Season 5 Episode 3: From Real Estate Investor to a Prominent Taco Bell Franchisee

Welcome to Restaurant Boiler Room: Season 5, Episode 3. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in The Boiler Room, we'll be playing a recent webinar with SG Ellison, a 330 unit Taco Bell and Arby's franchisee. SG started as an engineer, became a real estate developer, and eventually became one of the country's largest restaurant franchisees. We'll be talking about his personal journey, how their companies have grown, their operating and management philosophies, thoughts on the current operating environment, comments on the future of real estate, key learnings from the Taco Bell brand for would be franchisees, and growth for the future within the restaurant industry. The Restaurant Boiler Room is a one-stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on a monthly basis. Feel free to find our content at Unbridled Capital's website at www.unbridledcapital.com. Now, let's enter The Boiler Room.

Well, welcome those of you who are trickling in. I know you'll keep trickling in here, but welcome. I'm excited to have SG Ellison here. This will get put into a podcast and it'll be on our website. A couple of rules to guide us by here. Number one, if you want to find the replay at any time, it'll be available on our website, unbridledcapital.com, in a couple of days, probably. It'll be dubbed on our next podcast, so you can have a chance to listen to it, the podcast is The Restaurant Boiler Room. Then it's on YouTube too. Surprisingly, man, we get several hundred people listening to it on YouTube every month, so that must be a medium that people use. Nonetheless, I'm thankful for everybody who touches base and listens on all the different media that we have.

Usually I do a quick update before we get started just about the deal market. I think Unbridled has 16 deals going right now, which would continue to represent probably a pretty significant reduction in what we've seen over the last several years. Probably at least a 30 to 40% reduction in deals. I think that's probably emblematic of what's happening in the industry. There's a supply-demand issue with selling restaurants right now. Good restaurant businesses really aren't on market as readily as they have been in the last couple of years. We had a Taco Bell, a Wingstop, and a Burger King deal on the market, each of those three in the last 60 days or so, outsized amount of interest from buyers. I think it's just because people have cash from the ERC credits and other things and want to spend their money, but they don't have anywhere to put it.

I think the deal market probably continues to stay a little bit depressed here for the next three to six months, but maybe we'll see it open back up as we get into the third and fourth quarter of 2023. That's my quick assessment. With that, I'd like to introduce SG Ellison. I've known SG for, I'd throw a year out there, it's got to be over 10 years now, 10, 11, 12 years since you've gotten in the business, we've personally done a couple of deals together. Really thankful for that too. I'd love to just have you tell your story and the story of your company. You're almost like an advisor type of person, even though you're a president, and you've got some great thoughts about the M&A market, the financing market. You've got a good real estate background. I think you'll find, guys, that this webinar will be really a neat mix of different areas of expertise that you can apply to what you know in this business. Welcome, SG. Tell us about yourself, brother.

Hey, Rick, thanks for having me on. When you asked me to be on, I was thinking about that question of, how long have I known you? It is about 10 years. I started our development company about 10 years ago. Before I got into being a franchisee, I was pitching real estate sites to Taco Bell owners. I remember being in a booth at a franchise forum on this side of it, trying to get build to suit deals in a new program we had developed with Taco Bell and you were on the other side just starting your business and Unbridled. When you asked me to be here, I was like, "Well, we both had a pretty interesting journey over the last 10 years." Both small market guys from a young time and now we're got some pretty successful partners and pretty good businesses. So congratulations on what you've been able to do.

Thank you. That's really kind. Back at you. Who thought an old boy from Arizona would have this massive restaurant business? Wow. I mean, all these people, it's almost like you're like a military arm or something, you're getting so large. I can imagine all that goes into it, but tell us a little bit about it all. How did it get going? How did you come to this?

Well, yeah, and I'm going to talk a little bit about people and I'm usually a pretty good listener, so I don't speak a lot to people about my journey, but I'm happy to do it here and hopefully it resonates with some folks. But I'm actually calling in from Maui, not technically on R&R trip, but here to celebrate Taco Bell and some of Diversified Restaurant Groups team members. We have the Golden Bell Awards here in Maui this week and we were fortunate enough to have eight Golden Bell winners at DRG of Taco Bell. And the Golden Bell is essentially given to the top 100 general managers across the system. I think now they've expanded it to international, so there might be a few more here. This is the most that we've had in our organization. We've obviously have more locations now, so that relatively speaking on a pro-rata basis, that you'd expect it to increase.

But I think we have at 300 stores, which we just opened our 300th location in Kansas City two months ago and we've been celebrating that for Taco Bell, but out of 300 we're probably three and a half to 4% of the total store count in the US. So to have essentially 8% of the winners, we're kind of out kicking our coverage there. And that's a testament to Todd Kelly and Tom Douglas and all the GMs that have put a lot of work into this and our directors and it's really fired me up. This morning, they had a 6:00 AM business review for the GMs and I wasn't actually planning on being there, but the time zones, I was up pretty early, walked around, got to go in and see what they were doing and I got to meet a guy named Justin Patton. Justin was an interesting story because he was a school teacher.

