McDonald's (NYSE: MCD), a long time behemoth in the net lease sector, has found itself under significant pressure lately. The company's financial performance is eroding, with 2014 revenue down 2% and profit down 15%. Once a company that posted twelve consecutive years of profit growth, it now faces problems that have complex roots and are difficult to address.
One challenge is that millennials don't find McDonald's as appealing as their parents, especially vis-à-vis alternatives like Chipotle and Shake Shack. There has been an underlying change in the preference of customers that, with each passing year, constitute a larger component of America's prime buying demographic. A demand for healthier options and the perception that McDonald's serves primarily low quality, unhealthy food doesn't help. The company is also facing competition from companies like Chick-fil-A, which has a unique model that prevents large profit-centric franchisee chains from emerging, and a resurging Wendy's. Other problems involve brand-tarnishing labor disputes with corporate and franchisee employees and food safety problems in Asia.
All of which begs the question, just what kind of impact are these problems having on cap rates for McDonald's properties?
Thus far, not much. If anything cap rates for 2015 may be down slightly, although data for the year is still preliminary (deals closing in 1Q15 were initiated in late 2014 and early 2015, before current year financials were released). It appears that McDonald's performance and reputation are still enough to keep these properties in high demand from investors. Nonetheless, financial performance for these properties is worth keeping an eye on.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
