Rick Ormsby
Welcome to the Restaurant Boiler Room, Season 7, Episode 6. I'm your host, Rick Ormsby, Managing Director at Unbridled Capital. Today in the Boiler Room, I will be doing a very detailed annual real estate review with Chris Lamuto of Northmark. He's a real estate broker. We'll be talking about cap rates, prices, cap rates by geography, time on the market, supply and demand, and answer common QSR and non-QSR real estate-related questions. I think you'll find it informative. The Restaurant Boiler Room is a one-stop shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise 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, thank you guys for joining. I see people kind of still trickling in, so we'll wait another minute or two. If you are listening, Delayed on the restaurant boiler room. Thank you for tuning in. Excited for today. We've got return performer and real estate enthusiast, Chris Lamuto from Northmark, who did a great job last year. What I like about Chris as a real estate guy is he's super practical and smart, enjoyed, I call him a friend. And he's also cut from the same cloth, I think, in many ways, but I love the way he thinks about like the rigor behind real estate and the data. driven behind it. So today we're going to talk a little bit and unveil a little bit of real estate detail that I think we don't typically talk about. And so it may get a little technical, but I think it's going to be great. So I'm going to sit here and act like a franchisee, and you're going to act like a real estate guy. I've got a bunch of questions that I can ask along the way. And then let's get started. And Chris, welcome. And everybody, welcome for joining. And so let's start. Tell us about the real estate market for QSR right now. What do we know and what's changed from last year?
Chris Lomuto
I'm going to preface that by saying, you describe me as a real estate enthusiast, which is an accurate description. That is true. But I am also a professional and I am available for hire should anyone need brokerage services. Okay. So moving past that, your question was, I'm going to summarize it. Where are we today and relative to, you know, let's say a year ago? To be succinct about it, we tend to compare where we were like at the peak because we kind of all got used to how good things were during the peak. So compared to the peak, we're definitely not where we were in, let's say, 2021 or 2022. That's true of all net lease real estate, including franchise real estate. But we're 2025 so far looks like the best year since we sort of entered these struggles related to interest rates and stuff like that. So 23 was a pretty tough year for everyone in commercial real estate, franchisees included. 24 was a bit better than that. So far, 2025 looks like it's better than 2024. So overall, I would say positive. We definitely have not gotten back to where we were during the real champagne times of 2021 and early 22, but we're on the right track and things are looking better than they have the last couple of years.
Rick Ormsby
Okay, this is going to be a pretty similar trend, I think, that I would say for M&A for QSR businesses and restaurant businesses in general. Sometimes we follow each other fairly closely. Sometimes we divert a little bit. You guys are probably improving a little bit more than we are because we deal with the consumer sentiment of the customer that's coming in or not coming into the stores. And you maybe have some impact there, but not quite as much. it's definitely a bifurcation across the industry right now for QSR M&A. Let's go dig into some of the details though, because I know you got some really cool graphs that I think I'll talk through for those of you who are going to be listening and not watching. Why don't you pull up some of these things and let's talk about kind of days on the market and real estate terms and what cap rates look like and how people are thinking about, landlords are thinking about, and tenants are thinking about cap rates and sale leaseback.
Chris Lomuto
Absolutely. Here, I will share my screen. And then while I'm doing that, you tell me, because you've seen these charts of graphs already, so you tell me which one do you think is most topical for right now?
Rick Ormsby
Definitely. Go for it. So for those of you who will be listening, this is a cap rate benchmark over time, which it's a bit of an eye chart, but it's about as best we can do at the moment. Talk through this to the people who are watching and listening about where cap rates have been and where they are versus the treasuries versus the S&P 500.
Chris Lomuto
All right, so as you said, we're looking at not just QSR real estate, but all triple net real estate in general, of which QSR and franchisee real estate would be a piece. So we're looking at that, which is this top blue line, and we're comparing that over the same period of time, being the last four and a half years, to what's going on with the Fed funds rate and treasury rates, particularly the 10-year treasury, and then what's going on in the stock market. The point of this is just to understand what's happened with triple net real estate pricing or cap rates to be more precise. What's happened to triple net cap rates over the last four years as compared to some of these other benchmarks to see if it tells us anything about real estate. And what I take from this is that if you look at, so the people who aren't seeing the chart won't see this, but For those of you who can see the chart, we're looking at this red line, which is the path of the Fed funds rate as driven by the central bank, making this steep climb right in starting in early 2022 from almost 0% interest rates up to 5% or a little higher. As compared to what's happened at triple net cap rates, if they were perfectly in line, you would expect a similar steeply climbing line, but that's actually not what happened. you have this really kind of shallow change, which sends something to the effect of the real estate market for sure is affected by Fed interest rates and things like that, but it's definitely not a one-to-one direct sort of impact. It's a little bit more than that and it's not- Surprising, surprising.
Rick Ormsby
Fed funds rate went from almost nothing up to 5% and it's since dipped in the last six to nine months. And then the cap rate has changed from maybe at a low around A5 cap rate back in late 2021, early 2022, and maybe a high into the low sixes, but just hasn't had the same effect, which has always been surprising to me, man. I would think that they would work in lockstep a lot more than they have, you know?