My parents were school teachers and so that was really interesting to me. And he went through and joined Taco Bell, eventually Yum Brands as a trainer, training is sort of teaching and started to really talk about how to make stores and grow leaders. And one of the things I was reading, and he has a book and it was about trust, and the question he posed in the book was, is trust given or earned? And about 70% of the respondents will say trust is earned. And so that is something that people kind of think and he tends to go to the other side and say, well, you got to give trust to see if somebody can earn it back. And he really comes together with this thing that trust is built.

So it's really a balance of both sides of this. And that's really sort of what our business is and that's what kind of got us going in Taco Bell and real estate world, is you got to kind of trust who your partners are. I'm fortunate to have great partners and David Grieve helped me start the company back 10 years ago and we've sort of built this company and this team based upon that value of trust.

That's great. And congrats to all those winners. I mean, as I think about you, you guys started off as real estate guys. Tell me a little bit about that and then how did you move into restaurant operations? I mean, you guys are at the forefront of it. People who listen and tune in, hear me talk about 2013, '14 and '15, you started seeing this migration and move to a different type of franchisee. Some of them were private equity and family office groups out in New York, let's say, young, raising money, buying assets, and others came from the real estate side, kind of then saw, gee, this real estate thing is doing pretty well and we love the businesses on top of them and we want to be a franchisee. And that's kind of the way you guys came at it really, I think. So tell us a little bit about that if you don't mind.

Well, yeah, I mean, you sort of asked me earlier in the week, how did I start, why real estate and restaurants and I was kind of thinking about that question and you try to go back to your childhood, why am I doing what I'm doing now? Is there any sort of influence? And all I can remember is I really liked playing in the dirt. My parents both worked really hard. Mother was a school teacher, father was a minor and then became a school teacher. So I was at home quite a bit, and back in the early '80s we didn't have a lot to keep us entertained. So I'd get a stick and just sort of build my own sim city out there in the dirt and try to have an imagination around that. And ultimately I like food, so that's why I'm in the restaurant business. But those two things built upon each other. I ended up going to Arizona State, I loved buildings, so I emphasized in structural engineering with a civil background. Did you get a civil engineering degree?

I did, man, I did actually, Ocean Engineering from the Naval Academy, but I ended up ... which is a portion of civil engineering. Yeah, yeah.

I remember us chatting about that. So I ended up going into structural engineering. I was pretty good at math, didn't read a lot of big books, I'm semi dyslexic here, so it takes me a little bit longer to get through some of that. But math was kind of my deal and I thought I would be a great structural engineer and build kind of the next Sears Tower. And I was sitting in an office one day at my first job out of college and I was doing moment calculations WL squared over 12 or something. And I did it about 8,000 times in a week and figured this isn't really me. I feel like I'm a little bit more a people person. So I kind of moved on and started in the land development engineering side, worked for a company called Carter and Burgess, who's now Jacobs.

At that point I started to become more of a land planner, which had a little more strategy to it, going back to that real estate side of it and became a project manager for the firm developing CVS drugstores. And at that time in 2000 there was exactly zero CVS drugstores in the western US. And the company I worked for out of the northeast had been a developer for them, and they had migrated essentially out to the west as a preferred developer for CVS. So I was doing the engineering side, they ultimately needed open an office. And when I was going to sit for my PE exam, they asked me if I wanted to come over and help them open that office and run their entitlement and construction facilities.

And so I did and a few years later the real estate acquisitions manager left or director left, and instead of them hiring somebody else, I told them I could do that. So I've kind of learned how to deal make through the 2000s, through CVS drug stores and another company called JP Morgan Chase. We did about 50 of those locations. So I did about 350 deals over 5, 6, 7 years with a great team and learned the art of negotiation, the art of getting the right type of deal and met a lot of people. And that's how I met David Grieve, was through that business, he had owned some drug stores. And that was about 10 years ago when we started First Street Development.

Okay. Okay. And then First Street Development ended up backing a Taco Bell franchisee who was acquiring some corporate stores down in Southern California. And then that's how you guys got into the real estate side of Taco Bell and then presumably from there you got into the business side after a while. Is that how it happened?

Yeah, yeah. Well close, not exactly, I mean, David was a founding partner with me in First Street Development along with Andrew Churn and Peggy. So our intent with the development company was to take what we had learned over the last decade and be a real estate developer, and we had some good contacts and good clients throughout the west, and so we were going to do that. But what had happened was at around the same time we found a handful of Taco Bell triple net deals in Los Angeles. And a good friend of mine named Mark Miller who ran real estate for CVS, had a friend, a neighbor, his name was Brian Cox, and Brian was getting ready to leave Taco Bell. He was awarded 29 stores, him and Mark Reed in a refranchise in 2012. And I got a chance to meet Brian at a social event with Mark and just started chatting about what he was going to do.

And he had some potential partners that seemed like they were going to take a big chunk of the company. And so we had talked about doing a sale lease back on the [inaudible 00:13:44] properties and he can generate some of the equity, additional equity that he needed to buy the company. And he thought that was a great idea. I obviously didn't have the money to do the sale lease back, but had been started working with David and called David and he was in the triple net retail business and loved the idea of buying those properties because basically A&C Ventures, the company that he started in 1992. And we went to execute that and essentially the brand, and I think maybe GE Capital at the time were we're sort of like, "Well, we don't want to just arb this real estate and then the real estate not be there for collateral. So we need the real estate to stay in the deal for a bit."

