Panelists discussing the state of the restaurant finance world were certain about one thing—uncertainty, as four active dealmakers agreed during Restaurant Finance Week, sponsored by Franchise Times and the Restaurant Finance Monitor.
"Every day is a little different right now, probably more unpredictable than any time in my career. We're spending a lot of time hand-holding. It's very difficult to plan right now, so that makes it difficult for clients. They want to know what's coming up," said Carty Davis, with C Squared Advisors.
"We spent a lot of time helping groups through PPP applications and now PPP forgiveness," he said, referring to the Paycheck Protection Program rolled out in April as part of pandemic relief for business owners. "Capital is unpredictable and it's uncertain. It's shifting, it's bank-specific or lender-specific or capital-provider specific. It's difficult for lenders because we don't know what's going to happen with COVID."
Davis had pointed advice for multi-unit restaurant operators whom his firm serves. "We see the next six to nine months being the biggest movement of capital we've ever seen in the industry. We think there's a number of issues that have been masked by PPP loans that people are going to be forced to deal with in early 2021," he said.
"The best advice we can give to clients and potential clients is: Put your 2021 capital plan together, put your 2022 capital plan together, and sit down with your capital provider and ask some really tough questions: Are they going to be there to support you? How are they going to deal with covenants?"
He foresees three "buckets" of lenders and other finance sources: Those who will actively underwrite clients and gain market share; those who will support existing clients only; and those who will get out of the restaurant finance business altogether. "So you need to find out now," Davis said.
Craig Wolf of Fifth Third Bank contrasted the first days of shutdowns, beginning in March, to the most recent. "Let me talk about the first 90 days. There's been a lot of time spent on PPP loans, helping our clients get liquidity. If you look at the last 90 days, we've seen a lot of stabilization, a lot of new deal flow, specifically in the QSR space. We've been looking at some limited M&A," he said.
"Some of the concepts that have been hit harder, you've been seeing arrangements getting worked out, doing amendments really into mid-next year. I'm encouraged by what we've seen in stabilization. It's an uncertain time, and with the spikes in recent weeks, but the last 90 days it's looked very different."
Casual and family dining concepts will have the hardest time gaining capital, panelists also agreed. "It's a tough question," said Tim Morris, Pinnacle Commercial Capital, about how to get a casual deal done today. "We are eight months into this. We'll have a little bit of experience of how operators of different brands have adjusted, and really see and focus on those that are capable in the off-premises area."
Geography and weather will play a role, too, with casual diners in Minneapolis, for example, that were able to do outdoor dining now shut down by the cold. "I think there's going to be some more time needed to see that performance and have operating teams prove that out," Morris said.
Gary Chou of Matthews Real Estate also compared the two eras (so far) of COVID. "The first three months was emergency mode. We were helping tenants and landlords adjust their rent. Deals at that point, it was frankly chaos, finding creative ways to keep deals together, or pausing them, or just letting them die," he said. The last three months have brought a "pleasant" turnaround. "The lenders are more positive in the space on the real estate side, and you're starting to see the elective buyer coming back into the market, and that's been a huge positive for capital availability."
Moderator John Hamburger, publisher of the Restaurant Finance Monitor, said restaurant refinancing and recapitalization have been "a big part of the business over the last five, six, seven years." Do panelists see new-unit development coming back in 2021?
"I do. I see accelerated unit development for a few reasons," Davis said. "Tier one QSRs are making very good returns. The franchisors know that and they're going to try to get some of that money in reimaging, new development, and now conversions.
"You're going to see some real estate availability in 2021 with closed restaurants, with some independents that have closed, and the larger tier one franchisors are re-engineering their boxes for more efficiency," he said.
Remodeling or new development requirements that were paused during COVID will come back online. "Most people have gotten a pass for 2020," but that's going to change, Davis said. "We're working with our clients on capital planning in 2021 and 2022, because it's time for them to present those plans to their lenders," he said, closing his statements with one certainty: "The profitability of tier one franchisees with drive-thrus is going to lead to accelerated development."