Chris Lomuto
I think most of us sort of intuitively expect that. And we've all been programmed to, you know, people who think about real estate and things like that, especially commercial real estate, tend to think of a really strong correlation between particularly treasury rates and cap rates. And for sure, there is a correlation there, but it's not as strong and immediate as probably most of us would have assumed, or at least in this cycle, it hasn't been.
Rick Ormsby
Go to the next one. What other juicy graphs do you have for us to talk about? I know there's a lot of good ones on here. This one is what? Cap rates by product type. Okay, so for those of you who are listening, what he's going to talk about here is like cap rates just talking broadly is one thing, but then we break into the details and we say, okay, we're going to talk about cap rates by geography, cap rates by type of asset, whether it's a warehouse or whether it's a QSR asset or a car wash. So go ahead, Chris, and educate us a little bit over the last few years.
Chris Lomuto
As you said, this is again, over time, looking back to 2021. And we're just comparing what's happened with cap rates in QSR broadly, which is franchise QSR, but also Starbucks and the other corporate operators who don't franchise. We're looking at all of those brands in this kind of brown colored QSR line. And we're just seeing what that looks like compared to some of these other triple net product types, which tend to be very popular. QSR, for context, QSR is, I don't know if it's fair to say it's the most popular, but intuitively I would say QSR for the last 10 to 15 years certainly has been one of the most popular, if not the most popular triple net product type. So we're looking at QSR compared to some other popular product types. And just quickly, my takeaway is that Not surprising to me and probably other people that work in my industry, being like fast food franchise real estate. Yeah, of course, GSR real estate was affected the last four years. But when you compare it to some of these other product types, like let's say Office in the green line, for those of you who can't see, What's happened in office is very predictable. It's been a very substantial change in office. Similar results in things like pharmacy where problems with Walgreens and to a lesser extent, CVS have really impacted. So the takeaway here is yes, QSR is affected, but not quite as much and not quite as volatile as some of these other product types.
Rick Ormsby
Couple of things I think of as I look at all these charts. So you basically have a chart here for those of you who can't see it or won't see it. And it lists, it shows a graph of QSR, pharmacy, office, and industrial, grocery, dollar stores, convenience and gas, and auto car washes, real estate, performance in terms of cap rates over the last four years. And what we find out is that the QSR is going to be the most competitive cap rate. It's at the bottom of this chart. That's right. Cap rates are between 5:00 and 6:00. And there's almost a gap of 200 basis points meaning QSR is better by 200 basis points, or that might be 30% better pricing than office buildings. Cap rates for office buildings have been in the 7 to 8 cap range. You see like, and then the middle of the range has been grocery stores, which tend to look like they're moving in about half of the, halfway between QSR and office buildings, so to speak. So if you're looking for cap rates and someone's telling you about what cap rates are, there could be a huge gap between the cap rate of a, call it a, whatever, a Popeye's restaurant and a class A office building in the same town on the same st. And it could be, remarkably different based on certain conditions. And then what else do we see in here? You mentioned pharmacy. Pharmacy's not doing well. The cap rates are rising tremendously over time in pharmacies, at least based on this data. And I guess, like you said earlier, it's probably a case in point of some of the pharmacies going bankrupt and not doing as well, right? So their cap rates have been cruising upwards in a negative direction quite precipitously. It looks like a little bit of the blue too, which is the car washes. They're not doing as well as maybe you'd want
Chris Lomuto
them to do, Yeah, they each have their drivers that are sort of creating what you're seeing here. With pharmacy, a lot of it is some of the organizational troubles that happened at Walgreens and Walgreens was recently taken private. It's just very uncertain what the future of Walgreens will be. You know, they've announced some store closures and things like that, which that kind of news ripples through the market fairly quickly. Yeah, We should probably just mention or anyone who's talking, but hearing about cap rates for the first time, if that's anybody, that in short, the cap rate is telling you usually the first year's income as a percentage of the price of that asset. We use, so if it's a 6% cap rate, that's telling you that the first year of income to the person who owns that real estate, their first year of income is 6% of the price that they paid. And we, in the real estate industry, we use cap rates the way investment bankers use EBITDA multiples. So we're always comparing them against each other and looking at things in the context of, okay, well, what was the cap rate on this versus that? The way you guys think about, you investment bankers think about multiples, like, well, this was a 7 multiple, this was a 10 multiple.
Rick Ormsby
Well said. Yeah, that's a great graph. What about the next one you got on? What other goodies do you have? It's Halloween, right? So I'm going into the deep into the Halloween bucket and pulling out Snickers or am I going to get a Reese's cup or a Gobstopper or I don't know. But Okay, this is the great graph. This is talking about supply and demand. For those of you who are going to be listening, this next thing is supply and demand. And basically, there's going to be a graph that's closings and a graph that's listings. And the delta between the two are going to kind of summarize how much is not selling, basically. So go for it, Chris.