So we did a two to three year walkout sort of forward commitment on we'll take the real estate in two or three years, in the meantime we'll take a limited partnership interest in the taco making business. And we sort of convinced ourself that would be an interesting thing to do. And that was late '11, early '12 and I think the brand was kind of rebounding from some issues in the 2000s, and they came out with one of the greatest products ever, which was the DLT. And I think we got in a pretty reasonable multiple at that time, sales took off, we started to see some really good returns on the equity side. That's when John Hoffman joined us, who had been in the investment banking, stockbrokers business back in the day.

And so David and John were like, "This is a really good business. We should try to stay in it." And at the time I think we bought a seven cap in the real estate, which today would be great, but the returns on tacos were in the double digits, so we were kind of thinking we were on the wrong side of that deal. And ultimately Brian and Mark were able to create some value and essentially refi and David helped with the structure of really refi-ing us out and then they got to keep the real estate and we essentially, at that time, went and found in 2013 closing '14, an opportunity to buy 75 units from Dolan Foster, Rich Lowe and Randy Rodriguez owned the company at the time with Paul Luce, and that was sort of our first step in our wholly owned franchise business.

Kevin Burke, one of your frenemies at Trinity and Citizen did a great job at helping us get started with that and has also been really helpful over the years like you have. And I think all you guys are really great at what you do and I think you have a lot of great clients and I think that that community is just pretty tight and I think you guys do a good job. But we started then, after that we bought 63 units in Nevada and then we just started acquiring. And over 10 years we've been able to accumulate 300 restaurants, really in 2014, September was our first acquisition. So that's sort of how it started.

From September '14 till now, you've gone from basically zero to 300 units, quite a journey. And I know your first acquisition was kind of San Francisco area and then around and then Las Vegas. And then I was involved in helping you guys buy the Kansas City market in 2017. And then you guys have come down to San Diego, you've gone up to ... I guess we helped you buy the Nevada market, Northern Nevada market. And so yeah, it's been great to watch. And you guys got into a second brand too along the way, didn't you, you're also Arby's franchisees now too. And what do you think about the difference between those brands and those franchisors? Just out of curiosity. I mean, I've said this a lot over a lot of different platforms, but the fraternity either usually goes from Yum Brands or GE Capital, everyone has some sort of a corollary back to that starting point. I'd love to hear your thoughts on the differences between the brands and the management teams and the franchisors and things like that.

The major difference is just the product, you're dealing with two different types of product. I mean, the similarities is good leadership and what vision that Paul Brown has had when he bought Arby's and then started just to add these other franchisors together, he's created a really unique place where you have some shared services, he's trying to develop best practices across brands. And the leadership at Arby's, what Jim Taylor is doing, we've got Rita Patel now doing the marketing, they just have a lot of top line opportunity there. So that's kind of the similarity, is that growth is really the mindset, but behind both brands. And when you look at where the AUBs are, you say, okay, what's the AUB potential relative to the market? When you look into a brand like Arby's and you see the types of franchisees that are coming into the brand, that are really high quality growth minded franchisees like KBP and obviously Flynn has a really big stake, two franchisees that have been very helpful to us.

And that's really one of the things that sets us apart and really sets actually Taco Bell apart as well, is the franchisees that are in the brand. Early on, for whatever reason, they adopted us, maybe because we bought a lot of stores and they figured we better make sure these guys don't go too far field. But I think they realized that we're willing to put capital into the business and we're willing to drive investment, to drive brand awareness and the drive revenue for us and for everybody else. And that kind of showed through When we started to do the Cantinas, we opened up one of the first Cantinas when we opened in San Francisco, it was actually the first Taco Bell to have the Cantina moniker, Neil and Rob, had opened up a Taco Bell that became a Cantina in Wicker Park. That was the first one.

And then shortly thereafter when we bought Las Vegas, that was a big hole in the Las Vegas strategy, was not having a Taco Bell on the strip. I'd had some experience on the strip, I had built four CVS drug stores on the strip, one of them way far north that wasn't very successful, but if you stay between the goal post, you can do pretty well. And the franchisee before us said, "Well, I'm not going to do a Taco Bell on the strip because the rent's just too high." And we realized that it's sort of like if you build it, they'll come, and we could build a Taco Bell and maybe we'd sell a few tacos, but we really had to build a flagship. And I saw what CVS had did with their first drugstore, and I think they had planned, they bought the property for $18 million. It was a quarter of an acre right in front of what used to be the Monte Carlo, and they needed to do about $20 million in revenue to make the thing [inaudible 00:20:55] for it to meet the proforma.

