Season 6 Episode 2: 2024 Franchise M&A Questions



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Welcome to the restaurant boiler room season six, episode 2. I'm your host, Rick Ormsby, managing director at Unbridled Capital, today in.


The boiler room.


I'll be answering franchise related questions about M&A, market conditions, cap rates.


Lending markets and factors influencing the turn around, it'll be a good way to get some quick insights real time.


The restaurant boiler Room is a one stop shop for multi $1,000,000 merger and acquisition activity and financial complexities affecting the franchise industry. We talked 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 capitals website at WWW dot.

00:00:49, now let's enter the boiler room.


Well, hope you are doing well and thanks for checking in. Our last episode was kind of a a three-way with a couple of guys in our office and we were talking about what we expect the state of the.


Union to be.


For 2024 and so I I kind of wanted to field some questions that came in from the peanut gallery over the you.


Know the last 30.


Days or so you know, and so I'll I'll kind of have six or seven questions that I'll just kind of read and then give the answers to and I think it'll be a good place.


Just to to just kind of sink your teeth for the next coming months because things have changed a little bit in our industry. It's amazing, like the change is always constant, right? It's one of the one constants in life is that things change, but it's it's just amazing after doing this for all these 20 plus years that the change since 2020 has just continued to be kind of hard to have predicted.


I know you all understand that, but I I wonder when the world will become a normal place again. I don't know that it ever will, but.


Before we get going, I'll say a couple of things. One is by the time you listen to this, we're going to be in the throes of college basketball season and the NCAA tournament. Like what a fantastic time of year. And I don't know those of you who who follow the the tournament, but it's one of my favorite things. You know, I'm a Kentucky native. You know, I live in Florida.


Obviously now but but the you know I'm Kentucky through and through and in the little old state of Kentucky that doesn't have, you know, professional sports teams, we've always gravitated towards college basketball.


And so this time of year is always really fun. Down in the Pensacola area here, the Sunbelt Conference tournament is every year and they're 14 teams in the Sunbelt Conference. They're kind of mid major Division One teams, not teams you might, you know, come across every you know every day. But like the number one seed in this year's tournament is Appalachian State. And I think #2 might be Arkansas State or Texas State.


One of the other.


But my son and I and and some of his Bible study buddies, we sneak down to to watch these games because you can you can sit like four or five rows off the bench and yet the to feel the pressure and like the anxiety and how badly these athletes want to win because the winner of the tournament gets probably the conference is only bid to the NCAA tournament.


It's kind of it's kind of exciting. So we got that going for us and you know that'll be a fun part of the of the spring if you enjoy that. I wanted to give a shout out to our team primarily we just you know every year the franchise Times organization comes out with a deal maker of the year Year award.


We're A5 time prior winner if if memory serves me right, we've won all five of those prior awards in the last three years, which is really awesome, right? One year 2023, we won three different awards.


And they they they give out, like somewhere around 10 awards, right. And only a couple of them are ones where, you know, franchisee M&A firms could actually win or play a portion of a win. And so, you know, so it's like it's even more exacerbated like if we won five of these things and now a sixth this year over the last three or four years.


There's probably only like 2015 to 20 chances to win six awards, right? So.


I'm blessed and honored to tell you that we we just want our 6th Deal Maker award, which I mean, I don't know the exact numbers, but we must be winning darn near half of.


The awards that they're giving.


Out, which is a real testament to the team we have and I'm I just brag on them for a minute. You know, we got a small, but just really smart, dedicated group of.


Guys and girls who work for.


Us and unbridled capital just really healthy and and I'm just real, real honored for that. Our team has really just been stable and strong and really thankful for that. This year's award we won not for any particular deal. We closed this award was actually a little bit better I think which is we want we closed over the the time frame they were studying which is a more than a year.


A little less than a year and a half.


On bridal capital closed 17 transactions, which which incorporates a little bit of 2022 and then basically the whole year of of 2020.


Three, which I mean it may not that 17 transactions.


Is well below our.


Our you know average during that time frame, but given the market conditions over the last year and a.


Half or so, which?


As you've, if you've been listening, you know, kind of that that things have changed a little bit, we'll talk more about that today. Like you know, I would say that our industry is probably down at least 50% right now. You know in terms of.


Acquisition activity.


Not only that, but you know the value of the acquisition activity changes when you know when the prices might be down a little bit for one reason or the other. So to be recognized for the amount of deals we are doing is really a a testament, I guess to the market share that we have in our industry and I'm, you know, really super honored and and thankful for that. And to throw another basketball kind of thing.


