King franchisees tell the Kelleher of Auspex Capital at ckelleher@auspexcapital.com.
Monitor there are at least 600 to 700 Burger King stores in The 10-unit Phoenix-area casual diner Humble Pie has been
the U.S. that are cash flow negative and should be closed. sold to Cornwell Development Partners. Reconstruction
According to Burger King’s FDD filing for the calendar Partners—Wallace Hite and Lee Cohn—represented
year 2017, it listed almost 10% of its 6,020 franchisee the seller. For more information, contact Wallace Hite at
owned traditional stores with volumes less than $900,000. wallace@reconstructionpartners.com.
Franchisees say it is difficult to make money under that
sales threshold. (We hear Pizza Hut is another brand that’s Former BDO and SS&G accountant Duston Minton has
making it difficult for franchisees to close stores.) joined Arizona accounting firm Henry+Horne as a partner
and co-leader of the firm’s restaurant practice.
And, let the Burger King grumbling continue. The
franchisor has unveiled its Burger King of Tomorrow Former National Franchise Sales managing director Paul
prototype and claims feedback from franchisees has been Wilmoth passed away last month at age 89. Wilmoth was
encouraging. That’s not what we’re hearing. the first salesperson hired at NFS by founder Jerry Thissen.
A 35-year veteran of the restaurant business, Wilmoth spent
Since 2011, Domino’s Pizza’s average U.S. franchise store time at Pioneer Chicken and Popeye’s. He was a past board
EBITDA has increased by 53%, from $70,000 to $136,000 member of the International Franchise Association.
per store. During that same time frame, Domino’s dollar
share of pizza delivery has grown from 21.9% to 29.3%. Sun Capital’s acquisition of the 145-unit Taco Bueno from
a Chapter 11 bankruptcy was completed in early January.
Cowen analyst Andrew Charles calls Domino’s Pizza the Owner Guillermo Perales told the Monitor the Taco
preeminant candidate for Restaurant Brands International Bueno employees have now moved into Sun’s offices and
(Burger King, Popeyes and Tim Horton’s) to acquire. “In the company has upgraded to a fresher tortilla and switched
our view, the acquisition of Domino’s could accelerate the from Pepsi to Coke. Perales bought the debt of Taco Bueno
international expansion of RBI’s existing brands, particularly for less than 50 cents on the dollar before taking over the
Popeyes, via Domino’s well capitalized franchise network,” company in a bankruptcy sale.
wrote Charles in a February 6 report.
Who says there is no opportunity in the restaurant business?
Gary Levy is the new chief strategy and growth officer for Chick-fil-A CFO Brent Ragsdale started at the chicken
Cohn Reznick, now the 11th largest accounting firm in the chain as a cashier when he was 16 years of age. He was hired
U.S. Cindy McLoughlin heads up the restaurant practice by Dan Cathy, now the CEO. Papa John’s CEO Steve
for the firm, but Levy will still maintain some restaurant Ritchie started as a pizza delivery driver.
client responsibility.
From 2007 to 2017, the Ford Foundation has provided the
Flynn Restaurant Group’s December acquisition of the Restaurant Opportunties Center (ROC) with over $11
368-unit Arby’s operator, U.S. Beef, was its 20th franchisee million in funding. ROC is an activist labor organization
acquisition. that is building popular support for a nationwide $15
Centerbridge Partners sale in January of P.F. Chang’s minimum wage and elimination of the tip credit. Co-
to TriArtisan Capital Advisors and Paulson & Co was a director of ROC, Saru Jayaraman, was recently named
Christmas gift for bondholders as there was concern over to the Nation’s Restaurant News Power 50 list.
a potential default. Last April, Moody’s downgraded P.F.
Chang’s debt to junk bond status and rated the outlook for
the company as “negative.” Centerbridge bought Chang’s and
Pei Wei in 2012 for $1.1 billion. Moody’s cited leverage at over
8x EBITDA and “interest expense and capital expenditures
outstripping internal cash flow generation.” Pei Wei, which
Centerbridge kept, is rumored to be losing over $1 million
per month. Bank of America Merrill Lynch acted as lead
financial advisor. “This was a great example of a ‘win-win’
being achieved against a really choppy debt and equity
market environment the past six weeks,” said Managing
Director Roger Matthews. For more information about
the deal, contact Matthews at roger.matthews@baml.com.
