One of the largest sectors in the net-lease space is quick service restaurants (QSRs), consisting of stand-alone locations flagged with tenants such as Wendy's, KFC/Taco Bell, and Burger King.
While these locations may look similar, their operating structure can vary significantly. On one extreme, the restaurant may be operated and tenanted by a franchisee with just one or two locations. On the other, the franchisee operator could have thousands of locations, or the store may even be corporately owned.
For buyers of these properties, the strength of the operator is of primary concern, as this is typically the guarantor of the lease. The stronger the guarantor, the more secure the payments, the less risky the investment and consequently the lower the cap rate the property will trade for. Indeed, within similar QSRs, cap rates vary significantly by guarantor type.
Below is a table of QSR sales since 2014, broken out by type of guarantor. As we can see, locations with corporate guarantors trade at a premium of approximately 90 basis points relative to franchisee guarantors.
However, exceptionally strong franchisees beat out even corporate guarantees sometimes. NPC International, which operates 1300+ locations of varying brands, produced an average cap rate below corporate guaranteed locations. This may reflect an investor preference for diversified operators, but could also be a coincidental selection of exceptional locations.
In any case, there are wide swings in cap rates driven by the strength of the guarantor. Buyers and sellers of QSR properties place a premium on larger, more stable operators.
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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.