I was thinking.


About it six time deal Maker award champion. So I was thinking like, OK, who won 6 championships in the sports arena. I'm going to pause for a second. Well, yeah. Michael Jordan.


So so I was like, what, a neat little pill. I'm going to put out, like a little, maybe a little ad in their paper that talks about we got 6 championships, just like the Bulls 919293969798. Maybe that sounds a little cocky or something. It's not meant to be. It's just kind of fun.


But but 66 awards, it's an honor.


  1. The couple of the questions that, that, that we're going to answer today, I'll read them off and then I'll just kind of go through them one by one. So one of them coming in is what's the current state of affairs in our industry if different than what we talked about, you know, on our on our podcast or pardon me on our webinar in this podcast in January because as I'm speaking to you now we're you know 45 to 60 days.


Last that period and so a lot of what we talked about in January is what we expect to happen and then of course it unfolds and you adjust and you never sure what's what's going to happen. So that's one question which brands are active, you know or or you're seeing franchisees selling in this market, I'll, I'll touch on.


That a little bit too.


How's the lending market and how is it versus what you expect? You know, I'll take temperature on that and give you some thoughts what's needed for a turn around in our industry. OK, you know, I'll, I'll try to answer that one as well. Lots of positive press on new concepts, coffee particularly but also chicken etcetera. What do you think, Rick, OK.


I can answer that.


And then I I'll end with this one, which is how are the cap rates?


Doing right now I.


I hope that we will have kind of a webinar will turn into a podcast later this summer or maybe in the fall, potentially, where we kind of like delve into an entire like 45 minutes or an hour talking about cap rates because I know a lot of you who listen.


You know, have real estate holdings and probably want a general update on that anyway, so that's going to be just I'll talk about that for five or six minutes today, but we'll we'll do more of that later on in the year, so.


Stay tuned. First one is current state of affairs are different than what we said in January. You know I I think as I'm thinking back to what what we said in January for the state of the Union, I guess I would just probably tag the industry right now as maybe being slightly more negative than than than what I thought it was going to be in in January.


For the year in 2024.


You know, it's not that I feel like the sky is falling, but over the last 45 to 60 days we continue to field calls from clients who have businesses that are declining, you know, and and I know probably in this market that's likely the people who will be calling, not the ones who are wanting to sell.


Because their business is awesome and they're trying to get the highest price that they could get over the next 20 years, you know what I mean? Because that's just.


Not the market.


Conditioning right now but but the amount of phone call.


Roles for people who are wanting to sell healthy businesses, those those those calls have dropped this year so far, more so precipitously than what I thought would happen. I thought, generally speaking that after 2022 and 2023 that we'd find 2024 kind of having a pickup of M&A activity again, right? Because the idea was.


All right. In 2021, we had a bunch of activity because of great market conditions, low interest rates. And don't forget the threat of possible higher capital gains taxes, which caused a lot of sellers to get off their seat and.


Tell Joe Manchin of West Virginia, you know, stop that from happening. If you'll remember the the storyline there. But those are pretty powerful reasons. In addition to really high sales and really low, you know, cost of goods or food cost at that time. So 2021 pulled forward a lot of sellers and that would necessarily mean in the wake of that the 2022 and 2023, probably we're going to be.


You know less than normal years, even in a normal economy. But what we ended up getting in 2022 and 2023 were high cost inflation.


I mean your, you know, bag of fruity pebbles is more expensive now than it was in 2021, right? In many cases, a lot more expensive. And the cost of Labor has persisted high.


So like in addition to the fact that we pulled forward a lot of the would be sellers in 2021, you know 2022 and 2023 kind of left people on the sideline because their businesses weren't doing overly well, right? And why would you sell a business unless you were unless there was a real reason like your board of Directors is telling you to sell?


That would be a reason you know you have like a a fund objective where you have to sell this franchise business.


At year 6 ± 6 months, or else right, you have to liquidate it. That would be a reason to sell regardless of the environment or you know, you had some, you know, first generation or second generation franchisees. You were just tired and psychologically tired and and might say I'm willing to just sell for a price that's 10 or 15% lower. That's.


OK, you know, but.


But over the course of a 40 year, investment has been a great career.


And I'm not going to let the last.


