Many Restaurants Seeing Profits Decline Despite Bounce-Back in Sales

Webinar panelists, including Joe McKeska of A&G Real Estate Partners, cite gap between landlords' longstanding expectations and the post-pandemic reality for restaurants

CHICAGO, March 8, 2023 /PRNewswire/ -- Landlords need to reset their expectations about restaurant profitability in the post-pandemic era—a "new abnormal" in which more restaurants are losing money despite rebounding sales, advised panelists in a Restaurant Finance Monitor webinar.

"A paradigm has been established over many years as to what constitutes a healthy restaurant with a supportable lease and rent, but in many cases that no longer applies," said panelist Joe McKeska, a Chicago-based Principal at A&G Real Estate Partners and leader of the firm's restaurant industry practice. "Whatever you want to call the new normal—it's more like the 'new abnormal'—we're in it. You have to play the hand you've been dealt."

"Strengthening Restaurant Portfolios in a Challenging Business Environment" was moderated by Restaurant Finance Monitor President John Hamburger. Turnaround and restructuring expert Dan Dooley, Principal & CEO of MorrisAnderson, joined McKeska on the panel, along with restaurant executive and former Wall Street attorney Robert Cornog, Jr., Chairman and CEO of both Punch Bowl Social and Wagamama USA.

Hamburger kicked off the hourlong discussion by asking about the industrywide effects of challenges such as lower traffic and higher food, materials and labor costs.

In response, Cornog noted that many office workers are back in New York City for just three days a week, a shift that creates the prospect of "Fridays turning into Thursdays" for restaurants.

"What is your lunchtime-dinner mix given that 40 percent of office workers in New York aren't there?" Cornog asked. "Operators are trying to figure out, 'What is the business we have, and how do we run that business going forward?'"

For some downtown restaurants, Dooley added, the hybrid-work model has contributed to decreases in average unit volumes of 40 or 50 percent.

Many restaurants have raised their prices enough to boost their sales totals, but they may still be on the bubble or losing money, McKeska noted. "What's scary to me is, we have seen cases where sales are actually up by 5 or 10 percent but the restaurant operator's profitability is down by 30, 40, 50 percent or more," he said.

In this context, the panelists said, portfolio optimization is even more critical to turning around distressed restaurants or positioning healthier chains for the future.

McKeska, who routinely renegotiates and terminates leases on behalf of restaurant clients, encouraged operators to engage with landlords and be willing to close underperforming stores. Chains pursuing out-of-court restructurings, in particular, should huddle with their secured lenders to gain clarity on what it will take to avoid going into default. "You really need to have alignment with your senior secured lender before you go out to the landlord community, because otherwise you're trying to hit a moving target," McKeska said.

Operators should make sure they have enough cash to fund early lease terminations, and as they seek to lower their rents and exit underperforming stores, they need to be transparent with landlords, McKeska said. That could include signing nondisclosure agreements and handing over financials. "The landlord has to understand why you're asking for this and, frankly, why what you're offering is better than the alternative," the executive noted.

Restaurants often have a strong argument. McKeska asked the audience to imagine a situation in which a restructuring restaurant offers to pay six or nine months of additional rent prior to early termination of a lease with 10 years of remaining term. "The alternative for the landlord is, the restaurant goes into bankruptcy, the lease is rejected, and the landlord gets an unsecured, 502(b)(6) claim, which generally has a smaller recovery," McKeska said.

In out-of-court restructurings, Dooley added, restaurants need to remember the importance of settling the majority of their termination claims, because a half-successful effort accomplishes nothing. "You cannot live with 50 or 60 percent," Dooley said. "That number has got to be 85 or 90 percent. Otherwise, you pay out a bunch of money and end up filing for bankruptcy anyway."

Ideally, restaurants will be able to show their landlords that key stakeholders such as vendors, corporate executives and sponsors are contributing to the restructuring effort. "That's everything from lenders taking loan write-downs, to franchisors easing up to some degree on royalty and ad payments, at least until the business gets back on its feet," McKeska said.

An aggressive effort also involves negotiating lower rents and additional lease options for on-the-bubble or even healthy stores. "For those stronger-performing locations, you can say to the landlord, 'Hey, maybe I will extend your lease if you give me a rent reduction,'" McKeska said. "To generate enough value to position the company for an out-of-court restructuring, restaurants need all of these components to come together across the portfolio through a thoughtful and strategic approach which is specific to each restaurant operator."

New York-based A&G has saved approximately 750 clients more than $10 billion in occupancy costs since 2012, selling $12 billion in real estate and leases in connection with M&A transactions, restructurings and other projects.

The full webinar is available at:
https://attendee.gotowebinar.com/recording/8637608745979518047

Media Contacts: At Jaffe Communications, Elisa Krantz, (908) 789-0700, [email protected].

SOURCE A&G Real Estate Partners