Marcus & Millichap is known for the intelligence it puts forth on commercial real estate in individual markets nationwide, and Barry Wolfe is one of its most active providers. The senior managing director of investments is an information faucet, and a colorful one at that. Go to LinkedIn and check out his horse race announcer’s voice-over of a video charting the changing places of top QSR chains over the past 50 years and see. Barry recently tipped us off to the growing role of sale-leasebacks during the COVID-19 pandemic, and we felt compelled to share what he had to say.
Are there reasons that operators that did not pursue sale-leasebacks pre-C0VID-19 may want to consider doing so now?
Yes, there definitely are. In times of uncertainty, cash is king, and if you’re a restaurant or a drug chain or an auto parts retailer that owns your properties, you have the ability to improve your liquidity and work out a lease with the buyer that keeps you in business at a good location for the next 15 or 20 years. I’m generally a fan of an operator owning the real estate, but in times like this, when a lot of operators are struggling, there’s an opportunity to acquire other great locations. But what it takes is cash, and banks are hardly lending. Sale-leasebacks can give strong operators the liquidity to expand.
Are market conditions favorable for pursuing this strategy right now?
It depends on the business you’re in. If you have a drive-through restaurant business and decent financials, it’s a great time right now to sell. Medical services is another very favorable category. But if you own a business center or casual dining establishment, it’s probably not a very good time to do this.
Explain the difference between high-risk and low-risk CAP rates.
A low-risk CAP rate is going to be a Chick-fil-A or a Taco Bell franchisee. You’re going to have a lower but steadier annual return on investment, and that’s favorable to the operator. Whereas if you buy a gym, you’re going to get a higher reward, but also a higher risk. So if you own a gym and you can sell it now, you’ll get cash and reduce your risk and you’ll work out a favorable lease that will still have you running the business for a long time.
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It appears that some brands like Dollar General, Burger King, and Advance Auto Parts have been making lots of deals. Is it because of the nature of their businesses, or is it because of location?
It’s both. These companies are big nationwide chains, and they’re also real estate developers. They’re expanding. Dollar General has been adding 800 to 1,000 units a year for the last decade. QSRs like Burger King and auto parts chains have done well heading into the COVID crisis and are still doing well. There are companies that have been hoarding cash and see this as a good time to acquire great locations. If I’m a five-unit Taco Bell franchisee who’s got cash and is able to buy, maybe three years from now I’ve got 40 units. If you have the capital, this is an opportunistic time to grow.
Has your national sale-leaseback team been especially busy during the pandemic?
Most definitely. Since March, we've closed on 17 sales spanning the QSR, grocery, automotive, convenience store, dollar store, medical, and drug store sectors—and that included medical-use cannabis. There are investors out there looking for real estate and pricing is aggressive. The pandemic has caused a lot of distress, but it’s not distressed pricing in commercial real estate.