"Banks are coming back" into the restaurant M&A game, declared Roger Matthews, who heads up retail investment banking at BofA Securities, after sitting out since March when pandemic-related lockdowns began. So are investors eager to buy brands doing well despite COVID-19, particularly quick-service restaurants, said panelists discussing the merger-and-acquisitions outlook for 2021 on the first day of Restaurant Finance Week, presented by Franchise Times and the Restaurant Finance Monitor.
"I think it'd be dishonest if I didn't say that through most of the pandemic the banks have been cautious," Matthews said, speaking specifically about large national and international banks like Bank of America, "Most of the banks are located in New York and Boston," early hotspots for COVID-19 breakouts. "The banks expected there would be massive losses on their loan books from the restaurant sector."
As time passed, though, "quick service has done great," especially those with drive-thrus. "From a credit perspective, they're all doing terrific." Although casual dining has been most affected, "what's interesting is the bigger players have done incredibly well," he added, naming Outback Steakhouse and Chili's as examples, with "same-store sales down only 10 to 15 percent. The pivot of the biggest players was extraordinary, to be able to switch to food to go."
His caveat: "Look, so much of this hinges on what happens with the virus. If we find ourselves in a much worse place and we're back to government mandates and what not, things will get dicey again."
But when COVID-19 is over, remember what happened after the last time a pandemic hit the United States, 100 years ago—the Roaring '20s. "The consumer demand is going to be strong as it was, if not stronger. We all can't wait to get back on the road, enjoying ourselves," he said. "I'm actually quite optimistic for the restaurant space once we get through COVID."
Susan Miller, a partner with Morgan Kingston Advisors, believes smaller deals and regional bankers will get their day in the M&A sun. "If you move below $20 million of EBITDA," meaning cash flow, "below $10-, and especially below $5-, we've seen a shift. For these smaller emerging and regional brands, a lot of this was magnified during the PPP process, where we saw a lot of international banks pull back and smaller, regional banks step in," she said, referring to the federally backed Paycheck Protection Program that started in April.
"For the smaller guys, we're going to see an interesting dynamic of local and regional banks stepping up and providing financing, because it's more relationship-driven, they're in the market and they understand the market more," Miller said.
Chad Spaulding of CapitalSpring was asked where his firm's capital is going to flow in 2021. "All the tier one brands are very much in play," he said, especially those with drive-thrus that were "stacking cash" during government shutdowns because they didn't have dine-in labor and facility expenses yet were doing a brisk business.
To win deals, it will be tough to compete with those who have "really competitive balance sheets. Their facilities are going to be remodeled…the signs are going to be shiny, there's going to be a lot of curbside appeal because they have the capital to do that," he said.
Glen Kunofsky, with NNN Pro Group at Marcus and Millichap, said that while his firm continues to be busy with rent and other lease renegotiations, "there's a lot more calm, especially in the QSR space" at the end of 2020 than in the spring. "Landlords are more apt to pick up the phone and take the call. You can be successful in real dramatic change in those leases, and where there are concepts out there that are looking to grow, and swapping out sites. Overall, the environment right now is very good because people are open to talking about their portfolio," he said.
Restaurant Finance Week, presented by Franchise Times and the Restaurant Finance Monitor, continues through November 13, with panels, keynote speakers and meetings between operators and financiers all conducted virtually. This week was scheduled to be the annual Restaurant Finance & Development Conference live in Las Vegas, and panel moderator David Farkas no doubt spoke for many when he noted he looks forward to meeting everyone again in person, when it's safe to do so. RFDC 2021 is November 8-10 at the Bellagio.