Ownership in the quick-service sector can provide many benefits. But before committing to a fast-food restaurant outlay, buyers need to understand the ingredients making up a QSR net lease investment.
Calkain, in the past, has pointed out the benefits of net lease ownership in the quick-service restaurant sector (QSR). From an investment perspective, fast-food restaurants provide an attractive entry price point, along with steady income, high visibility/access to customers and stable cap rates.
However, much as there are differences between fast-food menus, not all QSR assets are the same. In the spirit of this topic, the investor needs to understand the ingredients of a net lease product to ensure investment success.
First, the basics. QSR real estate is generally stand-alone, situated on pad sites with drive-through service and, more often than not, located near larger retail centers or on major retail corridors. The restaurants offer lower price points for food items, a basic menu and little, if any, table service. Fast-food customers are more likely to take out, rather than dine in (on-site playgrounds and play areas notwithstanding).
However, just as the menu offerings at an Arby’s differs from that of a Dunkin, QSR net leases can differ as well.
QSR net lease investments typically are offered in either fee simple or ground lease formats. On a fee simple basis, the investor owns both building and land. In the ground lease arrangement, the investor owns the land beneath the building but the building itself belongs to the tenant. While examples can be found of any tenant in either arrangement, Chik-Fil-A and McDonalds are usually ground leases, while Burger Kings can readily be found in either format. So too for Dunkin’ and KFC.
According to the most recent Calkain QSR report (Q2 2019), the average cap rate for QSR properties was 5.74%. That metric, however, is the average. Cap rates can ranged from 4.3% (Chick-Fil-A) to 6.9% (Church’s). Both of these companies sell chicken and are backed by their national corporations. But lease structures, rent rates, demand, geography and other factors can impact the property values.
As a sector, the QSR sector will typically have creditworthy tenants but that backing doesn’t always come from the corporate level. A McDonald’s or Chick-Fil-A net lease will be backed with by a large corporate parent company. However, KFC, Dunkin’ and Burger King restaurants are often dependent on a franchisee’s creditworthiness. A franchisee that owns five KFC restaurants is going to be a higher credit risk than Chick-Fil-A, which backs all 2,000-plus restaurants at the corporate level.
To conclude, while a customer can always count on the same Burger King Whopper or a Starbucks Venti latte whether those restaurants are in Portland, Oregon or Portland, Maine, not all QSR net lease investments are alike. To ensure a recipe for success, the wise investor should thoroughly understand the ingredients making up a particular net lease asset.