You know 5 or 10 or whatever percent, you know, dictate, you know my timing because I'm ready to do it. Or you may have some element of distress or personal change in circumstance that causes someone to want to sell something, even when it might not be the best time. So we had those kinds of activities and and the other and the other type of sellers, frankly, within every slightly Gray market, you know, where things aren't the best.


You you have like examples of brands that are doing awesome that are kicking **** and taking market share and where that you know, so they're not experiencing that that kind of drift or you have some franchisees that are bucking the trend because there's just awesome operators and they.


Use, you know, difficult times to sharpen their acts and sharpen their sword and do better, right? So you have those, those kind of situations too where you have some businesses that are just doing really well and bucking the trend. But generally you know when you layer on those factors on top of kind of the pull forward from 2021, we knew 2022 and 2023 would be a little bit weak.


Right. What I thought would happen was that in 2024, we'd start seeing just the the supply come back a little bit, right? It's like, gosh, there's got to be some people that after a couple of years of sitting on the sideline now they're three years older and they're like it's going to be time to sell this year. And I'm ready to come back to the.


Market. So that was the first thing that that I was postulating on that really so far this year has not come true. I think we have gotten a lot of inbound calls in the last 45 or 60 days, but they aren't of the variety of people who are ready to sell a healthy business and are ready to sell it and go. It's more like it's more like the.


The the calls are are in in. In many cases are still the same calls of the people that would only sell because they had to, either because of distress or a board decision or some other reason.


And if you're.


A buyer and you see a healthy business on the market right now. It likely means that they had to sell for.


A reason that.


Was unrelated to the profitability of their business and because of that, I mean if you're doubling down in your brand or in your or in this space and you see a good opportunity, I mean it might be the perfect time to buy something that's healthy, that comes out right.


Because for whatever reason, the person that's selling this business probably didn't time it right but needs to sell for a reason.


Then, and if it's a good business and you still believe in the in the health of the brand that you're looking at, then it might absolutely be the right time, because profits are likely down a little bit and the EBITDA multiple has dropped a little bit too. You might be able to pick something up for 20% less than you could have a couple of years ago. And it's the same investment, right?


If you have the same perspective on the brand's future.


That's a good thing, but overall, most of the phone calls we're getting are from people that have struggling businesses and they've been, you know, hit with increased costs, but most importantly, now in 2024, we're starting to see sales drag and traffic in many brands in many locations really drop a lot you.


You know, so.


If you're bucking the trend, which about probably if you know I'm just kind of throwing it out.


There, if we.


Have like you know, let's call it 12 or 13 clients right now. We probably have three or four of them that are bucking the trend and have great EBITDA increases every month and have strong traffic and things are looking great, but probably 2/3 of the clients you know the remaining 8 or 9 or whatever that number is are probably the ones that are.


That that aren't doing well, that the traffic is down pretty substantially in many cases double digits and.


Goals. You know, they're feeling like they can't take anymore sales increases because the cost of their of of the food products in the stores are are you know, right now the cost is too too high and and that's one of the reasons why why traffic is dropping. I think I've said this before, if you just kind of pull into your normal fast food location in your community.


I think you're we're all noticing that the prices of the number 5 meal, you know for example are way higher than they used to be, right? And it's justified because costs have.


Been so high.


But a customer is only willing to pay that.


Amount of money for so long.


So I think that's been the negative drag a little bit on the first quarter of this year so far. I would say that I think I'll revise my prior thinking that 2024 might be the year of the turn around and maybe high supply of good deals return to the market. I'm now I'm probably saying without much certainty of course, but I'm now probably saying that that's not going to.


Happen this year at all.


And we may be in the spring of 2025 before we start seeing, you know, or maybe even the summer of 2025 before we start seeing those conditions.


Range and we see like a return of really.


Of a lot.


Of really healthy businesses to the marketplace, keeping in mind that these businesses sell typically as a multiple of their trailing 12 month financial statements. So most healthy businesses are going to be timing, timing, things when they have a when they have a healthy.


12 trailing months or 13 periods of of financial.


Commission that's going to be something to watch as we go forward. OK, that's the answer to #1. The 2nd is which brands are active. Well, you know if if I look at our pipeline at the moment, I cannot.


I cannot really say with a whole lot of certainty that that, that there's a pattern we're probably involved in more Pizza Hut, KFC and Popeyes transactions than we've then we've been involved in in the past.