And they ended up doing that with just water and sunglasses and I think they did north of 40 million the first time. So David had a lot of experience on the strip looking at properties, I had built some, so we went to Taco Bell and said, "Let's do something really great and this is what we want to do." And we weren't sure that they would go along with us as far as we wanted to, but they really jumped in with two feet. They brought more than we would've ever expected. Then we built this really great sort of Willy Wonka destinational Taco Bell that really aligns with what the brands fun and consumer mindset and keeping it young, and we've had just an amazing run with that. And have since opened seven Cantinas, all unique to their trade areas, all very successful. You'll see the Las Vegas Cantina quite a bit, you'll see Pacifica out on the beach quite a bit, and the brand has been really helpful in helping us to maximize the potential in those assets.

For those of you who may not have, maybe some of you listening or watching haven't been to a Taco Bell Cantina, it's kind of this mix between Taco Bell and a crazy nightclub and it's just got a really fun and edgy feel to it. And you ought to check out the one on South Las Vegas Boulevard, it's really something to behold. As a matter of fact, I seem to remember somebody was singing Humpy Dance there a couple of years ago.

I was hoping to bring that up and get a cameo, but maybe towards the end of the build. But I mean that Taco Bell, I think helped put us on the map a little bit for folks that are willing to try some things, but also protect the brand values and to care for what the folks before us have built. And I think that that really helped. And when you look at Taco Bell, most everyone's of growth mindset and within the brand, within the franchisees. And when I was first starting the business in real estate in 2002, I got a chance to go to a Phoenix Open Lunch, you have the lunch and there's all these people that come and it's before the tournament, like a month before, and they usually have speakers. And Lou Holtz was there, the West Virginia guy, and he was an idol just from, I was a college football fan.

And he said, "If you're not growing, you're dying. So take an inventory of your life and put it in motion and start doing some things." And I'd originally thought that meant just go grow for the sake of growing and realized that it really is about growing people, growing emotionally, investing in things that'll help people grow, and it's the people that'll grow your top line, your revenue, and it's what you invest in them that will ultimately help you grow your company. And that's how I think we've gone from zero to 300 is we've put a lot of effort into trying to build the right culture, starting with Todd and Tom and all the team, they really put the culture out there and we're just trying to feed it and give them the opportunity to feed it, and they do a really good job with it.

Well, that's great. That's great. I think I told you when we were doing our kind of intro here, that the people who watch and listen are this interesting mix of franchisees and lenders and private equity people and franchisors and investors and all these kind of people. And so I'm just trying to think of maybe pivoting a little bit to maybe some of comments that you might jump into and talk about what makes ... I've got four or five questions that we could ask, but maybe the first one could be, I mean, what's the operating environment look like right now, to somebody who might be listening and isn't a franchisee and may or may not know what's going on? I mean, what's it like in this environment to operate a business that has 300 units? And I mean, I guess with the Arby's, I don't know how many Arby's you have-

30, we have 30, we're opening up our 30th location in Pahrump Nevada. If it hasn't opened yet, it'll open in the next day or two.

Yeah, yeah, that's great. Congratulations. So over 330 locations, what's going on out there? What's it like right now?

I mean, it's very, very difficult. It's not easy. And again, we've only been in it for 10 years, so we haven't seen all the cycles, but I feel like we've gotten a masterclass in operating cycles from pre-pandemic, through pandemic, through labor crisis, through supply chain, through inflation. So we've got a pretty good education in the last handful of years of what happens. And fortunately, we're in a brand on the larger side like Taco Bell, that has a lot of resilience and we call it sort of recession resilient if you will, I mean, we're not quite in a recession yet, and has a lot of resources where these people share best practices and they're the number one franchisee franchisor relationship the last two years. I think you probably read that. And they really have that sort of foundation of restless creativity that Mark King has kind of brought to the company.

And when we look at what he's done with the leadership, it's the best leadership team that I've seen in the last decade, bringing in Sean Tresvant to run the brand, Scott [inaudible 00:26:34] who's just doing an amazing job at understanding what drives the franchisees and giving them space to drive them, and drive the business. And then I was here this morning or last night, got to hear Mike Graham's motivate, when he gets in front of general managers, there's nobody better that motivate. And when you look at the operating business, the operating challenges, you need people like that that can help you navigate the challenges that are in front of us. I think one of the things that we look at is sort of operating in California, it's a challenging environment to operate in. We just had that Fast Act sort of a put into law last September.

We were able to garner enough signatures to get a referendum going and take it to the ballot in '24, which I think gives the opportunity for the franchise community and the restaurant community in general to tell the narrative of how great these jobs are and how great the opportunities they create for people to grow in their careers. So while it's difficult, I tend to believe that as you scale and as you build upon what your baseline is, you're able to handle a lot more of those challenges a lot better. And surrounding yourself with the right people that can help you handle those challenges and strategize. Mark King, I listen to Guy Raz, you're like the Guy Raz of investment banking, you know that?

I don't know Guy Raz, is this guy crazy?

Well, yeah, I mean, he's not as crazy as you, but he's like a professional podcaster.

Okay. Guy Raz.

If you haven't listened to him, and if the folks that are listening haven't listen to him, I find him would be super interesting, he has a podcast called Wisdom From The Top. He's probably the only podcast I listen to every month or two when I have some free time or an hour, he has some really amazing people who ... he did the one called The Founder or How I built This, is what it was called. So he talked to people who built companies, and now he has one for the last couple years called Wisdom From The Top. So it's folks that sometimes building a company from the ground up is a lot different than running a large stabilized company, so you have folks like Mark King was on there recently, who obviously ran TaylorMade and adidas, and you should listen to his story because it's really amazing from where he started in Wisconsin to running these great companies.