Chris Lomuto
As you said, 2 lines, one chart with two lines, one on top of the other. For those that can see, the blue line on top is showing us over the last four years, the listing activity of only QSR deals that are either new construction or sale leaseback. And just quickly, the reason I did that is so that we're filtering out QSR deals that only have one or two years left on the lease. So we're looking at QSR real estate that should be relatively comparable in terms of profile. It's got a long-term lease. It's either new build or it's sale lease back. So we're looking at the supply over the last four years, 4 1/2 years on the top in the blue, and then down below in the red, we're looking at, it's sort of a privacy of the demand. It's looking at closings of QSR deals of that type. And I think to be fair, we should not say this is an exact model of the demand, we're sort of proxying it by saying, well, this is what we were able to find for closing comps. Realistically, the difference between what was listed and what was sold is probably closer together. This is probably exaggerating how many deals we're not able to close, but in terms of trend, it should work. The takeaway, one of which you pointed out when we were talking about this yesterday, Rick, was you see this huge spike in supply in Q3 of 2022.
Rick Ormsby
those who don't have the benefit of this graph, just, and I know the numbers may not be exact, but we're saying like in 2021, we had 200 or 230 listings and like 160 closings. And then all of a sudden in 2022, it shoots up to 470 listings with only 200 closings, which basically this enormous jump in supply without the corresponding demand changing at all. So go ahead, Chris. Yeah.
Chris Lomuto
That was well said. Then as we kind of advance into 2023 and into 2024, you see both lines kind of stabling out where that sort of tracks with how the market has felt the last couple of years, where things have felt a little, things in 2022 felt really kind of chaotic. They started to settle down anecdotally, I'm saying they started to feel like they were settling down kind of the second half of 2023. And they felt a bit slow, but sort of more stable since, like Q3 2023. And then as I said earlier, they're starting to feel a little bit better as we get into 2025. I always tend to like when the data sort of supports the way it felt, because it means, you know, we as brokers, are reading the market correctly, we're not just making all this, we're not just making it all up, we're actually seeing it correctly.
Rick Ormsby
I suppose you'd like to see these two lines coming together even more, which means you want demand and supply to be as close as possible. That means it's going to be a frothy time. If you have a lot of demand and you have the corresponding supply, you've got a healthy market. The more you have supply without demand, the price drops, the cap rates get worse. And the more you have demand without supply, it's the opposite. It's like, I have the only Lamborghini and there's 100 buyers for my Lamborghini. So the price goes way higher than it normally would. So that's a great graph. And I know you got some more. Let's go to the next one.
Chris Lomuto
You just described what this one charts. This one is just tracking over time what that absorbs and looks like. And to your point a minute ago, going back to the chart with the two lines of supply and demand in Q4 of 2021, Our record keeping shows there were 205 sale lease back and new build QSR deals on the market, 205 and 187 that closed. That's really close. Almost every deal sold in U4 of 2021. And this chart is tracking what that looks like quarter by quarter over the last four years. And so in that quarter was 91% absorption, 91% of the deals that got listed that month closed if we're just counting numbers. And this is tracking that over time. And I think the takeaway is that we've sort of been, the last couple of years, we've sort of been hovering around two-thirds absorption, which is probably a little bit conservative because we don't capture all the comps, but we're looking pretty good. And for point of reference, what I see here, what I noticed actually looking last night, Rick, if we look at the absorption, right, how many deals sold versus how many were listed, in Q2 of this year, it was 64%. If we compare that to Q2 of 2021, 62%. So that is a very strong signal to me that, hey, you know what? At least in terms of absorption, we're sort of comparable in Q2 of this year to where we were in Q2 of 2021. And to me, that really says something.
Rick Ormsby
Coming from a franchisor background, I'm always talking about same-store sales comps over last year, and the whole industry thinks this way. So for those of you who are watching and listening, who are operators, you're just naturally going to think this way, but like pick a number. First quarter, let's just do first quarter and then second quarter, starting in 2021. The amount of deals that's sold, 79% in Q1 of 2021. Q2 of 2021, 64%. Q, pardon me, one of 2023, 54%. Q1 of 2024, 45%. In Q1 of 2025, 52%. As we go into Q2, You had 62% closed in 2021, 46% closed in 2022, so it dropped a lot. The absorption dropped a lot. Things weren't closing in 2022. In Q2 of 2023, we're at 63%. At Q2 of 2024, we dropped down to 52%. But now, like you said, we're at 64% in Q2 of 2025. So directionally, it looks like there's a mild shift to things closing at a slightly better rate. We saw a huge drop, obviously, in 2022. And I'm sure that makes sense to you.
Chris Lomuto
It does. And I would say this measuring absorption probably tells us more about the health of the market in terms of where supply and demand are relative to each other than it does the absolute demand. Because what can happen is if you have very, you might have completely stable demand, month over month, exact same demand every month, but the absorption will change based only on supply. So if you have a lot of supply, but the same demand, suddenly the absorption will go down. If you have very short supply, but the same demand, you'll have super high absorption. So I think what we're seeing is that there's a bit where we seem to be in a relatively steady state in terms of how many deals are coming to market, specifically QSR, new build and sale lease back, how many deals are coming to market and how many are getting purchased, we're sort of in a relatively steady state, in a similar state that we were in Q2 of 2021. And that's, to me, that sounds, that seems positive for sure.