YUM franchisees Sean Tuohy and Michael Roe spent 30
years building a successful franchise and two years selling
their 105 Taco Bell and KFC restaurants and 55 real estate
properties in six separate transactions to maximize the sales
price, which was $213 million. Tuohy and Roe remain
Page 6Julia Stewart: “We got in a big hurry.”
I spotted former Dine Brands Global CEO Julia Stewart at PE to Restaurants: Too many?
the ICR Conference last month in Orlando. What has she “Private Equity is very focused on the due diligence process
been doing, I wondered, since resigning from the asset-light to make sure [franchise acquisitions] have good systems in
parent of IHOP and Applebee’s in March 2017? place. And now they are beginning to educate themselves on
Her departure, most observers agree, was sparked by 2015’s operations,” explained franchise consultant Lynette McKee,
hastily launched grilled steak program at Applebee’s. The who attended a private equity conference this month in
rollout, begun amid negative same-store sales, required New York City.
franchisees to purchase costly new grills and train workers McKee, who’s also a partner in Results Thru Strategy, added
to hand-cut steaks. Same-store sales failed to improve that PE remains “very interested and aggressive,” and is
despite heavy marketing. continuing to look for opportunities to acquire franchisors
After leaving Dine Brands, the veteran executive traveled (and franchisees) with at least 50 units.
(often with her daughter to various colleges) for much of One trend she’s noticed recently: Institutional investors
’17, she explained a week later in our post-conference phone are also examining franchisees during the due diligence
call. She spent last year bonding with private equity firms. process. Franchisors wanting to make themselves attractive
“I was learning how they operate and think and see the acquisition targets, in turn, will also have the “best and
world,” she said. brightest” franchisees. Not surprisingly, franchisors with
Part of the process involved advising Rhone Capital on good systems attract them.
last year’s $560 million acquisition of now-private Fogo Young brands that want to franchise should be implementing
de Chao. “One of my first recommendations was to take it systems early on, she added.
private, which they did,” she said, adding the new owners McKee, however, cautioned that some PE firms now believe
then invited her to join the board. “I’m helping them as the restaurant space is too crowded and that franchised
much as I can.” industries like healthcare, for instance, may provide better
Meanwhile (recruiters take note!), she’s seeking a CEO returns. The conference, in fact, featured panels on investing
position at “a consumer-facing company” with aggressive in healthcare and health and fitness franchises.
growth plans. You’ll recall Stewart spent 17 years at the helm Buy the dirt!
of Dine Brands (then DineEquity), acquiring Applebee’s—a If the opportunity arises, should a multi-unit franchisee
crowning achievement—along the way. acquire real estate? Once bought, should they then do a
Controversially, she refranchised all of Applebee’s. I asked sale-leaseback transaction, freeing up capital, which can
Stewart if CEOs could be successful long term in a casual- be used for, say, operations — or to buy more property?
dining brand that didn’t operate company restaurants. “I I was reminded recently of the merits of owning real estate
think that depends on the situation of the brand and its by two proponents: Monitor columnist and attorney Dennis
franchisees. So many variables are involved, it’s hard to Monroe and veteran operator and Dairy Queen franchisee
say,” she offered. Bill Spae. They argue that owning real estate allows property
Yet, you led a brand that did just that, I added. “That was owners wide flexibility.
all about putting all of your resources — G&A, if you “Concepts go up and down and those people who have owned
will —into growing the brand. Marketing, R&D, HR, their real estate have tremendous options,” insists Monroe,
training — it’s all about the resources franchisees need to who negotiates real estate transactions for restaurant clients.
be successful. If you put all resources against that and be One of them is becoming a landlord of a “legacy asset.”
supportive of franchisees it can be successful,” she explained,
adding franchisees aren’t concerned with the size of legal Spae, who has done sale-leaseback deals, agrees. “If you are
or accounting departments. “They care about what you’re an established franchisee you should buy the property. That
doing to help them them grow.” helps you later on,” he said, noting, for example, problems
with landlords are alleviated. Spae, however, currently leases
Yet the grilled steak program arguably did the opposite space for all 44 of his DQs.