And one of the things he says on it, and I talked to him about this two weeks ago when we were in Florida, was his baseline is the Rita King rule, which was his mother. And the rule was essentially you don't need to know the answers, but you need to know how to get them. And so he's really kind of built a team at Taco Bell that are folks that may not have done everything and have all the exact background in the restaurant business, but they do know how to get the right answers and help support the right teams. And so that's sort of something that I've always sort of used as well, I've walked into different industries, not knowing a whole lot about them, but knowing that we can figure them out. In engineering, we sort of learn that rule called Occam's razor, where the simplest solution is the easiest solution.

So you take complex things and you kind of backpedal and you go find the answers. When David and I were running really hard in from '14 to 2020 when we started to build this restaurant company, we were still buying a lot of real estate and our team was getting a lot bigger at the investment headquarters in Sonoma, and there was a lot of folks that were just coming in and asking for what to do on things. And similar to the Rita King rule, but different, he sort of posted a sign that just said, bring solutions. You come in with, you're going to have an issue, but just come in and say what you think you should do, and then he can validate what that idea was. So I think the point I'm trying to make is that the operating environment's very difficult. Unionization is something that is a dirty word that we don't like to talk about in the business, but it's real. When people are running around trying to unionize store by store, whether it's Starbucks or Chipotle, we had a strike in one of our locations at one time.

But you bring in the right people to find the right answers to support the right teams. I mean, unions, I think, were important at one time, or in some industries, my father was an underground copper miner, my grandfather, my namesake, SG, he was an underground copper miner. My mom's dad, Demetrio Sapien, they were all underground and they were 5,000 feet below grade with a jackhammer. That sort of environment in the '70s and '80s and in the auto industry and a lot of industries, you really needed those folks to protect in labor. Nowadays, market drives that protection, you have social media, you've got news, you've got to do the right thing by your team members or employees or you're going to be out of bounds. And so we just have to tell that story to the California voters that I think they'll understand it and then they'll understand that if you grow wages too rapidly, that's only going to affect pricing at the end of the day and you're going to pay more at the pump, if you will.

[inaudible 00:32:39] tacos, so to speak. Yeah. Well this is kind of going off-topic a little bit, but with all the things that you said you've learned from Taco Bell, if you were yourself 10 years ago and you were looking to maybe get into a brand, I mean, what three things have you learned from Taco Bell that you say you'd look for in a new brand that might be smaller but growing a little bit? If you're going to be either an investor or somebody to operate it. Anything pop to mind that you might ... because obviously there's all kinds of ways to get into the franchising world. One is to invest in tier one assets and brands and to grow through consolidation and new growth, but there's a lot of new startup franchises out there, and I just kind of wondered how would you think about that? What learnings would you take and apply that to a new venture?

Well, I think if I knew today what I knew 10 years ago, I think I would end up in the same place. It's like, do you have a category that's sort of a category killer or owns the market. Taco Bell, certainly it's closest competitor is not very close. Arby's is a very unique provider in their segment. There's not anybody that does exactly what they do in a drive through format with the quality of product that they have. So I think those two things are important.

I think a franchisor that has some skin in the game is important. When you look at what Taco Bell, I mean, they have almost 500 units or 480 and they're building another 20, 30 locations, trying to every year. And then Arby's certainly, I mean, they have almost a third of the system, so they're not going to make a decision that is damaging to the middle of the P&L because they have a bulk of the middle of the P&L. So there's a real symbiotic relationship in how those decisions get made. And so I think being with a group or a franchisor that is growth minded and opportunity minded.

I think those are great answers and I know those are off the cuff answers. The second answer to me is a really interesting one. For those listening who are considering getting into the franchise space in some way, the model over the last 5, 6, 7, 8, 9 years has been to refranchise and for most brands to whittle themselves down to a one to 3% corporate ownership. So if they had 2,000 units, they'd only operate 20 to 50 units and they'd allow franchisees to operate the rest of them. And they, over the last seven or eight or nine years, have refranchised stores or sold stores to franchisees. Taco Bell and Arby's are two kind of notable examples. Taco Bell has a lower corporate ownership, but Arby's has a pretty high corporate ownership. And then you have the other side of the fence, which is like Starbucks and Darden Restaurants and all these over here that are almost entirely, if not entirely corporate owned, which corporate historically does a really poor job of operating a P&L relative to a franchisee.

But the point that SG's making is that when a franchisor has a decent chunk of restaurants, they're more heavily invested in brand success than they maybe are if they're just scraping royalties off the top of franchisees. And it's an interesting and probably really valid point, going back to basketball being it's the final four, you guys have heard me say this before, back in the '50s, they had tight shorts and socks up to their knees, and then you got to the 1980s and you had tight shorts and socks up to their knees, and then you got into the early 2000s and you had baggy shorts down to their ankles. You know what I mean? You couldn't even tell if they had socks or not. And so now things go, what comes and goes and you just see trends coming back after all these years.