As a percentage of our total deal flow, OK, we also right now are at a lower than average amount of Taco Bell businesses that we're selling. For example, you know so and I think you know same with same with Burger King potentially you know Burger King is going through a turn around, they've got some great news that they're coming out with publicly and a lot of decent comments from the franchise.


Franchisees about the new management team. So I think there's good news on the horizon there, but.


But clearly there's there's not as much, you know, strong deal flow out there either so. So those are kind of some of the factors I I guess I would, I would note that the brands in terms of their level of activity, otherwise you know some of the the deals that we're taking would be just kind of one off large franchise first, mostly first generation.


One off large first generation franchisees in various brands who have making decisions to sell or to raise capital based on particular circumstances. So it's kind of hard to see a pattern otherwise.


Whether you know, here's something to couple of things to think about #1 we have not seen an increase in calls at all. You know from California now that the, you know, the $20 minimum wage with inflation to it has been made public and is all over the news. So I think largely, you know, either we're not getting phone calls or franchisees.


Or, you know, or know that their businesses are going to take a little while to adjust to those increases in wage costs before they have a a business that gets stabilized and and they can sell it for for a price if they if they want to so.


Not seeing any, any change of flood, flooding of deals to the market in in California or anything like that. I guess the other comment I would make is you know if we look at the types of sellers that we are getting the phone calls from, whether they're independent like first generation or second generation franchisees versus sponsors or financially backed organizations, you know I'd say that.


Blended trend is is it's coming in about like it has in the past. You know we have a couple of you know assignments with boards of directors or with financial sponsors who are influencing a sale for particular reasons related to their return on investment.


Or their fund life seems to be about normal. Maybe a bit of an uptick in those kinds of phone calls versus versus the past that may be highly correlated though with the fact that seven or eight years ago, for example, we didn't have as many financial buyers and operators in the system to begin with, right? So there weren't that many phone calls being made that way. But I think we still see a.


A pretty steady diet of first and second generation franchisees independently owned who are the ones making these phone calls to us.


  1. That's number two. The third question is how are the lending markets? Well, isn't it the case that these darn lenders only lend you money when you don't need it? And when you do?


Need it? They won't lend it to.


You. I don't know, man. That's the way. It's the way someone once told me that it was a kind of an old farmer.


Guy and I was like, you know, he's probably right about that.


But I'll remain with the comment that lenders see things typically three to six months in arrears. They're typically going to see their clients or brands, you know performance after the quarter is completed and then probably two months after the quarter is completed because the information has to be assimilated in PN.


And then sent to them right for their covenant compliance work. So for this reason, most lenders are typically, I'd say four to five months or six months behind the curve of what an M&A advisor would see in terms of trends.


Comments. So we typically old good old Rick and then bridal team and you know and investment bankers like us probably see trends developing before they you know as they're happening real time lenders not so much. So the lenders are you know are in my opinion quite frigid at the moment. You know there's plenty of liquidity which is good.


You do get.


Increasing amount of lip service from the the lenders. Right, you know, we're in the market of lending businesses, we're doing this, we're doing that. But then you ask like how many deals have you actually closed with new clients in the last 90?


Days and you're going, if you ask specific questions like that, you're going to hear pretty, you know, pretty low answers. In many cases, I do think lenders I'm seeing are doubling down pretty hard on their best clients. So like anything else, if you are excellent at what you do as a franchisee and you're looking to acquire, you're going to have plenty of liquidity. There's a lot of competition at the top for the best franchisees that are under.


Whatever and operating well, and because we don't have a lot of recapitalizations going on right now because not a lot of M&A activities out there and not a lot of people are trying to redo their financing at all right now unless they have to because the interest rates have gone up so much.


I do think there's just like this massive supply demand issue, right, there's there's sales reps on the lending side that are losing their jobs. You know, almost by the day, you know, every time I send an e-mail to the to the lending community, it seems like there's more and more people that are not with their current employer anymore. So on the sales side, they're going to be aggressive. The problem is in the.


And the way you got to think about it is what is underwriting, how is underwriting thinking about these loans?


And I think it's gotten kind of chilly and frigid this year, and it'll probably stay that way for some time because of the same store sales patterns and traffic patterns in our industry. So generally speaking, you know, the lenders are going to want to, they've had some pretty unhealthy change in their deposits and loan to deposit ratios.


If if kind of have kind of worsened, you know that's that's six to nine months ago now, but still they they they're really adamant in many cases that they get the deposits on the loans that they make which is really kind of you know it seems like not being able to see the forest through the trees but that's that's how they continue to operate at the.