Rick Ormsby
Yeah, that's great. That's great. All right, now we got cap rate trends, all the stuff that people want to talk about. So we've held on to that for 25 minutes and now you get the good stuff, right, Chris?
Chris Lomuto
Yeah, I agree. I think this is what everyone wants to know.
Rick Ormsby
The difference between closing cap rates, asking cap rates, and closing cap rates. You mean people are asking for prices that are higher than what they're willing to accept? Go figure.
Chris Lomuto
You know what I mean? And of course they should. And of course they should. Of course they should. You know, as it pertains to that, we probably want to understand as market participants, at various different kinds, what that relationship looks like. And to that point, I would say, as we look at 2024 and 2025, you see that the, what in finance or real estate we call the bid-ask spread, right? The difference between what people are asking and what the buyers are paying, that spread has gotten a bit wider over the last 18 months, but it may be starting to narrow. That seems to say that, okay, buyers and sellers Coming into 2024, buyers and sellers were kind of getting a little bit farther apart from each other in terms of what buyers wanted to pay versus what sellers were trying to achieve in terms of pricing. They were kind of getting further apart there during 2024. But as we're getting into 2025, or now at this point, we're almost wrapping up 2025, we are wrapping up 24. It seems like those expectations may be sort of coming back together. They're getting closer as those two lines seemingly are converging.
Rick Ormsby
Cap rates have been holding somewhat steady for the average closing cap rate. It looks like around the high fives, close to six cap over the last six quarters. I have to say, Chris, that this does not include the impact of commissions, and this is for 1031 real estate, not for bulk assets that are sold on the market to real estate investment trusts. And real estate investment trusts, would you agree, typically price things at about 100 to 150 basis points, you know, less attractive, I guess, than the 1031 market. The benefit being, of course, in our business, that when you're selling a business that has a ton of real estate, really the only way to handle bulk real estate sale of 100 properties is to sell it all at once to one party. But there is that gap between the two, typically, correct?
Chris Lomuto
That's right. What we're looking at, these cap rates that are on screen right now that currently are averaging, you know, in the high fives, you know, kind of 575 to just under 6 cap, those cap rates, those closing cap rates largely reflect individual QSR realist triple net deals, single property deals, mostly single property deals, mostly which are going to 1031 exchange buyers, not exclusively, but mostly going to 1031 exchange buyers. And yes, in terms of when as a seller, When your situation is such that you really need or want to be exiting something much larger than one property, 10 units, 15, 20, 30, 50, 100, whatever the case may be, if it's an M&A that involves a lot of real estate and the franchisee wants to monetize that real estate immediately to use that for acquisition capital, or they simply need someone to buy the real estate on their behalf and lease it to them, that's sort of the classic story in which really your better buyer is someone like a REIT or some other really large money player. And those large money players, exactly as you said, tend to be about 100 to 150 basis points higher in cap rate than these one-off kind of individual buyers. With these large money players, you gain a lot of purchasing power with them. You gain a lot of convenience. They're really, really fast. I mean, I just did a 13-unit QSR deal to a replayer. They got through all 13 units, all the diligence, all the title reports, all the CC&Rs, probably 500 plus pages of legal documents, easily, probably 1000 pages of legal documents. They got through it all, did all the phase ones, did all this work in 30 days and closed. From open to close in 30 days on 13 properties, they probably had 15 attorneys working on it. was incredible. So you gain that, but you pay for it in the fact that you don't get quite the same pricing that you get from the one-off buyers.
Rick Ormsby
Yeah, and oftentimes in our M&A transactions, it happens the same way. I mean, not always, and it's not as pronounced maybe as here, but I always tell people less than half of the time are the people when we're representing them on the sell side take the highest price. I mean, they usually, look at a variety of factors like assurance of closing, franchisor approval. Do you have the money? What's your reputation? Like, are you approved in the brand that the deal's for sale? All these things that kind of affect what the best offer is. And so it's no different here. You know, you can get the highest price by doing 1031 sale leasebacks, but try to do 15 of those if you have a 15-unit business that you're trying to sell with real estate attached to it. It's like trying to corral all the chickens in one pen and almost impossible to do with the same assurance of closing. So thank you for explaining that to us. I know we got more. I'm going to make fun of some people in different states that don't have as high a cap rates as others or don't have as attractive cap rates as others. Can we do that? Speaking of making fun of people in states, you're in California and I'm in Florida. We're literally at the moment in like, I think the opposite corners of the world. I'm in Coconut Grove on on this fine, beautiful day in the Miami area. And you're in north of Sacramento, aren't you, Chris?
Chris Lomuto
I am east of San Francisco. We may not be in different worlds geographically, but certainly I would say we're probably in different worlds politically, at least in terms of the zeitgeist in our two states that we reside in.