And I assume that will happen at the franchisor level again. Maybe there will be a movement afoot and there might be a movement afoot when there's a little pain and suffering maybe in the marketplace, for franchisors to take hold of some assets that are in distress and actually build their corporate ownership back to a more notable or sizable level and have more skin in the game. And by doing that, attract the right type of franchisee who sees that as a partnership because they operate stores and not just franchising. That's a bigger point for another day, but I appreciate you bringing it up. It's a really interesting one for sure. I mean, what do you think about real estate? Tell me a little bit about real estate, you know more about real estate than almost anybody else does, SG.

I mean, again, you think more highly of me. First I'm like an NCAA division one quarterback and now the real estate guru. But I've made some more real estate mistakes than a lot of people, but overall we've managed to do fairly well. I think the real estate market, we've been waiting for cap rates to go up for a decade or longer, they're continuing to going down until very recently. So until the interest rate market has moved substantially, where we're starting to see a little bit of cap rate degradation. For high quality assets like Taco Bell or long term high quality franchisees, like Arby's, are still able to garner a pretty good cap rate if you're looking to sell those. I mean, these are 20, 30, 40, 50 year investments that have passive cash flow and have some tax efficiencies. And so people are still really interested in those.

But the days of getting a sub five cap for a single unit operation, probably not here for a little while. The other piece of the real estate market today is what we're hoping and we think we're going to see, some buying opportunities [inaudible 00:38:35] seen a little bit already. Certainly as if you're caught in some sort of debt that is getting ready to mature, then you're going to be looking at a pretty big hit in cashflow if you have to refinance that, if you don't have the equity to just sit around for a while, because where you might have been getting two, three points of interest over the last five years in your term, or if you have a 10-year term or a CMBS or some sort of life clock out, if that's coming up, you're probably inclined to get rid of that asset.

And you're probably willing to do it for par value or debt value and take any equity you have and maybe trade it. So I think that we're going to see some of that. We're seeing a little bit of it. I think we're going to continue to see some of that. We've been pretty bullish in the multi-family market. Historically we've had a retail triple net portfolio under the A&C ventures enterprise. David started the business based upon sale leaseback program of Payless back in the early '90s, built an amazing portfolio of real estate over those years. And what we've seen is that over time, the value appreciation maybe isn't as great as the value appreciation of what we've seen in the multi-family market.

While the barrier to entry might be a little higher, the initial cap rate may be a little lower, the initial return may be a little lower, but we think there's favorable financing in the public markets like Freddie and Fanny over time, that that's a good place to be to preserve equity and to grow your real estate portfolio. So I think for high quality retail assets, restaurant assets, the market was going to be great, just fine. Other than that, you're going to see a lot of movement, maybe people go out to other product types like multi-family or even industrial has had a big push in the last few years just through the Amazon and sort of online digital markets place that we see, which will probably continue to grow.

Yeah, yeah, it's similar to what I tell people on the restaurant M&A side too. It's like if you have an asset in a brand, a geography unit, economics, if you have an asset that's really, really strong, it'll always command a great price and a lot of attention. But otherwise, if you don't, in this kind of market, like you said, there's going to be opportunities to buy probably at a lower price as interest rates come up and people have to refinance. These are big considerations and big cash flow crunches if we don't see some relief at some point on the interest rate side. What do you see, if I could ask you, what do you see on the food cost side, jumping back into the restaurant business, I mean, how do you think about inflation for the rest of this year and next year? I mean, I'm not asking you to be an economist, but I mean, what are you feeling? Is it going to stagnate and drop in the second half of the year or is it headed straight up to the moon, I mean, what do you think?

Yeah, I'm definitely not an economist, but I watch CNBC every now and then. We do have some purview to what we see is happening in our food cost. And I think that inflation will continue to come down. I think we're going to see some better food costs throughout the balance of the year. I mean, we've kind of seen it a little bit this year. Last year was insane, we were in the 18% range, food costs increases and labor was at 8%. And so I think we're a little bit lower than projected in terms of food costs so far this year. You look at the inflation data, it seems to be slowly coming down. So hopefully that'll continue and we'll see how the Fed continues to monitor that.

I mean, the biggest issue most recently was sort of the banking crisis out west with Silicon Valley Bank and opened up the eyes of maybe the Fed and how much influence the interest rate hike is having or how fast it can change the environment, unintended consequences maybe. And so I think that that sort of stabilize, I think the banks overall kind of came together and said, okay, the banking sector and the confidence in the banking sector needs to remain. But I do think that Fed has to take that into consideration on how fast they continue to raise interest rates and potentially flatten and come back down. But I don't know, I mean, I'm really not qualified to be saying any of this.

Yeah, shoot, I've been guessing for years and it been wrong the entire time. I did have a good buddy, one of my college buddies who texts and he goes, "I got my money out of Silicon Valley Bank, like the afternoon that they shut the doors." You know what I mean? [inaudible 00:43:34].

