A 314-Store Wendy's Franchisee Just Filed for Bankruptcy. The DealGround Data Is Fascinating.

On Sept. 17, Meritage Hospitality Group, one of Wendy's biggest franchisees, filed for Chapter 11 in Michigan. Meritage, a publicly traded company (MHGU), operates 314 Wendy's across 15 states, about 5% of U.S. Wendy's. Before bankruptcy it had already closed 60 underperforming stores, with more expected.

DealGround data shows the net-lease market was pricing this in long before the filing.

The markdowns started a year ago

Since last October, nearly 30 Wendy's operated by Meritage have come to market.

• Meritage was selling its own real estate. About a quarter were owned by Meritage-affiliated entities, structured as brand-new 20-year sale-leasebacks, with starting rent set at approx. 7.5% of store level sales. The company was raising cash off the land under its own restaurants.
• The market marked it down in real time. About a third have had price reductions, typically around 10% and as much as 22%, pushing asking cap rates from the 5s into the 6s. A price reduction on the Lithia Springs, GA location on Sept. 11, was only six days before the bankruptcy filing.
• Paw Paw, MI is the poster child. Listed last October at $2.2 million and a 5.75% cap, it was cut three times to $1.8 million and a 6.5% cap by July, and the proposed rent lowered along the way from $129,000 to $120,000. It was still unsold when Meritage filed.

The deals that sold

Six Meritage-guaranteed stores changed hands before the filing.

• Some closed days before the petition. A New Jersey buyer paid $1.54 million for a Winston-Salem, NC store on Sept. 8, nine days before the filing, on a new 20-year lease. A California family trust closed on a Memphis store five weeks earlier.
• Are Higher CAP rates worth the risk? The discounts were real. A Winston-Salem location traded at an estimated 7.3% cap against a 5.75% list price. A Hilliard, FL deal was listed last November at a 5.0% cap, sold in June at a 6.6% cap, about 25% below its first ask.

Who owns Meritage's stores

• The recent buyers are family offices, not institutions. All six were private LLCs or family trusts, mostly from out of state.
• Institutions are a small slice. A national net-lease investor owns a handful of Meritage's Oklahoma stores, bought in 2012 and 2014, and an older net-lease fund owns a few around Toledo. The rest of the landlord list is mostly family trusts and single-property LLCs from Connecticut to Arkansas.
• Meritage still owns multiple locations. Will they sell these next? Affiliated entities still own stores around Toledo, West Michigan and West Texas.

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