Rick Ormsby
Totally. But it is interesting. You have the darkest colored state over here, which in this case on this graph means the most attractive cap rates in the country achieved for property that's sold from what you study here seem to be number one in California. And then the West Coast in general, I'm like, what the heck? In some of these states in the West Coast, it's very difficult to sell restaurant assets, but the real estate, it's the opposite effect. Tell us why you see the graphs, and then generally as you look back into the Midwest, the upper Midwest, and kind of the plain states, you start seeing the cap rates not being quite as attractive. And then the difference in cap rates like from high to low is 4 1/2 cap in California. Florida is also pretty good, and so is Texas. But you have, I think some of the worst would be up in like Minnesota and Kentucky, where we're talking like 5.9. So there's a pretty big gap of like one, almost 1 1/2 cap between the different states. And For those of you who are listening and watching, it's important to know you can't just go around cap rates. I mean, a lot of my friends and colleagues in this industry will just call me asking what the cap rates are. This is really a telling thing to say that you could have a 30% difference in value between the exact same Taco Bell, okay, sitting on with the exact same sales and the exact same building type and the exact same franchise agreement in one state versus another in terms of the value of the single tenant real estate. Go for it, Chris.
Chris Lomuto
I would say that's right in concept, but I'm going to come back to that. Don't let me forget because I want to tackle that.
Rick Ormsby
And I bet I'm wrong as I'm saying that too, aren't I? Because it's not, because in the QSR, this is a general graph and within QSR, it's probably not quite as delineated maybe is what you're going to say.
Chris Lomuto
Yeah, mostly. Don't let me forget. Don't allow me to get to the track. So in general, what you find in terms of First of all, cap rates are ultimately driven by the buyers, right? A seller can ask whatever they want for pricing. Like anything, a seller can ask whatever they want, but ultimately it's the buyers who will ultimately decide what gets paid. And so sort of historically what we've seen is that the demand for real estate, which includes franchise real estate, tends to follow kind of the demographic and migrational kind of activities around the country. As we frequently, for years, we saw people moving to the coast and to the south. And that just kind of intuitively drove real estate buyers to those markets because they said, oh, this is where you want to be with your own real estate because this is where everyone's going. And this is where the, if this is where population is going, then this is where the growth is. And that just sort of intuitively makes sense in terms of wanting to own commercial real estate. So what you tend to find is a higher level of demand, a higher willingness to pay for real estate in markets like Texas and Florida, Arizona, Nevada, you know, states that have either a lot of tourism, or they tend to have really good weather, or they tend to be growing in terms of population, or they tend to have strong centers of commerce, really significant cities. The real estate buyers tend to go there, and that tends to drive the cap rates. Whereas you have other states or other parts of the country, there are plenty of markets out there that are actually really strong markets, but the buyers just aren't looking in those markets because they just don't know them or they don't understand them. or they don't know how to make sense of them or they don't have any familiarity with them. So what we've found for years is that 1031 exchange buyers almost always buy. the property that they buy, they almost always have some kind of connection to that property or that market. So like if I'm representing a buyer who's based in the Bay Area of California and they buy a deal in Michigan, I can be almost certain that if I probe, I'm going to find out that somebody who's in that buying decision went to college there or has family there or they grew up there. That's always the case. And the point being, quickly, because I'll wrap it up, is the buyers tend to go to the markets that it Things like, are growing or markets where they have some familiarity. And a lot of the buyers specific to California, a lot of the 1031 buyers that are in the exchange market are people that reside in California and people tend to like to buy where they live.
Rick Ormsby
Yeah, that makes sense. That's why maybe one of the reasons why California has such competitive cap rates is you're saying that people want to buy where they live and there's just a lot of 1031 activity there. And, you know, I mean, just from someone's observation, it's probably a higher motivation if you're tax motivated, and a lot of these small sellers of real estate typically are, you're probably higher motivation in a high tax state like California to do a 1031 when you sell a property, then you might be in a state like Florida or Texas where the taxes aren't the same, right? That's true, yeah. That totally makes sense. But I think if you, and by the way, if you're listening to this and you didn't get a chance to see this graph, you reach out to me and we can get all this data to you, these graphs. And if you are watching, we'll send a link with this information out at a later date, but it's really helpful to see kind of a national heat map of where cap rates have varied up and down. Take only 30 seconds and tell us why my comment about USR real estate being at different cap rates across these different states is not necessarily as pronounced as it would be on a national trend.
Chris Lomuto
I'll give you an example. If you took two identical shopping centers, they're anchored by a brand new Target or something like that in, let's say, California versus Kentucky or something, on average, we might see that there's 100 basis points of spread between California and Kentucky on average. But if we look at two identical shopping centers that have really almost identical retail fundamentals and the circumstances of that real estate are very similar, that spread is going to be a lot closer and there might not be any spread at all. So it's not to say that you can't achieve a three and a half or four cap in the Midwest part of the country, right? It can be achieved, but on average, on average, there tends to be more demand for certain markets than others. But that doesn't mean that you couldn't achieve it. just means that on average, there's more demand in one market versus the other.
Rick Ormsby
Got it. And in the case of Kentucky, which is my home state, even though I live in Florida now, baby, that's the best ground you could have, man. Brown and fertile, and you can drop almost any kind of farming thing you want in there and it'll grow. Anyway, side note, keep going. What other graphs do we have that we can talk about other charts and trends? Thank you, Chris, for doing this. is outstanding. And we've got 20 minutes. I'm going to say the last 15 minutes for point and shoot questions that I know people who are operators are probably going to have in general. So this next one, I asked you to maybe talk a little bit about valuation. How do you value a piece of real estate from a cap rate perspective? Go for it. Let us know.