We live in the Bay Area, we saw a little bit of contagion there, some banks that we know, but I think it was stabilized. I think had the federal government not come out on Sunday morning or Sunday evening at 3:00 PM and said, "Hey, if you have real money in a deposit in a bank, we're going to make sure you get your real money and not just a bank certificate." If that not had happened, I think you would've saw lines of people at banks, particularly starting in the Bay Area because you're just closer to it, but eventually your neighbors would've been down at the local credit union and they have some gun racks in their-

Plenty [inaudible 00:44:13].

... let me get my money because I don't trust you guys. And so people talk about bailouts and federal government, all that stuff. And this, to me, wasn't a bailout of the bank. And certainly I think there are some things that are being looked at with that bank and other banks and they'll have to ... you can't bail out sort of the owners investors of the bank, but you can certainly make sure that people who had money in there that they've earned, or small businesses or people that need to make payroll, that that money is going to be available to do what they need to do. So fortunately, I think that that sort of stabilize is going to open up some oversight and smart people like Jamie Diamond and others will figure all that out.

I appreciate your comment about real estate, maybe there're being some opportunities with interest rates. And what do you think the future of on the restaurant side looks for you guys at DRG? What does it look like five years down the road? What do you think it's going to be?

That's a good question. I started in '12, '13 when we started putting these companies together and I was strictly sort of real estate, and I was kind of side by side with David and looking at how we're building this restaurant company, but strategy was mostly real estate, working with Brandon and Scott and Chris at First Street Development. And then as we started to get bigger, we knew that we had to get more involved day to day, and I was kind of the short straw to do that. And so I did. And ultimately after having a franchisee or two kind of help run the company for us, got far enough along to say, "Hey, we need to do this ourself." And I jumped in as the franchisee in 2019.

We had outsourced a lot of accounting, we had outsourced HR, we had outsourced a lot of the efforts that maybe you do when you're growing or are a small company. But we got to a point where we needed to own it and control what we did. And we learned that from guys like Joey and Rick Pearson and the Two Collar Group. And the anglers really helped us quite a bit at Border and Mark Peterson and Crystal. But they-

Always heard that that's somewhere between the 125 to 150 unit, which is where you kind of go from outsourcing everything to starting to bring it in house, from an efficiency-

Yeah, I don't know the magic number, but I do know that if I knew what I know now, I would probably try to control it from the get go. But the first thing that I did in 2019 when I took over the paper and really led the company 100%, the restaurant company, was we didn't really have a plan. So in January of 2020, we had a restaurant leadership conference in Las Vegas, and I think at the time we had 180 locations or something. And we said, "Okay, well what are we going to do by 2024?" And the plan was, we're going to have three brands because we thought that multiple brands would create multiple opportunities for our team. We're going to get to 500 restaurants because we believe scale mattered, and we're going to get to $700 million of top line revenue because we believe that revenue is going to drive opportunity.

And I was really hyped up about that and got into there my first meeting and said, "Here's our goals. Here's what we're going to try to do. Let's go one DRG, one team, one dream." We all know what happened in February, 2020, the lights went off for a few days and COVID shut down. So that became more crisis management and how are we going to get through essentially what we have and stabilize that? And then so over time we start to stabilize, we buy something here, we buy something there, we continue to grow. And I'm going to our leadership conference this year, 2023, so almost four years, well I guess three years, three years from that date. And I'm saying, "Well, okay, well how are we tracking our 2024 goal?"

Well, we don't have 500 restaurants. We have 330. So yeah, there's still time to get there, but we do have three brands. I'm going to qualify our third brand as this wine brand that we came up with and branded, called Squalo Vino, that we have one location with, in Tiburon, California. But we can service the entire country through our wine club and we're going to build this little brand into a mighty brand. And we have Arby's, we have Taco Bell.

Send that info to me. I'd love to learn something about it if you're-

Yeah, I will, I will. We have a lot of background beef from Sonoma, Napa in the wine business. And David has had a wine brand for 15, I think 2006 was his first vintage. And then when we look at our top line goal, by the end of 24, we're going to exceed, but just organic growth, our goal from 2020. So I was really floored when I looked at these numbers recently because I didn't expect through everything that we had, that we actually could be able to achieve that. We may not get to the 500 stores, but we're going to get to the revenue and the brand projection. And what that means is that we've, per store, our AUVs have grown greater than we hoped. We've built 40 Taco Bells, including seven Cantinas. We've built almost eight Arby's since we've had them. And we continue to grow that top plan.

I think it's really about what do we set our goals to? And we go in into our DRG leadership conference next week, that's called Race to the Top. We have F1 coming to Las Vegas in November. So we're sort of honoring that and leaning into it and saying, how do we get to our goals and how do we essentially look to double in our revenue, double in size and create more opportunities? And we look at F1 of being a place where there's a lot of teamwork done, it's not unlike being in the restaurant business where you need all these people to be able to do something that leads to the end product. And so we're really kind of going after that and going to set some goals next week on where we're going to land in 2028, being that we're going to hit these intentions that we made in 2020. And I just think that those things are important, intentions and what you're setting out to do is important to put out in front of you.

I love it. You've done an amazing job. It's a really cool story, taking over as president franchisee in 2019 from the background that you had, not easy not growing up in the restaurant business to do what you've done really. And I got to ask a couple of quick fire questions because we got two or three minutes left here. Number one, 30 seconds or so, would you consider investing in non-restaurant franchises and what would turn you to it if so?

