Net Lease Profile: McDonald's
McDonald's, with its "golden arches" and Dollar Menu, remains the dominant brand in the QSR space. With primary, secondary, and tertiary market locations, McDonald's size and reach provide a strategic competitive advantage, as well as varying risk/return investment opportunities for net lease property buyers. Brand recognition, operating stability, and strong credit ratings reinforce McDonald's standing as a prime net lease investment property.
McDonald's remains the best example of a "flight to quality" in net lease investing. As cap rates have adjusted across the board for all net lease investments, McDonald's assets continue to attract multiple buyers and trade at a significant premium over other properties. This aggressive pricing is a result of the high credit of the tenant, overall lease terms, relatively low purchase price, and general lack of supply in the marketplace. While McDonald's, like most QSR brands, franchise the vast majority of their locations, when leasing a location they almost exclusively select locations and guaranty leases on a corporate level.
The "Golden Arches" have long been a Business school case study of a real estate business that happens to sell hamburgers, as they prefer to purchase the real estate of their restaurants versus leasing, which has in-turn, created a lack of supply in the net lease market. When they do lease a location, it is almost exclusively done so through a ground lease, generally for 20 years with 3 to 5 renewal options of five years each. Previously McDonald's has been willing to offer rental increases of 10-15% every five years of the lease, however lately they have been able to scale back their rental increases to 10%, and are currently signing leases that will be flat for the first ten years. In terms of the underlying real estate, McDonald's needs 0.75 - 1.15 acres of land with premier access and visibility. While McDonald's has used their strength to negotiate lower rental rates, that has translated into easier rents to replace in the unlikely event a site were to be vacated, however that situation is viewed as extremely unlikely given their lofty credit and significant financial investment in each location by paying for the construction of their own structure.
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