Chris Lomuto
This is sort of walking through the math for sale leaseback to get to what we think real estate might be worth in a sale leaseback and what you'd be paying in rent as a franchisee in that sale leaseback. And it's not complicated math at all. And so for anyone that's looking at the screen, these top five here in the model just says, take your four-wall EBITDA for that given restaurant, divide that number by two to three, and we'll get into two versus three, but suffice it to say it's market-driven. You're probably safest if you want to be safe for back of the napkin, use 2 1/2. So take your floor wall EBITDA of that store, divide that by 2 1/2. That will give you pretty good indication of what your first year's rent should be. A broker like me would, in step 1A, I'm saying a broker like me would sanity check that resulting rent number against comparable real estate and comparable QSR deals to make sure, like, okay, if we take your four-wall EBITDA divided by 2 1/2, is this putting us somewhere in the range that's appropriate for this real estate? So we'll do the sanity check. We'll then put a cap rate on that year one rent figure. So we'll take that year one rent, we'll divide it by the cap rate. Let's say it's 5.75%. So we'll divide your rent number by 5.75%. That's your asking price. right? Then with the help of your broker, you can do it yourself, but either by yourself or with the help of your broker, you'll kind of try to understand relative to our asking price, where are we likely to land on our closing price or our closing cap rate? And then to get to the net proceeds, what you actually take home before tax, we would subtract the closing costs from the closing price, right? And so then down below, I just ran you through the actual math. So we're saying, okay, hypothetical deal, 325,000 in store level EBITDA. We'll divide that. In this case, I said, let's divide it by 2.0. That gives you a year one rent of 162,000 and change. We take that 162,000 and change of first year rent. We divide that by 5 3/4 percent cap rate, which is market determined. I'll help you estimate it. that would get us to an asking price of a little over 2.8 million. We would make a reasonable estimate as to how close to the asking cap rate we can get, right? Where's the market likely to close? In this kind of hypothetical model, I said, okay, well, if we're asking five and three quarter cap, we'll probably close it. Six cap would mean the price of 2.7 million and change. And then there's probably 5% of closing costs, which is brokerage commissions and title insurance and things like that. So if we land at a number of around 2.7 million, subtract 5% closing costs, that gets us to net proceeds before tax of just under 2.6 million.
Rick Ormsby
Yeah, it's great. Thank you for that. Of course, people call us all the time to help them value the restaurant, restaurant real estate. I would just say that there are certain maximum rent numbers that franchisors are going to allow, which is typically around 8% is what we set the maximum rents. And then we will run the rent coverages backwards to see if at 8% there's significant, there's substantial rent coverage ratio. And if there isn't, then we back the rent down until we get into that, into a reasonable rent coverage ratio to come up with a price. But you know, if you're operating an industrial complex or you're operating a warehouse facility, determining that rent doesn't necessarily have to fit those rental guidelines that the franchisors are pushing for to make sure their clients aren't, you know, their franchisees aren't over levered. because the rent is the first thing that goes haywire if sales go down. And so they're protective and don't want franchisees to have rents over 9 or 10%. Obviously, it affects the quality of the franchisee when times are difficult. Go ahead, though. There's another graph that talks about annual, average annual rents. Interesting graph here.
Chris Lomuto
To your point a minute ago about rents, It's always helpful when you're talking about, say, a leaseback to understand, okay, well, what's reasonable on rents? How do, whether you get to the rents by EBITDA coverage. which is kind of what I was talking about a minute ago. Or the other way that you hear it talked about a lot is what you talked about in terms of rent sales, right? Eight, 8 or 9% of sales use that to establish rent. They're both valid ways to get there. Arguably, rent to sales are probably the more commonly 1 used. But whatever the case, you know, you put 8% on the sales or you do your rent coverage and you get to some number. And I earlier said, you know, you want to put that in context. Well, this is that context. So this is tracking the rents as quoted or QSR sale leaseback and new build real estate deals over the last four years, right? I mean, just average of all the sale leaseback and new build QSR deals in the last four years, what did those rent numbers look like and how's that changed? And so in 2021, the average new build and sale leaseback QSR deal reported that the tenant was paying 120,000 a year in rent, 10,000 a month. Whereas in 2025, we're now up to an average of around 154,000. So if you like do your rent coverage and you arrive at rents that are like $400,000 a year, okay, well, we're going to be several orders of magnitude above the average, which may be okay, but at that point, you definitely want a broker to look at that real estate and give you a sense of like, okay, yeah, considering that we're in a super wealthy area in front of a brand new shopping center with the best of the best retail anchors, that those kind of rents might make sense and the market might tolerate those. Whereas if we're out in a greenfield in the middle of the country, The market may resist, the market will resist in that case, rents that are orders of magnitude above the average. They're going to want to, the market's going to want to push those rents down because they're going to feel like the deal has a lot of risk.