for some franchisees. What went wrong? “I think — and
I take accountability for this — we moved too fast. We Yet, because operating restaurants requires a continual supply
had such a desire to beat the competition and get ahead of capital using it to finance real estate purchases could mean
of the casual-dining sales trend, which wasn’t positive [at less investment in the physical asset itself. “This gets down
the time],” she said. to the allocation of capital,” Monroe explains, “and that’s
what all the sale-leaseback guys always sell. ‘Hey, you want
Stewart now, apparently, regrets the decision. “I probably to expand your concept so don’t waste it on real estate.’”
should have done more to slow it down and have the right
research and the right amount of testing,” she admitted. Next month, I’ll let proponents of sale-leaseback transactions
“We got in a big hurry to make certain we were making have their say.
money for our franchisees.” —David Farkas
Page 7MARKET SURVEILLANCE
Restaurant Brands
Papa John’s International International Fat Brands Inc.
PZZA-NASDAQ QSR-NYSE FAT-NASDAQCM
Starboard Value buys Claims franchisee profitability at BK Borrows $20 million from
$200 million in preferred shares improved in 2018 versus 2017 Sardar Biglari’s Lion Fund
Date: February 3, 2019 Date: February 11, 2019 Date: January 29, 2019
Transaction: Papa John’s sold $200 2018 Results: The company reported Transaction: Fat Brands is a franchisor
million of convertible preferred stock adjusted EBITDA of $2.2 billion, a that owns Fatburger, Hurricane Grill
to hedge fund activist Jeff Smith’s year-over-year increase of 4%. Burger and Wings, Buffalo’s Café and Buffalo’s
fund, Starboard Value. Smith is known King added over 1,000 restaurants Express, Ponderosa and Bonanza
for taking on former Darden CEO primarily in Brazil, Russia, France, Steakhouses and Yalla Mediterranean.
Clarence Otis in 2014 and winning a China and the U.S. Popeyes added It borrowed $20 million from The Lion
proxy fight to replace the company’s 210 units. Comparable sales were up Fund, L.P. and The Lion Fund II, L.P.,
entire board of directors. The preferred marginally—2% at Burger King, .6% which as of September 30, 2018, were
shares Starboard acquired are at Tim Horton’s and 1.6% at Popeyes. 63.9% and 93.0% owned respectively,
convertible into common stock and CEO José Cil said the company’s focus by Biglari Holdings (BH-NYSE). The
represent between an estimated 11.2% is “driving top-line, bringing more two funds are managed by Biglari
to 15.4% of the company’s outstanding guests into the restaurants driving Capital, of which Sardar Biglari is
shares. Papa John’s also agreed to profitable growth.” As for franchisee chairman and CEO. As of this date, the
increase the board from six to nine profitability versus a year ago, Cil said investments in The Lion Fund II, L.P
directors and nominated Smith to the average profitability was up at Burger consisted of 3,768,423 shares (15.7%)
position of board chairman. CEO Steve King, flat at Tim Horton’s and flat to of the outstanding shares of Cracker
Ritchie was also appointed to the board. slightly negative at Popeyes. Barrel Old Country Store.
The company agreed to reimburse Terms: The short-term loan matures on
Commentary from veteran restaurant
Starboard for its out-of-pocket fees of June 30, 2020.
analyst Roger Lipton: The operating
$592,500.
details of Restaurant Brands reflect Interest Rate: Interest accrues at an
Use of Proceeds: Approximately half a great deal of financial engineering annual fixed rate of 20% and is payable
of the proceeds will be used to reduce rather than predictable, above average, quarterly. The company may prepay all
the outstanding principal amount of long-term operating progress. The unit or a portion of the outstanding principal
the company’s revolving credit facility. growth at Burger King will continue, and interest without penalty, subject to
The remaining proceeds will be used but the profitability “levers” are largely a make-whole provision providing for a
for general corporate purposes. played out. Tim Horton’s has serious minimum of six months’ interest.