Moment and I think you you have a really big turn away from lenders on on brands that are struggling in, in some cases the question is not can we find 3 or 4 lenders to to be get interested in our deal it it's more the question of is any lender interested in this brand right now?


And I think the answer in some.


Cases is going to be no.


And if along the way you have any questions or want to call me about that, you know about your particular brand or some insights or questions, I mean feel free feel free anytime. OK. So that's how our lending markets, the next one would be what is needed for a turnaround, what is needed for a turnaround and by a turnaround I I guess the question is.


What is needed for you know the M and a sector franchise M&A sector to turn around to go from what might be a drop in the last three years of 50 to 60 to 70% back to something that's maybe more healthy, predictable and regular?


You know what, like I said earlier it it's like unlikely to happen in 2024. Yeah, I hope it happens in two.


1025 but.


I think there's like 3 or 4 levers that have to be explained to make this kind of. To answer this question, I mean, the first really is and the most important is how's the P&L look given that trailing 12 month or trailing?


13 period financials are the way that our industry prices these deals typically obviously with the look of historical years too.


The first thing I would think about is you're going to start seeing a healthy return of healthy sellers to the marketplace that will increase the M&A activity. When you see that the businesses are showing, you know relatively stronger trailing 12 month EBITDA and sales performance and at the same time, you're going to see buyers return.


Generally 2. When that's the case, like right when the margins go from, I mean this is just an example, it's silly example, but say the margins go from, you know to 10% to 13% or 11% to 15%. Again you're going to see buyers reenter the marketplace because that's a model that becomes more attractive to both.


You know, kind of financial buyers and for strategic buyers too. And also when those margins jump back up to 15%, if they do depending on the brand or maybe it's 8% to 12% or whatever the the margins are, you're going to start seeing that you're going to see more people sell because the price of their business is going to be higher, right, just by a simple matter of taking their EBITDA and multiplying it by multiple. So that's the first pin.


We're kind of and I don't. And I kind of don't feel like right now we're there. I kind of feel like 2023 trailing 12 month financials were way better than in most cases in 2022. But for 2024, for the first quarter of the year, I would say again like I said earlier, 2/3 of the of the brands and operators out there are doing aren't doing as well as they as they did in 2023.


At the same time.


Both on a sales and maybe also on an EBITDA perspective, some are bucking the trend and doing great and those are the businesses that are receiving lots lots of interest, but lots aren't more than half aren't for sure. That's the first piece we got to get the trailing 12 P&L healthy and relatively stable as well not herky jerky like it's been.


You know the second factor that would influence an M and a turn around would be, you know, interest rates and cap rates, right? So like in the in, you know, interest rates are still really, really high and what that has done is it's kicked a lot of the financial buyers out of the buying process.


As you know, it always was a financial engineering situation for these financial buyers. It was how cheap can you borrow the money and put as little equity as you can into the acquisition and then how much could you build it out either through acquisition. But in many cases the big lever is new unit development and then how much could you, you know, build new stores?


And how much debt could you take on? And then how could you grow, you know, pay down your debt, raise your EBITDA and then sell the business at a big you know kind of five to seven years later or the big increase and and you feel good about it like so that's?


That's kind of the formula for a lot of the financial buyers, and because interest rates are high, it's just the equation. Doesn't the financial engineering equation doesn't work anymore? When I say anymore, I mean like right now, what does that mean? Like on our deals, I think I've said in the past very, very few financial buyers are looking at our deals now. It's amazing like we.


Used to have.


You know, like dozens and dozens and dozens. And now we have one or two or three. It's. I mean, it's literally, like, almost like the Mojave Desert of financial buyers. They just don't exist at the moment in, in many cases.


They'll they'll come back. But I think what? What has to happen here is like, right now, if you're going to buy a business and this favors people who can actually operate businesses, I mean, you can buy a business, you operate it well. You know what you're doing, and you can have a great return on that investment. But the financial engineering piece of it with interest rates as high as they are.


Just doesn't make sense. The other side of it being that the cost to build new units has doubled basically over the last five years too. So the returns on new unit development are lower until we get meaningful change in interest.


Rates until we get meaningful change in the cost of construction, I think you know we're going to that's going to be the second lever that's going to not get switched on for a while. So keep keep watching that what happens in our economy this year, I don't know but it but most people are saying we're going to have quite a few reductions in interest rates.