Rick Ormsby
That's great. So it's a great sanity check to look at what the average rent paid by a QSR tenant is. when determining what the rent we should use when we apply the cap rate to it to determine the value of the real estate. And let me give you an example that we can talk about quickly, like for our friends on the call here who operate 7 Brew, for example, or the Dutch Bros, or some of these concepts that have tiny real estate footprints. and are absolutely just cranking sales out of these small locations. When, on the other hand, you could have the opposite effect, right? Where you have a legacy brand that's doing 1,000,001 in sales on a nice piece of real estate, where the real estate itself is worth more as a separate use than it is as an actual operating business. Now, both of those exist, but let's talk about the Seven Brew example. You pulled up a chart here.
Chris Lomuto
I was ready for you.
Rick Ormsby
Knew I was going to say it, didn't you?
Chris Lomuto
I did. Yeah. And it's topical too, because there's been a lot of 7 Brew inventory that's under the triple down real estate market in the last 12 to 18 months, I would say. So yeah, because we were talking about 7 Brew the other day, for myself, I said, oh, well, let's just look at where 7 Brew rents are. What this chart is showing is how popular different levels of rent are when we survey all the Seven Brew deals that have come to the market. How popular or how often do we see different levels of rent? So for example, the most popular bucket, when we divide up buckets of annual rent between the different sites that have come to market, $75,000 to $100,000 a year is the most common kind of level of rent that we've seen for Seven Brew deals that have come to market. But there's 3% of the deals that have come to market have been showing rents higher than 175,000 a year.
Rick Ormsby
Read the numbers that the percentage is out for people who are only going to be listening just real quickly. So it's hard to see. So 14% of the time, the Seven Brew rents have been less than what, $75,000 a year?
Chris Lomuto
That's right.
Rick Ormsby
And then what do we have here? 34% of the time the rents have been between 75 and 100K. 20% of the time we've been between 100,000 and $125,000 in annual rent. 19% of the time between 125,000 and 150,000 annual rent. 10% of the time between 159,000 and $175,000 in annual rent, and then only 3% of the time above 175,000 annual rent. Do you project that number might move a little bit if, and it's, this is 7brew, but it could be any brand, if the performance starts to ramp up in the stores and get stronger, could you see that shift a little bit more towards the higher value rent?
Chris Lomuto
I would say yes, for sure over time it will be the franchisees in aggregate, the franchisees over time pushing those rent numbers higher. And a lot of that comes from M&A, the M&A market. As we start to see M&A deals in 7 Brew, what's likely to happen is franchisees will say, hey, people like us will get a call from a franchisee that says, hey, I'm looking at this 20 unit 7 Brew package for one of my competitors who's retiring. You know, there's 19 parcels of real estate here. Can you find me someone to do a sale leaseback so that I can execute this acquisition right now? And the franchisees collectively in those situations will be telling their brokers, people like me, how much money can we squeeze out of this real estate in the sale leaseback? Because the more money we get out of the sale leaseback, the less capital they have to bring. to buy the operations of the company.
Rick Ormsby
Yeah, the value, the more money you can put on the real estate side, obviously, the less money you have to fund on the business side and the less money you have to borrow. In one sense, it's one exchanging one piece of debt for the other because the obligation to be a landlord, you know, to be a tenant, it's a similar obligation. You've got to pay somebody a certain amount of money over time, but that stream of payments is valued higher than the multiple of the business in most cases, especially with some of of these legacy brands. Now, 7 Brew and some of the other ones, like we're doing a lot of business in like Wing Stops and Taco Bells and some of these businesses have really high trade at really high multiples of EBITDA. So that gap is a lot less. But if you're talking about some of the other legacy brands where you only get a five times EBITDA multiple, but you have cap rates in the sixes, there's a big delta between the difference in the financing method. Now, Chris, we've got about 9 minutes. Is there one more graph you want to show us that we can talk through really quickly? And then I want to really I do want to hit a couple of these questions that I know everyone will have. If you have one more graph to talk about, which one would it be?
Chris Lomuto
I mean, I like them all. I guess I would say this one quickly.
Rick Ormsby
Days on the market?
Chris Lomuto
Yeah, days on market. This is kind of from list to close. From the day you put the ad out saying this property's for sale to the day you close. Those transactions were going really fast at the peak of the market early 2022. As you can imagine, they slowed down quite a bit going into, 23 and 24. They seem to be falling again, where the deals that are selling seem to be selling more quickly. And I would say anecdotally that feels right. It took forever to get a deal sold earlier in the last few years, whereas now they're starting to move a little bit more quickly. That doesn't mean they're all selling, but the ones that are selling are moving more quickly than they were.
Rick Ormsby
So it looks like we were in the 200 to 210 days on the market kind of time frame over the last five or six quarters. And maybe it's just a blip, but we're hoping that that number kind of shifts down into the 170 to 180 range, which when things take longer, there's less time to sell, that typically is a healthy sign for the market that there's a better, you know, kind of supply demand kind of.
Chris Lomuto
That's right. Yeah, better balance. Yeah.
Rick Ormsby
So, you know, but that number was really low. When it was at its lowest, it was like 130 days, you know, so that's like, if you're doing 130 days to sell something, That means you've got it on the market, you find the buyers in two weeks, and then you basically go through 90 days of closing and the deal's closed, bam, like this, right? In the case where you have 200 to 210 days, you're sitting there on the market for 90 to 120 days or more before you find your offer that you're going to accept. And then you have your 90 day closing. Something like that is how you might think about it.