Investment Banker: Bank of America franchisee tension still to be dealt
with, and we are sure that peace will Warrant: The company granted a
Merrill Lynch advised the special warrant to the two Lion funds to
committee of the board of Papa John’s. be made. However, the improvement
in franchisor margins at Horton’s, purchase up to 1,143,112 shares of Fat
Summary: There was no comment (which the franchisees claim was Brand’s common stock, exercisable only
on the deal from former CEO largely at their expense) will not be if the amounts outstanding under the
John Schnatter on his web site, duplicated. Popeye’s is no doubt the loan are not repaid in full by October
savepapajohns.com. best growth vehicle within this brand 1, 2019.
portfolio, but their scale is not large Use of Proceeds: The company used the
Ritchie told CNBC’s David Faber on enough to move the overall corporate proceeds to repay its existing $16 million
February 5 that the transaction with profitability or cash flow by much. The term loan dated July 5, 2018 with FB
Starboard will allow them to focus on bottom line is that the earnings and Lending, LLC, a specialty lender funded
the brand: cash flow of this situation are unlikely by a family office.
to grow by more than mid single digits
“This investment gives us an in the near future, having grown by Summary:
opportunity to focus on what’s most even less than that in calendar 2018. Fat Brands has approximately 350
important. There’s no doubt we have The cash generation may well be used franchised locations across 29 domestic
to get better. We are going to continue to reduce the $11 billion of net debt, states and 20 countries. CEO Andy
to invest in the areas of product and but that hasn’t been the case in the Wiederhorn told the Monitor last
technology and people. We know that last two years. The dividend at $2.00 month he was working on a number
we need to improve the unit economics annually, yielding 3.2% currently, of other acquisitions to add to the
of our franchisees.” is secure, but the stock is no bargain company’s portfolio and was looking
at 23x 2019 earnings, and about 20x to expand its debt facility.
trailing EBITDA.
Page 8STATS AND QUOTES
British accountant Paul Pittman
RESTAURANT EXPERTS OFFER INSIGHT FOR 2019 speaking to Oath Finance about
a report produced by his firm,
Analyst Topic Market Commentary Price Bailey, showing restaurant
insolvencies in Britain up 40%
Jon Tower Casual “Buyer beware: History suggests the 2018 compared to 2017: “Restaurants are
Wells Fargo Dining casual dining SSS renaissance may be fleeting
and valuation could come under pressure a capital-intensive business. Many are
Securities perpetually walking a balance-sheet
entering 2019 should SSS growth not persist.”
tightrope and it often only takes a few
Malcolm Knapp Labor “Labor will continue to be hard to get and months of poor takings (sales) to send
Knapp-Track increasingly expensive. The better-performing
concepts will have a strategic advantage in them over the edge.”
getting the pick of labor but there still will
be shortages.” Former Bain consultant and new
Domino’s CEO R itch A llison
Will Slabaugh Technology “Our view is that Domino’s impressive results describing the brand’s franchise
Stephens Inc. are due, in large part, to the tech investments development process: “You will not
made in past years, including amassing a hear Domino’s advertising franchise
~450 person tech team in Ann Arbor and
outsourcing to 100+ more individuals, which opportunities on the radio. You will not
has ultimately led to a decreased marginal cost see us going to franchise shows in the
to operate the business for the franchisees and U.S. to try to recruit outside operators
a better experience for consumers.” into our business. All of our operators
R.J. Hottovy Online “The ripple effect from online grocery will in the U.S start by working in the stores
and prove they’ve got what it takes.”
Morningstar Grocery become
as the
more pronounced for restaurants
food-away-from-home/food-at-
Equity Research Sysco CEO Tom Bené discussing the
home spread widens via increased grocery
competition...expect additional restaurant recent news that his company will
closures and decelerating industry growth.” cut 10% of its corporate salaried
Nicole Regan Public “Going-private deals have accounted for the workforce: “Anytime you take an
Piper Jaffray Company removal of millions of dollars of EBITDA action like this, it’s difficult for the
associates involved and we take that
Contraction and billions of market capitalization, which
in turn creates scarcity value in terms of the very seriously here. But I think at the
number of investable options available...we are same time, it is our responsibility to be
at the mid-point of the current contraction constantly looking for ways to optimize
phase.” this business, and improve the overall
Andy Barish Delivery “An outstanding question remains how experience our customers are doing
Jefferies delivery service providers will use their business with us, and we’re going to
proprietary customer data. Will they create continue to do that as an organization.”
their own restaurant brands to meet demand
and take share from their restaurant clients?”