Later on this year, we'll watch it.


And see I've.


Taken a couple of informal Poles just to Buddy who owns a landscaping company. Another buddy who's a roof.


Per another buddy who owns an IT company, OK, totally unrelated to to what I do, but I asked each of them. I said. How you doing? You know, that's a general question to which I'm like, they're like, oh, yeah, you know, we're doing all right. The market is, you know, a little bit puzzling so far this year. But we're doing OK and making a profit. OK, then I'd ask a more specific question, like, how do you expect your first quarter sales?


To be in 2024 versus 2020.


Three and one of them said down 40%. Another said down 30 and the other said down 15. So you you know what I mean, ask specific questions, you get specific answers, but the temperature of those three random people in one area of the country in totally different occupations gives a pretty negative outlook about consumer spending.


You know, so I so I just kind of make note of that.


That until we.


Get meaningful kind of changes in the in in the interest rate environment. I think people are going to be pulling back. We're going to see more of it this.


Each year, a third kind of thing is like brand specific, right? So what do we need for a turn around? I mean, one is clearly we need a good looking trailing 12 P&L. Two, we need to have like better interest rate environment and lower cost of new development and a third is we got to have you know good specific performance on the sales and traffic level in our industry.


And at the brand level.


Some of that doesn't isn't like a blanket statement like, of course, QSR is going to go back to this model where we grow 1 to 2% in same store sales a year, right, with 1% newer units coming on board. And so therefore we're all fighting for a couple of percentage points of growth in sales and profit, and that's what it's always been in our industry.


But a couple of things have happened. Like now we've got more competition. It seems like coming in. You know how many new coffee spot we'll talk about this in a minute. But how many new coffee shops in our little city of Gulf Breeze, FL we're fixing to have six coffee shops within a 500 yard area.


We get this. Our city only has 5000 people. That's crazy, right? So you know what I mean. Like that. That's a that's a factor of the competition. But overall, like, how's the industry doing? It should go back to kind of normal right soon. And then how is your brand doing? And brands are performing wildly differently across.


Across the spectrum, if you were to take a pen and paper and to write down 20 brands, right, the ones that you drive by every day and you know, take big ones, small ones, new ones, legacy ones, whatever.


QSR fast casual even throw in a couple of non restaurant franchise brands and list them on the page like I could show you some crazy little graph of performance that I would just make up and the and the performance would be way different within those brands at any one point in time. It's part of the reasoning why Yum Brands bought KFC talk around Pizza Hut and then they tried it, then they bought Long John.


Silver's and W is part of the reason why I'm sure.


Or the guys over at restaurant brands, you know, have you know Popeyes, you know, alongside a Burger King. And they also bought Tim horton's. Right. And part of the reason behind works acquisition of all of these concepts that they have. And it's also, you know, like Inspire Brands has a litany of concepts now too. You know, Constellation Brands too, like all these different brands are are like.


Creating diversification and.


And and and putting their corporate know how to each individual brand and sharing expenses and things at the.


Top but a.


Lot of it is because some brands are up and some brands are down. It's nothing different than investing in a basket of stocks. They don't all move in the same direction at the same time. So you know that that third piece of of a turn around is more brand.


Specific it's unlikely to happen if the first two conditions don't happen in terms of the amount of M&A activity and the amount of healthy M&A activity, but it is a factor overall.


  1. The next question is just two more questions. Lots of positive press is the next question. In newer concepts, coffee, chicken, etcetera and then the the dreaded question ready. What do you think?


I always say that, but I asked my wife that we're just talking about things. I'll say like all the time. What do you think? And it remember that movie, the founder he was trying to portray Ray Kroc in the McDonald's story and he was going around selling mixers. And. And he as a mixer salesman to some of these kind of drive through restaurants in the 1950s.


He would he had portrayed him asking the question all the time of the franchisee after they tried his mixer, his his shake mixer. He would say, what do you think? And then of course, they'd all say this sucks. I'm not buying it. It's too expensive. You know, all that stuff. I always think about that when I asked that question. So it's it was asked, what do you think? And I'm.


I'm left with the conclusion that I said earlier that the, you know, with so many coffee, new coffee places coming.


And you know, it's kind of endemic of what the overall industry is experiencing. I mean, I think some of these new concepts are taking, are seeing the legacy brands drop unit counts. If we want to be particular about it, right. And they're seeing like, you know, gosh, this brand used to have 5500 units and now it has 3800 units. And if you listen and you, you'll know which and and you're in that brand, you'll know which brand I'm talking about.


