Cap rates for corporate Triple Net QSR properties decreased to a 5.25% cap rate while QSR properties leased to franchisees also declined to a 6% cap rate. One of the primary reasons that net lease investors are targeting this sector is the financial transparency these assets typically offer. Landlords are able to demonstrate performance through store level sales, tenant financials and profit & loss statements, providing investors a level of transparency in many instances. The Triple Net QSR sector continues to be a popular with 1031 investors as the QSR sector is e-commerce resistant and service oriented.
Triple Net QSR
Within the Triple Net QSR sector, the financial backing of a lease can vary from a corporate guarantee from a large, public company like McDonald’s down to a franchisee with a single location. Accordingly, cap rates can vary drastically depending on the financial strength of the tenant. Thus, corporately backed leases generate a 50 basis point premium over its franchisee backed counterparts. One of the main benefits to franchisee backed leases is that they typically contain provisions that require the tenant to share store sales with the landlord. Investors gravitate to the QSR market as it offers a lower price alternative to dollar stores and auto part retailers. Contrary to dollar and auto part stores, the leases associated with Triple Net QSR properties frequently have rental escalations every five years or on an annual basis.
Casual Dining
In 2015, casual dining properties were priced at a 50 basis point premium over net lease retail. The overall casual dining segment continues to experience headwinds from fast casual concepts including Panera Bread and MOD Pizza as millennial dining habits continue to alter the industry with a greater focus on delivery and fast and fresh options. Accordingly, the casual dining sector experienced a more rapid cap rate expansion than the overall net lease retail sector. Year over year, the casual dining segment experienced a widening of cap rates by 35 basis points, while net lease retail increased by 22 basis points. Accordingly, the casual dining sector was priced at a slight discount to the overall net lease retail sector. Regardless of the challenges experienced by the casual dining sector, this property type continues to garner significant investor demand. Investors have been cognizant of struggling brands including Applebee’s; as its second largest franchisee filed bankruptcy in 2018. Accordingly, investors have been targeting brands that have been performing well in the current environment like Olive Garden, Texas Roadhouse, Chili’s, LongHorn Steakhouse, etc.
Statistics of note
Triple Net QSR NNN properties: average cap rates hover over 5.5%. Pizza Hut leads the way with 6.5% with Burger King and KFC close behind at 6% cap. Dunkin Donuts, Taco Bell and Wendys trade at 5.5% or so. The average Triple Net QSR property is priced at $2.0 MM. Panera and Chic FilA command premium pricing at or more than $3.0 MM. Starbucks. Taco Bell and Wendys sell for $2MM, while McDonalds, Burger King and Dunkin trade between between $1.7 – $2.0 MM.
In contrast, Casual Dining Properties are more expensive, with average prices at or near $3.0MM. Outback Steakhouse and Red Lobster trade for around $4.0MM. Buffalo Wild Wings, Applebees, Hooters, Chilis, TGI, and the like sell for $3.0 MM. Texas Roadhouse brings up the rear at $2.2 MM. The cap rates vary by lease terms, so longer leases over 20 years, trade at around 5.8% cap while properties with short lease terms will go for up to 7.2% cap.
If you are interested in the purchase or sale of a Triple Net QSR property contact the experts at Triple Net Investment Group to get started.