Restaurant Finance Monitor
INTEREST RATES Stock Market INDEX
2/13/19 Last Month A Year Ago Trend 12-31-18 02-13-19 YTD%
Fed Funds Rate 2.50 2.50 1.50 RFM
INDEX 4,359.31 4,935.13 +13.2%
1-Month Libor 2.49 2.52 1.59 S&P
2,506.85 2,753.03 +9.8%
500
3-Month Libor 2.69 2.79 1.84
The RFM Index shows how a basket
1-Year Treasury 2.55 2.57 1.95 of restaurant stocks trade in the stock
market during a particular period.
5-Year Treasury 2.53 2.53 2.54 The index follows a strict rules-based
methodology that weights QSR and Fast
10-Year Treasury 2.71 2.71 2.83 Casual at 70% with full-service making
up the balance. Most indices are market
30-Year Treasury 3.04 3.06 3.11 capitalization weighted, including the
S&P 500. The RFM Index overweights
Prime Rate 5.50 5.50 4.50 larger restaurant companies.
Page 9Staying In Is The New Going Out!
Gone are the days of increasing visits to restaurants. While Fast casual falls prey to changing consumer behavior
we still make a lot of visits (62 billion), we are changing the Fast casual restaurants emerged on the scene roughly 15 years
way we use restaurants, how we order food and where we ago, generating considerable attention within the industry.
consume the restaurant meal. These restaurants were positioned as a fresh alternative to
traditional fast food, with attention placed on food quality
In many ways, the new restaurant in town is our home. This and service. Over the years, some fast-casual chains have
is a tremendous challenge for restaurants heavily dependent faltered, but others have grown and supported a steady
on consumers eating at their restaurants. growth in the concept’s market standing overall. What
has been particularly impressive is the way the segment
According to NPD CREST, there was a 2% increase in advanced through the great recession when the balance of
restaurant meals eaten at home in 2018 as total industry the industry suffered traffic losses.
traffic remained flat. Since this seems to be the only area
of traffic growth, all segments of the industry are focusing However, fast casual has now fallen prey to changing
on gaining a share. consumer behavior. Overall growth for the segment has
slowed to a point that unit expansion is outpacing traffic
While dinner represents almost half of all home meal gains.
occasions, breakfast and lunch showed the strongest growth
in restaurant meals eaten at home. This shift in behavior has Fast casual is particularly weak at its most important
had an impact on various dayparts in one way or another. daypart—lunch. Lunch accounts for nearly 50% of all visits
and realized a decline of 2% in 2018. Growth also slowed at
Changing dynamics at lunch the morning meal. Dinner visits grew quite strongly (+7%),
The American lunch hour as we have traditionally known likely supported by convenience-related options and meals
it is slipping away. Maybe you have already noticed, or eaten at home.
maybe you are too busy working to care. More and more
people are eating at their desks as they work through lunch. Dinner visits up 1%...something not seen in years
Additionally, a growing number of companies have catered While it seems like this trend is nothing to write home about,
food brought in to enable employees to continue working it is newsworthy. Visits to restaurants for dinner have been
through their lunch period. These changes in the traditional declining for years. However, like other meal occasions, the
lunch hour have been subtle and gradual. growth was derived from meals purchased from a restaurant
and consumed at home. A variety of factors are at play that
Another key factor impacting lunch performance is more are supporting this trend: e-commerce solutions, click-
people working from home. According to the Bureau of and-collect models, third-party delivery services, menu
Labor Statistics, 24% of employed workers did some work aggregators, direct-to-consumer and subscription services.
from home in 2016 (latest information available). There is These are all examples of new ways consumers are accessing
little doubt that the increase in number of restaurant meals food today.
eaten at home at lunch is being supported by the convenience
of getting a meal delivered to the home. Luring consumers out of the house and back to the
restaurant
Regardless of the cause, these changing dynamics at lunch How do restaurant operators win this battle? The first way
continue to take their toll on the restaurant industry. Visits to win is with the menu. A restaurant must have menu
to restaurants for lunch have struggled for many years and offerings that beat at-home availability. New menu offerings
over a third of all restaurant visits occur at lunch, which that stimulate interest, variety, freshness and quality go a
translates to roughly 33 billion visits. In 2008, consumers long way in meeting value expectations.
