Why Smart Investors Choose QSR and Healthcare Real Estate Sale Leasebacks

Debt capital costs have doubled in the last two years. This has pushed healthcare real estate operators and restaurant chains to look for different ways to finance their operations. Many businesses now turn to sale leaseback deals to free up their property’s capital because Federal Reserve rate hikes cut into their profits.

QSR real estate stands out as an attractive option, especially when you have most sale leasebacks hitting 13 to 15 times multiples. Some deals are a big deal as it means that they go beyond 16x. The healthcare real estate sector keeps growing too. Senior housing occupancy hit 82.2% in Q3 2022 – up 4.3% from pandemic lows. Commercial real estate developers across Florida and nationwide have noticed how stable these sectors remain during shaky economic times.

Red Robin showed how well this strategy works when they completed sale leaseback deals for 27 properties. They raised $84 million to cut debt and invest in capital improvements. JoJo’s ShakeBAR found success too. They used new financing platforms to get non-equity capital, which helped boost their top-line revenue by 30% after opening more locations.

This piece looks at why QSR and healthcare property owners choose sale leasebacks more often now. We’ll compare them to regular financing options and share what investors need to know before jumping in.

Why Sale Leasebacks Work for Healthcare and QSR Real Estate 

Sale leaseback transactions are a great way to get unique advantages for both QSR and healthcare operators who face capital constraints. These deals have become popular as practical financing solutions now that debt has become more expensive.

Freeing up money from owned real estate

Sale leasebacks let QSR and healthcare businesses get the full value from their property assets. Traditional financing only provides 70-80% of a property’s appraised value. SLBs let operators access 100% of their real estate equity. This complete release of capital gives them lots of financial flexibility. They can use this money to fund new locations, upgrade equipment, reduce debt, or finance acquisitions.

Healthcare providers can use this money to close the “gap” between their current finances and bigger strategic plans. Urgent care facilities put this freed-up capital to work by growing their practices, buying new locations, or investing in cutting-edge medical equipment.

Long-term lease structure and stability

The life-blood of successful SLBs lies in their long-term lease structure. Most deals run for 15+ years with optional renewals extending an additional 20+ years. This means operators keep control for 35-40 years. They get predictable operating costs while keeping the same control they had with ownership.

Well-structured SLBs let healthcare operators write off 100% of lease payments instead of just the interest portion of a mortgage loan. The lease structure also lets them hand over certain management and maintenance tasks to the new owner. This reduces their operational workload.

Why these sectors are ideal for SLBs

QSR and healthcare properties make particularly attractive SLB candidates for several reasons. These sectors stay strong during economic downturns, making them “safe bets” for investors who want stability.

On top of that, investors want these properties because of their credit-driven nature. Location matters in traditional real estate, but SLB investors care most about the tenant’s ability to generate steady cash flows. QSR businesses typically command valuations between 13-15x multiples, with some exceeding 16x. This creates potential arbitrage opportunities.

Healthcare properties, especially medical office buildings, give investors “ceaseless demand” because they’re recession-resistant. The move toward strategically located ambulatory care centers has boosted the appeal of healthcare real estate for SLB investors.

Real-World Examples of Successful SLBs

Sale leaseback transactions in QSR and healthcare sectors have shown great results for businesses that want quick capital. These ground examples show how well-structured SLBs bring major financial gains.

Red Robin’s $84M capital raise

Red Robin Gourmet Burgers has completed an impressive series of sale leaseback deals in the last year. The restaurant chain sold and leased back 27 owned properties in three separate phases. This smart move brought in $84 million in gross proceeds, giving the company more financial options.

The company wrapped up its third deal with Essential Properties Realty Trust, which brought in $24 million from ten owned properties. Todd Wilson, Red Robin’s Chief Financial Officer, said these deals helped the company cut debt by $49 million and discover the full potential of shareholder value. They used the extra money for capital investments and share buybacks.

Taco Bell and Zaxby’s portfolio deals

QSR companies of all sizes have closed many successful portfolio-level SLB deals. A portfolio of seven Taco Bell locations in Ohio brought in over $18 million in 2022. Six Zaxby’s locations in the Southeast earned $13.4 million.

A private equity firm bought a 14-unit Taco Bell portfolio in northern Louisiana and used a sale leaseback to fund it. The deal closed at $36.1 million with new 20-year triple-net leases and 1.5% yearly rent increases. They got six competitive offers in the first week, which shows investors really want quality QSR assets.

Healthcare facility SLBs in high-demand areas

Healthcare real estate has drawn big SLB investments. Medical Properties Trust closed a $1.55 billion sale leaseback with Prospect Medical Holdings in 2019. The deal covered 14 acute care hospitals and 2 behavioral health facilitiesin California, Connecticut, and Pennsylvania.

Prospect Medical Holdings’ CEO said this deal helped them pay off existing term-loan debt and get funds for better facilities and future purchases. Medical Properties Trust also invested in seven community hospitals run by Saint Luke’s Health System for $145 million and one acute care hospital operated by Halsen Healthcare for $55 million.

Doctor practices also use SLBs to help ownership changes, especially when younger doctors buy out retiring partners who own practice real estate. Healthcare providers continue to see the benefits of freeing up capital through real estate deals.