Chris Lomuto
Yeah, that's right. I might like tweak exactly where you landed in terms of dividing up the calendar, but yeah, that's the idea. And then without diving into the numbers, you get to some really interesting stuff when you start to kind of look at percentiles. And the point, the reason I think it's interesting is that if you just look at all the transactions, over thousands of transactions, you arrive at some data that helps you sort of figure out like, okay, the median deal over all QSR, both sale, lease back, new build and legacy deals, all of it, the median over the last four years was 137 days list to close. Okay, that's fine, whatever. But what it does tell you is like, okay, if I'm in day 215 of this listing, I've got real estate on the market for 215 days already, there's only a 25% odds that I'm going to actually sell this at all, right? If I haven't sold by day 215, there's 75% odds that's probably not going to sell at all, at least at the pricing that you're at.
Rick Ormsby
So what I'm seeing here is with this graph and just a general commentary is you've got a segment of the marketplace that's way overpriced and not dropping their price and not closing, basically. In our business, when that happens, It is a massively terrible thing. If you're here and listening, having unrealistic expectations when your business is on the market is one of the worst things that you can do. Because then, obviously, you risk confidentiality with your employees. The business becomes like spilled milk or tired, and then they take it off the market. It doesn't sell. In our business, when you put a business back on the market after not selling it a year previous, it usually attracts 10 to 15% lower price because people just will look at it and say, it didn't sell the first time. There must be something wrong with it. I know the real estate, it's much more a factor of just kind of a linear factor of the price was too high, therefore it didn't sell. Drop price and it will sell a little bit more. But I know there's probably a little bit of that in your segment as well. But let me pivot in the last couple of minutes. 30 second answers. Ready.
Chris Lomuto
Speed round.
Rick Ormsby
Big, beautiful bill, Trump's tax bill. Tell me why that's exciting for you guys, quickly.
Chris Lomuto
I think there are several reasons, but one common one that gets brought up is depreciation. As buyers of real estate, we're now able to take advantage of accelerated depreciation as we were earlier, going back to 2017. That was being unwound, but we can do it again. And that helps once again make real estate incrementally more attractive. to people, they now have tax advantages restored that had been unwinding over the last few years. So it makes real estate a little bit more attractive again.
Rick Ormsby
Very, very powerful to be able to have the accelerated depreciation and then do cost segregation and get this massive tax goody in your back pocket when you buy a piece of real estate in year one now with the new bill. Here's another one. How does the corporate guarantee change? the pricing of a piece of real estate relative to a franchisee that doesn't. The franchisees are looking at these cap rates and they're not overly achievable in all cases, right? You've got numbers in here that are like Starbucks corporate is guaranteeing the lease, and of course that's going to drop the cap rate precipitously.
Chris Lomuto
Speed route answer, it will depend. It will depend because not all franchisors are equal and not all franchisees are equal. So in general, A strong franchisor versus a strong franchisee, that spread could be down to 25 basis points. Back in the day when we were comparing Carroll's Corp deals to the franchisor, the spread wasn't that big. But if you wanted to say like 50 to 100 basis points, generally speaking between like your average franchisor and your average franchisee, that's probably close. 100 basis points maybe is probably reasonable. Probably something similar to that, between a big and a small franchisee.
Rick Ormsby
Yeah. Maybe 50 to 100 basis points. And I'm sorry to cut you off. We got one more minute. All right. I want to get to this last question. And we're very thankful for your time. And it's been a really good, really good discussion. Real quick view on 2026, are you optimistic? Are you pessimistic? Do you think prices are going to rise? The supply and demand curve is going to come back together a little bit. We're going to have a healthier market in 2026, or is the whole world going to fall apart?
Chris Lomuto
I think so. I'm cautiously optimistic. I think it depends on your worldview. If your worldview is that in the grand scheme of things, 2026 is likely to be incrementally better than 2025, I think that gives you a view of triple net real estate. that aligns with that. If your worldview is like, oh, things are about to break loose and we may be in trouble, AI asset bubble may be about to burst, then that may not be so good for triple amount real estate. We'll see. But generally, me personally, I tend to think 2026 is going to be incrementally better than 25, and it looks like 25 is shaping up to be a good year.
Rick Ormsby
And we have interest rate reductions on the horizon typically, we're expecting for 2026. Who knows how much or when that'll happen. But thank you so much, Chris. Thank you for everyone who has watched and who will listen. We'll put this out on the Restaurant Boiler Room. If you have questions, always reach out and then we'll get a link to the webinar out to you via e-mail. Thanks so much again. It's been a joy having you again, Chris, and best wishes and blessings to you and your business.
Chris Lomuto
Rick, I hope that what you and I did here comes close to some of the other stuff that I've seen you do with your team, because I watch your stuff as well. You're just a tremendous resource to everyone in your industry and in my industry, to be honest. I mean, we learn a lot from you guys. And so if I got anywhere close to that, then I'm very proud of myself. What can I say?
Rick Ormsby
I think you eclipsed it times 100. Thank you, man. And thanks again. Appreciate you being here. And for the kind words. Thanks so much for entering the boiler room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review. I 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 therefrom.