made 73 visits per capita to restaurants for lunch, in 2018
that number has fallen to 63 visits per person. At the same time, increased focus on the guest experience
should have a favorable payoff. Superior service and speed
Lunch has traditionally been the occasion where consumers of service are critical components of driving customer
have looked for convenient, cost-effective solutions. They loyalty. Making customers feel valued is also a key to
haven’t wanted to invest a lot time, money or energy into building customer loyalty. These are the wants and needs
this meal. And that is why historically, QSRs have been so to meet in order to lure consumers off their couches and
successful with the person on the run. The QSR segment into a restaurant. Without fulfilling these needs, potential
is heavily dependent on lunch, capturing nearly 80% of restaurant visitors will continue to shift their restaurant
the total lunch business. Within that, burgers, sandwiches meals to in-home occasions.
and retail places have dominated the QSR lunch market.
—Bonnie Riggs, Restaurant Industry Analyst
However, there’s a “new kid in town” known as fast casual
that weighed heavily on the performance of these players
by capturing more share of the lunch market—– reaching
10% in 2018.
Page 10ANALYST REPORTS
Sysco is the largest distributor to chain restaurants and recently announced
Sysco Corporation a plan to achieve $650 million to $700 million in cummulative operating
SYS-NYSE income growth by the end of fiscal 2020. The company says it will achieve
Recent Price: $66.20 this by acquiring other broadline and specialty distributors and through cost
reductions. The company has been experiencing rising operating expenses due
to higher warehouse and driver expenses, and just announced a 10% reduction
in salaried corporate support positions.
Goldman Sach’s analyst Karen Holthouse has a Neutral rating on the stock
and a 12-month price target of $70. “Our general view is that cost-driven
growth strategies should be valued at a lower multiple than more sustainable
algorithms, and we struggle with valuation that remains near the high end of
historical levels,” wrote Holthouse in a report in early February.
Wells Fargo Securities analyst Edward Kelly has the stock rated Outperform.
“SYY should continue to make progress in driving local case growth, improving
pricing discipline, ramping investment in customer-facing technology, cutting
costs, and pursuing M&A,” wrote Kelly in a a recent report.
GrubHub Consider the size of third-party delivery provider GrubHub: There are now
more than 105,000 restaurants in more than 2,000 cities (including 6,500
GRUB—NASDAQ Taco Bell and KFC locations) on the platform and 17.7 million active diners.
(Outperform) The company’s revenues reached $1 billion in 2018, a 47% year-over-year
Recent Price: $86 increase, on over $5.1 billion in restaurant sales. However, fourth quarter
revenue of $288 million wasn’t enough to meet analyst expectations as adjusted
EBITDA per order fell to $0.98 in the fourth quarter, down from $1.57 in
the third quarter due to increased marketing expenses to attract new diners.
Shares are off 40% from the company’s high-water mark in September as
investors weigh the outlook.
Cowen analyst Thomas Champion says the results for GrubHub were
disappointing and has lowered his 2019 earnings estimate based on the
company’s EBITDA guidance of $250 million. Still, Champion sees active diner
growth staying strong and a topline opportunity from “several positive catalysts
including YUM co-marketing unfolding.” He maintains an Overperform
rating on the stock and set a price target of $108.
Chipotle offered free delivery on burrito bowls during the second half of
Chipotle Mexican Grill December that drove comp sales up 6.1% while store margins improved to
CMG-NYSE the 17% of sales level. Both sales and margins were higher than the Street
“Buy, Buy, Buy” was estimating. Looking closer, traffic was up 2% while the average check
Recent Price: $603.36 was up 4.1%.
Since Brian Niccol took over as CEO of Chipotle exactly one year ago this
month, its shares are up a whopping 237%. Priced for perfection you might
conclude at roughly 21x projected 2019 EBITDA? Not according to CNBC’s
momentum king, Jim Cramer, who likes what he sees:
“Chipotle is giving you a remarkable turnaround. I’m a big believer in Niccol’s
strategy. Hey, by the way he moved the headquarters all the way out to
California. The big-think redo of the chain is a place for dazzling innovation
and his tactics are all about good execution. Father time gets some credit, too.
The customers have forgotten about the health scare and now they are back
and they seem to love Chipotle as I do, more than ever,” said Cramer on his
show Mad Money on February 7.
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