Buyouts, Bankruptcies, & Burgers
Wendy’s Set to Close 140 Locations in Q4
Wendy’s plans to close a substantial number of outdated, underperforming restaurants across various markets nationwide. These closures will primarily affect locations with an average unit volume (AUV) near $1.1 million, resulting in slimmer operating margins. In the first nine months of 2024, Wendy’s closed 111 units, mostly franchised. This trend is expected to impact the value and, more importantly, sentiment towards Wendy’s assets, particularly in locations where sales are not reported.
Operator Buyouts
As 2024 winds down and we head into the new year, a big talking point with Wendy’s is the behind-the-door consolidation of these smaller operators. Over five operators with fewer than 20 units have now sold off their operations to the larger groups, as they were unable to keep up with rising labor, operational, and food costs. The largest buyout thus far has been that of the Braid Group, which sold about 80 sites to Flynn Restaurant Group.
Starboard & Sale-Leaseback Risks
At this time last year, Starboard Group filed for Chapter 11 bankruptcy, which ultimately settled in late Q2 and early Q3 of this year, reducing their locations from over 100 to 0, according to their website. A primary factor in this bankruptcy filing was their aggressive rent structure, applied during sale-leasebacks. Typically, these rents are set at a percentage of the rent or, if newly developed, at a rent where, once a cap rate is applied, it covers the developer’s spread on construction costs. The risk in buying these deals is that the rent is often too aggressive for the property’s actual market. This puts the landlord at risk if the store underperforms, and potentially forcing the operator to request a rent reduction.
Corporate Offering Lease Buyout and Closing Stores
Since September, owners have received calls from the corporation requesting either a lease buyout or a significant rent reduction at their locations. Such requests occur exclusively at Wendy’s locations where Corporate is guaranteeing the lease. However, one of the larger operators in the system, Meritage Hospitality Group, is facing similar circumstances. These requests come in light of an expected poor Q3 earnings report by Corporate and the ongoing operational headwinds everyone is feeling. As a result, owners are left with vacant stores and properties worth significantly less than if it were leased.
Deals On Market
- Total Active Listings: 52
- Average Term: 15.15 years
- Sale-Leasebacks: 29 of 52 Active Listings
- Average Cap: 5.45%
- Average Price: $2,454,704
- Average Days on Market: 92.8 days
- Average Rent: $133,781
As of 10/02/2024
Market Sentiment
As most owners are aware, the current market climate has been challenging for both buyers and sellers. There is a significant backlog of inventory, with properties lingering on the market as buyers wait for interest rates to decrease to make investments more viable. Meanwhile, sellers are holding on to 2021-2022 pricing expectations, creating a disconnect between buyers and sellers across the industry. The transactions that are closing typically involve properties with one or more of the following characteristics: strong underlying real estate, new construction, long base lease terms (15+ years), and strong guarantees. An uptick in transactions is anticipated once the presidential race is complete and as the new year approaches.