Those are actual number.


Others you might be in a brand that has, you know, 6500 units, but really should have 5000 units. If we look at the return on investment of individual units across the country, you have brands that have 75 units that should have 6000 units. These are legacy brands. When costs increase, it is no longer true that the good old days.


You do $1,000,000 in sales at a restaurant and make a lot of money. Those numbers now are like you need to do a million four in sales or you don't make any money, right? Because costs have come up so much all along the P&L, not just food costs and labor, but property taxes and insurance and rent and Cam charge.


And just some of these fixed expenses like uniforms and you know payments to vendors and all all of it you know and so you can only hold the line on on even sales so long.


So you're seeing unit count reduce and I think some of these new concepts are seeing that. I mean I I I can see it out in the marketplace, they these younger guys and girls who are starting these concepts are looking around and they're like, well, some of these legacy concepts you know kind of aren't addressing the Gen. Z and millennial customer anymore. No one goes there. Go look at their locations and see.


And I think we can beat their ****, you know, on main and main. If we just locate across the.


From them and.


We can do it with newer assets. We can do it with.


Higher AUV's.


People aren't as price conscious on some of these new brands as they are with legacy brands either because maybe the demographic of the of the customer is a little bit higher end, but also because it's perceived to be fresher, newer food. So these are all kind of reasons why.


You know, I I see a lot of new competition coming in. I mean, I saw McDonald's come, their CEO came out and said that they're going to be focusing on their low end customer with value products, right, which is probably a thing to do.


Because everyone's raised their prices so much they had to, I guess in many cases to keep their profit levels, but they've raised their prices so much that that they're unable now to to cater to the lower end customers and and we all knew that once that once you know cost came down especially food cost came down, there's going to be a price war again and value is going to win.


Because the value equation in the marketplace is really frankly unsustainable. I mean, traffic is dropping for that very reason. Hop in your car and go try 10 different places. I bet you're not even eating out as much as.


You used to right? Because of the cost, so value.


View is going to happen in discounting and price sensitive sensitivity is going to start happening. McDonald's is focusing on the low end customer and all the while I think these new concepts are kind of are kind of appealing to a different demographic that wants a different type of food and they're marginalizing kind of the legacy QSR brands a little bit.


I mean, I see it with my own kids, right? We have a Chipotle close to our house and those and my kids. I mean, this is just some silly example, but my kids want to eat Chipotle all the time and they cannot. They'll hardly go to another fast food place, you know? I mean, they'll go to a Chick-fil-A, they'll go to a, they'll go to a Panda Express, oddly.


Enough and they'll go to a Chipotle and you know, of course dad's in the industry. So I'm forcing them to go elsewhere, but that's about it. I mean, that's about it. You know what I mean? So.


Yikes. They love.


Kava. Right. They love. I mean our daughter loves Dutch brothers. You can't get them in Florida. Really. But. But you can't in Texas area. They love 7 brew.


And they like they say, like the coffee shops, right. And they love the the fresh, the fresh food and fresh ingredients. So I think that pressure will continue to to to be placed against the legacy brands. And frankly, I think there's an easy it's like a basketball, it's use a basketball analogy. Right. I always when I used to coach basketball, I would tell the kids to hustle.


And don't assume because your your your teammate is on is on a breakaway that they're going to lay the ball in and it's going to go in, hustle to the rim every single time, hustle to the rim every single time, because guess what's going to happen about 30% of the time, they're going to miss the layup or the dunk and you're going to be the only guy under the basket.


To get a rebound and to put it right in for the easiest rebound and two points you're ever going to have and you'll be able to stuff your stats.


With with what I call junk ball, you just play junk ball and pick up the junk and put it back in and score and it counts as the same two points, right? But I think a lot of this junk ball condition in in our in our environment is going to be found by these new concepts picking up an easy hustle to the basket kind of sales increases and taking some away from some of the legacy.


Brands, if they're not careful, just because they're not catering to the new demographic as much any.


Cap rates. The last question, how are cap rates doing OK? So generally speaking, we're just in the marketplace talking about this, you have two major areas. You have the 1031 market which are individual real estate buyers. Typically these people are people who have sold something maybe in California and then they're looking to not.


3 taxes on it, so they do a 10/31 and it forces them within a pretty short time frame to have to go buy another similar type of asset and then they roll their money into it and they don't.


