Discussing the state of the restaurant finance world, panellists were certain of one thing: uncertainty, as four active dealmakers agreed during the event Restaurant Finance Weeksponsored by Franchise Times and the Restaurant Finance Monitor.
“Right now every day is a little bit different, probably more unpredictable than ever before in my career. We spend a lot of time holding hands. It is very difficult to plan at the moment which makes it difficult for customers. They want to know what’s in store for us,” said Carty Davis of C Squared Advisors.
“We’ve spent a lot of time helping groups through PPP requests and now PPP forgiveness,” he said, referring to the paycheck protection program introduced in April as part of pandemic assistance to business owners. “Capital is unpredictable and uncertain. It’s shifting, it’s bank specific or lender specific or lender specific. It’s difficult for lenders because we don’t know what’s going to happen with COVID.”
Davis had specific advice for the multi-unit restaurateurs his company serves. “We expect the next six to nine months to be the largest capital movement we have ever seen in the industry. We believe there are a number of issues that have been obscured by PPP loans that people need to address early in 2021,” he said.
“The best advice we can give clients and prospects is: put your 2021 capital plan together, put your 2022 capital plan together, sit down with your financier and ask some really tough questions: will they be there be to support you? How will they deal with alliances?”
He envisions three “buckets” of lenders and other funding sources: those who are actively underwriting customers and gaining market share; those that only support existing customers; and those who will exit the restaurant financing business altogether. “So now you have to find out,” Davis said.
Fifth Third Bank’s Craig Wolf contrasted the early days of the shutdowns, which began in March, with the recent ones. “Let me talk about the first 90 days. A lot of time has been spent on PPP lending to help our clients get liquidity. If you look at the last 90 days, we’ve seen a lot of stabilization and a lot of new business flow, especially in the QSR space. We looked at some limited mergers and acquisitions,” he said.
“Some of the concepts that were hit harder, you’ve seen agreements being worked out, changes were made by the middle of next year. I’m encouraged by what we’ve seen with the stabilization. It’s an uncertain time, and it’s peaked in the last few weeks, but the last 90 days have been very different.”
Casual and family dining concepts will find it hardest to attract capital, panellists also agreed. “That’s a tough question,” said Tim Morris, Pinnacle Commercial Capital, of closing a casual deal today. “We’ve been here for eight months. We’ll have a little experience of how operators of different brands have adapted and really look at and focus on those who are capable off-premises.”
Geography and weather will also play a role, for example with casual guests in Minneapolis who have now been able to dine alfresco closed due to the cold. “I think it’s going to take some more time to see that performance and have the operations teams prove that,” Morris said.
Matthews Real Estate’s Gary Chou also compared the two (so far) eras of COVID. “The first three months were emergency operations. We’ve helped tenants and landlords adjust their rent. At that point, it was frankly a mess to find creative ways to hold businesses together, pause them, or just let them die,” he said. The last three months have brought a “pleasant” turnaround. “Lenders are more positive about real estate and you’re starting to see the buyer of choice coming back into the market and that’s been a big benefit for capital availability.”
Moderator John Hamburger, editor of Restaurant Finance Monitor, said restaurant refinancing and recapitalization has “been a big part of the business for the last five, six, seven years”. Are panelists looking back on new unit development in 2021?
“I do. I see accelerated unit development for a number of reasons,” Davis said. “Tier 1 QSRs make very good returns. Franchisors know this and they will try to get some of that money for reimaging, new development and now conversions.
“You’re going to see some property availability in 2021 with restaurants closed, with some independents that have closed, and the larger Tier 1 franchisors are revamping their boxes for efficiency,” he said.
Redesign or new development requests that have been paused during COVID are coming back online. “Most people got a pass for 2020,” but that’s about to change, Davis said. “We are working with our clients on capital planning in 2021 and 2022 because it is time for them to present those plans to their lenders,” he said, concluding with certainty: “Tier 1 profitability franchisees with drive-thrus will lead to accelerated development.”