Yes. I mean, just similar intrinsics, good brand, good franchisor. Yeah. I mean there's other products out there that I'm sure would qualify.

There's kind of very little cross-pollinization, we all in the industry would've thought it would've been more of cross-pollinization by now, but it hasn't really happened in huge-

There's some folks that do some good job at it. I mean, I think Tom Cook and [inaudible 00:52:00] comes to mind, he's got some fitness, he's got some other brands and he's done a really good job at diversification from the restaurant business. We've invested in other restaurants, we're invested with Michael Mina, who is a really great, amazing chef.

Yeah, great restaurants in New York, I mean, all over really, Las Vegas. Yeah.

It's really good to see what he's doing. And so it's really led to a lot of interesting opportunities for us.

I bet, I bet. Here's another question for you, how much you sleep in these days?

I sleep in a lot. I mean-

You do okay. You probably got 11 or 12,000 people working for you. I mean, it's got to be a tough job.

Yeah. But look, I have eight Golden Bell winners, and then you have eight Golden Bell winners because you have 50 amazing area coaches, and you've got amazing directors and great leaders. And I'm sort of like, I'm trying to learn from some of the great leaders and CEOs out there, that's really about putting the right people in place and allowing them to do their best job and giving them the avenue to and being there for them with the questions that they need. I was reading on the flight out here, a quote or a little back page of Ron Howard. You remember Opie?

Yeah, yeah.

You remind me of Opie, you were probably like Opie as a kid, running down to the creek with your fishing pole.

Maybe. Maybe. Maybe.

Yeah.

Didn't have enough money for a fishing pole, I just had a stick like you did for a-

Well, that's what he had. But he talked about, as he became a director, and I'll try to paraphrase it, he would do a shoot and oftentimes an actor or a cinematographer or a sound person would come in and want to do it a little bit differently. And he would ask himself, okay, does the way they want to do it change the intent of the shot that he's trying to create? And if the answer was yes, it changes what he wanted, then he would just say, "Okay, well this is not what we want, so let's not do it." But most of the time, if it wasn't going to change what he wanted, then he would just, "Okay, that's do it that way. It sounds great." But most of the time it was his rule called six one, and we've all heard six one, it's six one, half a dozen of the other.

If their idea is different than my idea, if I was doing it, I would do it this way, they're going to do it and they want to do it this way, it's probably going to be the same, so let's support the way they want to do it because they're executing it. And often, he said, more times than not, the shoot would come out better because it's their idea, it's their execution of what they want, they're going to put more passion into it than your idea. And so I thought about that, and I think that's a lot of the way that our company works from the top throughout all of our leaders, is we respect what our team members and our executives want to do. And if it's a little bit different than we would do it, but at six one half to the other, we say, "Go do it your way and let's see the results." And we can see them and where we're at today at the Golden Bell.

Yay. That's wonderful. Enjoy Hawaii. I'll say that my favorite Taco Bell product has always been the double-decker taco. I can eat that thing until my face turns green. What about you? Last question, what's your favorite Taco Bell menu product? And then we'll end with that.

Well, it's different than the question that you had earlier, which was if I was on a desert island.

Yeah, right.

With my Taco Bell-

That's actually what I asked. You're on a desert island-

I'm going to answer that. Yeah. First of all, if I was in a desert island, I want this kukui nut, which is the Hawaiian nut that has, if you break it open, in the inside it burns. And the Hawaiians used to use it for guidance, and now they use it for enlightenment and guidance. And so if I was on a desert island, I'd hope there's a lot of kukui nuts, and if I could have anything at Taco Bell, it would be the grilled cheese steak burrito because I'd be on a desert island and I'd be very hungry, and that's a very filling and delicious product.

Yes,

But it's also, if you get the spicy one, it can be pretty spicy, so I need something to wash it down with. And so I'd probably get one of our Baja blast twisted freezes from our Cantina, big yard of it, and a grilled cheese burrito, twisted freeze, and I'd be in heaven on the [inaudible 00:56:46].

What else would you need?

I'm looking for that desert island.

Yeah. Yeah, right. And no internet service, right?

Exactly.

SG, it's been an honor and a pleasure. Thank you for ... it's been real insightful. I know everyone's enjoyed it and will enjoy it. For those of you who tuned in, thank you for doing so. We'll come back with another webinar in a couple months. I'm noodling on what it'll be, but we may go into legal challenges in negotiating M&A transactions, that's kind of on my mind right now, and that'll be a pretty informative one. But thank you so much, SG. Blessings to you. I hope you guys continue to kick butt in your businesses and thanks so much for everything.

All right. Thanks, Rick. Fun being here.

Great seeing you, man. Take care.

Bye, buddy. Bye-bye.

All right. Bye-bye now.

Thanks so much for entering The Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, Tune In, and Spotify. If you like these podcasts, please listen, rate and review. I'll also encourage you to visit our website at www.unbridledcapital.com for the best franchise, M&A and financial resources in the industry. Our website includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions. Please note that neither Rick Ormsby nor Unbridled Capital Advisors LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein or omissions there from.