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Investors Eating Up Fast Food Properties

Rising Interest Rates Could Take a Bite Out of Deal Pace, However
December 4, 2013
SOURCE: CoStar COMPS Analytics
SOURCE: CoStar COMPS Analytics
The appetite for fast food restaurants continues with sales of such properties on pace again this year to exceed more than $1.2 billion as they did last year. Those amounts top the combined totals for 2010 and 2011.

In the latest major acquisition, Centre Partners, a leading middle market private equity firm, acquired Captain D's Holding Corp. a leading national chain of 521 seafood-themed fast-casual restaurants in 26 states. Terms of the private transaction were not disclosed.

Captain D's senior management team will own a significant stake in the business and continue to serve in their current roles.

The seller was Sun Capital Partners Inc.

In another notable set of deals that closed just before this past Thanksgiving, an entity affiliated with New York-based American Realty Capital Trust V Inc. purchased and leased back 41 Burger King restaurants across Illinois, Ohio and Pennsylvania for a total of $63.2 million, averaging $1.54 million per eatery.

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The leases were 20-year, absolute NNN deals.

A cap rate of 7.04% was reported by a market source with knowledge of the transaction.

The seller/lessee, affiliates of Toms King Services LLC, originally rolled up ownership of the properties mostly in the spring of 2012.

Not only is the volume of deals running at a significant pace, the average sales price is increasing rapidly.

In the second quarter of 2012, the average sale price per eatery was coming in at $405/square foot. So far this quarter, they have been averaging $580/square foot. That is a 43% increase, according to CoStar COMPs data.

The only thing inhibiting investor demand at this point is a limited availability of product, according to Cassidy Turley’s Single Tenant Net Lease Overview issued last month.

Going forward, the trend of rising prices could slow or flatten if interest rate hikes hit next year as many anticipate, the report noted.

The average capitalization rate for fast food deals that closed in the third quarter of 2013 was 6.9%, according Cassidy Turley. That compares to an average of 6.5% in the second and a reading of 7 a year ago.

“In general, we are seeing first-tier fast food properties moving with cap rates below the 6% mark nationally, though we have seen some top quality assets (great location in strong market) with the most desirable long-term tenancy in place (McDonald’s., Chick fil-A, In-N-Out, etc.) trade with caps heading into the 4% range,” the report noted.

Second-tier fast food properties are averaging in the 6% to 8% rate nationally. Third-tier and/or value-add fast food properties are generally trading with cap rates above the 8% mark everywhere.

Cap rates too could likely increase by the final half of 2014 if interest rates rise. However, continued intense competition for first-tier fast food opportunities will mean less of an uptick for these properties, Cassidy Turley noted.

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