Pay taxes on.


It OK, it's pretty powerful phenomenon that's been in the industry for a long.


That's one type of real estate buyer. The other type of real estate buyers are Reit's, real estate investment trust. These are a lot of these are public, some are private. But.


These are you.


Know big real estate holding companies that buy big swaths of real estate. Not one property here or there, but like in our industry, like 25 properties, OK or 30 or 50 or 100, maybe 10, whatever.


So Anna, go comment on the retail market right now is that we're just in the marketplace on, you know probably 50 or $60 million of real estate. And I would say that I, you know, talking with with well over a half dozen reads.


The CAP rate environment is somewhere between 7 1/2 and 7 3/4 very predictably that's that's where it is. And maybe you can do a little bit better with the master lease, but keep in mind master leases are typically not approvable by a franchise or and many franchisees just won't, won't touch them and master.


Leases where you pay a fixed amount of rent over all of the assets, not just on any one individually.


So without a master lease, I think we're talking 7 1/2 to 7 3/4 cap rate in this market. Quite a big change. They may have. The rates may have overcorrected and they're certainly much more liquid to the fact that interest rates have increased. Now on the 1031 market, it's not necessarily quite that way because people, individuals have.


Other reasons to invest in real estate, right? They are trying to avoid paying taxes right now. They want to defer taxes or they have nowhere else to put the money or their brother tells them they should do it or they like real estate and dag on it. That's what they like. So there's all kinds of mispricing opportunities, but we can look at the 1031 market overall.


And we can we can gain some insights. So I hear some insights. I think they'll be valuable for you across all you know kind of this is just kind of looking at the various pieces of data that I keep up with and this is just a ballpark, OK. So go to your real estate advisor if you want, if you if you want better information. But as I kind of look at this from a high level cap rates are probably about a full 100 basis points.


Right now above where they were at their low point of like call it mid 2022 average cap rates in the marketplace are probably that are getting done or probably around 6 1/2 to six and three quarter cap probably leaning more towards the six and three quarter cap.


You know the activity in the marketplace is probably at or near A5 year low and has been hovering in the same kind of range for like the last year, more or less. You know, we don't know what what will happen. Cap rates have largely flattened out.


Relative to the last couple of months, so we don't know what's going to happen in terms of deals. But generally speaking, we're at kind of a five year low and we've been hovering around that low at a constant pace for the last 6 to 9 months.


And we'll see what happens this year. My guess is it's not going to change or it may actually dip some more, could be wrong. There is a gap right now of probably about 1/2. I mean, it's always this way. So, so know this in the 1031 market, usually a buyer wants a half a turn, a half a turn of cap rate more than what they'll ultimately settle on. Does that make sense? So in other words, if the.


True closing market is at six and three quarter CAP. You can pretty well bet that a buyer is going to be asking 6 1/4 or 635.


And when and ultimately the thing sits on the market longer than it than it than it has, and therefore it, you know, we end up having to negotiate, right. So there's more negotiating going on and there's more price reductions that are happening over let's say 2021 and 2022. And then within the actual kind of details, I think we're going to see like that.


You know, QSR continues to perform pretty well and has the most attractive kind of cap rates of a bundle.


The worst is probably like office buildings and then maybe, you know, kind of industrial buildings and and and those kinds of things. You know, obviously office buildings have taken a big whack with vacancies, right? And so their cap rates are going to probably generally speaking, I mean this is a blanket comment, not particularly any geography, but they're going to be typically the the worst.


In in QSR, especially ones that have you know tier one brands or ones with corporate guarantees or guarantees from large franchisees with over 100 locations?


Are typically going to fare in the best 20% of the cap rates in the environment. You might be able to see QSR cap rates, you know being 25 to 50 basis points at times depending on the deal, the brand, the location, the profitability better than the than the average and and and sometimes it could be worse by that amount.


To do so, that is a general cap rate update and I think we'll just go ahead and close with that. Thank you all for for listening. Feel free to reach out anytime. I think we'll be entering a period of the next two to three months of continued kind of quietness in the market.


It I think as we we kind of try to as an industry lift our sales profits and traffic over last year, we're going to have some challenges in many brands over the next few months until we hit the summer time. And then I think it'll probably you know even out a little bit and maybe conditions improve a little bit as we start seeing interest rates reduce.


Until then, we'll be here and thanks so much for listening to the restaurant boiler room. Go, Wildcats. See you later.


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