Cap rates in the net lease casual dining restaurant sector were 5.75% in the first quarter of 2016. Casual dining restaurant properties with corporately guaranteed leases had cap rates of 5.65% while franchisee leased properties were priced 65 basis points higher at 6.30%.
Cap rates for casual dining restaurant properties will vary depending on if the lease is guaranteed by a franchisee or corporate operator. In the first quarter of 2016, franchisee backed casual dining restaurants accounted for only 31% of the overall supply of casual dining restaurants. Franchisee operated restaurants were priced at a 65 basis point discount compared to corporate backed restaurants. Additionally, cap rates for franchisee backed restaurants can fluctuate depending on the financial strength and size of the franchisee.
Investor demand for single tenant casual dining restaurant properties can be illustrated by the 43 basis point cap rate premium over the entire net lease retail sector (6.18%). Net lease investors have targeted the casual dining sector as it is one of the few net lease sectors that is e-commerce resistant. Private and 1031 exchange buyers are attracted to casual dining restaurant properties as they are frequently absolute triple net and feature rental escalations during the primary lease term. Additionally, casual dining restaurant properties feature recognizable tenants and are typically located in highly visible locations in retail corridors. In the first quarter of 2016, private buyers accounted for 93% of all single tenant casual dining restaurant transactions outside of portfolio sales. During the same time period, REITs and institutional investors accounted for 75% of all portfolio transactions involving casual dining restaurants.
Sale leaseback transactions by large corporate operators such as Darden, Bloomin’ Brands and Bob Evans have been able to boost supply of single tenant casual dining restaurant properties for sale. In the current low cap rate environment, operators are able to unlock the value of their owned real estate and are able to use the capital proceeds for repayment of debt or stock buyback programs. The expectation is that the sale leaseback market will remain active as operators will attempt to take advantage of the low cap rate environment.
The single tenant net lease casual dining restaurant sector will remain active as this asset type continues to attract private and 1031 exchange investors. The rental escalations and absolute net lease language found in the majority of the leases associated with casual dining restaurants are attractive to private and 1031 buyers. Corporately guaranteed leases will remain in the highest demand among private investors due to the strength of credit associated with the assets. REITs and institutional investors will continue to seek larger portfolios of casual dining restaurant properties via sale leaseback transactions. Portfolio transactions typically allow economies of scale and higher yields compared to acquisitions on a one-off basis.
About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group.