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Second-Largest Applebee's Franchisee Files for Bankruptcy Restructuring

RMH Franchise Operates 159 of the Popular Eateries
May 11, 2018
Facing a potential loss of some of its franchise rights, RMH Franchise Holdings Inc., the second-largest franchisee of Applebee's restaurants, has filed a petition for relief under Chapter 11 in the Bankruptcy Court.

Headquartered in Atlanta, RMH operates 159 restaurants across 15 states that combined represent slightly less than 10 percent of all Applebee's locations.

"Significant challenges encountered by the Applebee's brand generally, and specific managerial decisions made on behalf of it by its franchisor, Applebee's International Inc. have negatively impacted the debtors' business operations and left them facing near-term liquidity issues," Mitchell Blocher, chief financial officer of RMH argued in bankruptcy court filings.

Applebee's International is a division of publicly traded Dine Brands Global.

Blocher said RMH had been in extended negotiations on a number of issues relating to the operation of its business. However, just prior to the bankruptcy filing this week, Applebee's unexpectedly indicated that it intended to issue a notice of termination of RMH's franchise rights relating to locations in Arizona and Texas.

RMH operates 38 restaurants in the two states.

Adding to the issues, the so-called "brass-and-plant" casual dining restaurant concept has seen better days. Average annual revenues for all franchised locations have been on a fairly steady decline: $2.35 million in 2015, $2.18 million in 2016, and $2.09 million last year, according to Dine Brands data.

However, the brand has started to post a modest recovery of late. Applebee's domestic same-restaurant sales increased 1.3% for the three months ended Dec. 31, 2017 from the same period in 2016, the first quarterly increase in two and a half years.

Specifically for RMH, for the trailing 12 months ending March 31, 2018, RMH generated $375.9 million in gross revenue, and $12.6 million of operating earnings, a drop of roughly 60% in two years from peaks of $431.1 million and $31.4 million.

It has not helped that Applebee's has had four presidents since the beginning of 2014, each coming in with a different set of initiatives for franchisees, and which called for additional capital expenditures from franchisees, Blocher said.

Dine Brands representatives told CoStar, "Over the last year, we have worked alongside our franchisees to return Applebee's to positive traffic and sales while consistently out-performing the [casual dining restaurant] category. While this situation is rare and unfortunate, we're pleased with our collective progress at Applebee's and very optimistic about our future, and the future of our franchisees. However, we can't comment on specific litigation."

Dine Brand has previously reported that it is continuing to selectively refine its franchisee portfolio by shifting assets to other existing franchisees, as well as some franchisees new to the system. The most recent example of this was the acquisition of a small number of restaurants in South Dakota, Nebraska and Iowa by the Legacy Apple, one of its existing franchisees.

The company has reported that it anticipates making a handful of additional transactions this year.

Last summer, RMH hired Hilco Real Estate to renegotiate and/or amend leases to get lower rents, or negotiate lease terminations where appropriate. There has been no filings yet in the bankruptcy case concerning potential store closings.
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