Cost of Capital: SLBs vs. Traditional Debt

Real estate operators in QSR and healthcare sectors need to understand their true cost of capital before choosing financing options. Sale leasebacks provide unique financial benefits that make more sense in today’s high-interest market.

Understanding cap rates in SLBs

Cap rates are the foundations of SLB economics, calculated as annual rent divided by purchase price to show the rental yield. Quality properties currently average between 6.5% and 8.25%, which represents the cost of SLB financing. QSR properties see multiples of 13-15x the annual rent, making them attractive options right now.

Many operators make a common error by comparing cap rates directly with traditional debt interest rates. This approach doesn’t show the real cost advantage because SLBs turn the entire property value into cash, while debt financing only covers part of the capital stack.

Comparing interest rates and lease obligations

SLBs have become more appealing as the financial scene has changed. Interest rates have gone up by 300-400 basis points since rates started rising. Cap rates, however, have only gone up by 150-200 basis points during this time. This difference makes sale leasebacks a better financing choice.

Companies should measure SLBs against their weighted average cost of capital (WACC) instead of just debt costs. SLBs sell 100% of an asset’s capital stack, so the right standard is the business’s overall blended cost of capital. Healthcare and QSR operators usually have a WACC in the low to mid-teens, which makes current cap rates look very good.

How SLBs improve cash flow and profitability

Traditional financing can’t match the immediate financial rewards of sale leasebacks. SLBs free up 100% of a property’s fair market value, while conventional debt/equity financing only provides 75-80%. This creates more working capital for running the business.

SLB lease payments are usually fully tax-deductible as operating expenses. Mortgage financing only allows deduction of the interest portion. This tax benefit can lower the actual cost of capital.

Current market conditions show SLBs running 200-300 basis points below traditional debt. This leads to better profitability and cash flow. Companies can boost shareholder returns by switching from higher-cost debt to lower-cost SLB financing.

Risks, Creditworthiness, and Misconceptions

Good credit stands as the life-blood of successful sale leaseback transactions in both QSR and healthcare real estate markets. Investors and property owners need to understand risk factors to guide through potential pitfalls.

Why tenant credit matters to investors

Credit strength drives SLB transactions. SLB investors look for stable, long-term income streams rather than speculating on property appreciation. The tenant’s financial health becomes the most crucial factor to assess.

SLB investors value tenant creditworthiness more than location. Property tenants need a recognized corporate credit score between AAA and BBB- to get optimal financing terms. This focus on credit helps investors provide generous terms, including lower interest rates and higher loan-to-value ratios up to 100%.

All the same, poor credit profiles can limit financing options or result in unfavorable lease terms. Companies that pursue SLBs due to financial problems often face costlier arrangements because their ability to pay future rent remains questionable.

The Red Lobster case: what really happened

In stark comparison to popular belief, Red Lobster’s bankruptcy didn’t stem from its infamous “Endless Shrimp” promotion – the company’s financial troubles started a decade earlier through a problematic sale leaseback arrangement.

Golden Gate Capital bought Red Lobster in 2014 for $2.1 billion and immediately sold the chain’s real estate for $1.5 billion in a sale leaseback. This deal turned Red Lobster from a company with no rent expenses into one that paid over $190 million yearly in lease obligations. These above-market rate leases ended up consuming about 10% of the company’s revenues.

This setup, along with substantial debt added to Red Lobster’s balance sheet, created overwhelming financial pressure. The chain reported $64 million in annual rent went to underperforming restaurants alone, which created severe cash flow problems.

How to structure leases to avoid pitfalls

Well-structured SLBs can alleviate common risks. Businesses should negotiate lease terms that maintain operational flexibility, including rights for beneficial capital improvements and reasonable assignment provisions.

Tax considerations play a vital role in sale leaseback transactions. Poorly executed deals risk IRS challenges regarding depreciation, rental payments, and interest deductions.

Companies must carefully assess their long-term financial projections before taking on lease obligations. The immediate cash boost looks attractive, but the resulting rent payments become fixed expenses that need to remain sustainable through business cycles.

Conclusion

Sale leaseback transactions have proven themselves as powerful financial tools for QSR and healthcare real estate operators through various economic cycles. Without doubt, SLBs have become more appealing in today’s high-interest environment. These transactions typically cost 200-300 basis points less than traditional debt financing. They also free up 100% of a property’s value, while conventional financing only lets you access 70-80% of the appraised value.

Well-laid-out SLBs create quick financial flexibility, as shown by Red Robin, Taco Bell portfolios, and healthcare facilities in states of all sizes. These businesses turned their static real estate assets into strategic capital. The funds helped them reduce debt, expand operations, and boost shareholder returns. Investors benefited too, securing steady, long-term income from recession-resistant industries.

In spite of that, businesses need to be careful. The Red Lobster case shows how badly structured leases can turn from a chance into a burden when heavy obligations eat up operating cash flow. Companies must assess their long-term financial projections carefully before they commit to permanent lease expenses.

Interest rates might drop in the future, but sale leasebacks will stay valuable financing tools because of their complete monetization advantage and tax benefits. So, QSR and healthcare operators with strong credit profiles can tap into the potential of these arrangements. Success ended up depending on proper deal structuring that balances