GE Capital and Trustreet: Two Trends in One
Nov 1, 2006 4:00 PM, Elaine Misonzhnik
Two trends converged Monday with the announcement of the proposed $3 billion acquisition of Trustreet Properties, a net lease REIT that specializes in restaurant properties, by the Franchise Finance division of GE Capital Solutions.
The deal underscores the increasing cachet of restaurants within the net lease world and Trustreet becomes the latest publicly held REIT to be taken over by a private equity entity.
Restaurants represented 10 percent of the $42 billion in net lease properties that were available for purchase as of mid-May, according to the net lease broker Boulder Group. By comparison, retail properties accounted for 31 percent.
But the restaurant business—and, by extension, restaurant-related real estate—is growing far more quickly than overall retail and provides more deal opportunity. Restaurants accounted for 17.4 percent of expansion activity in the retail sector this year, with only discount retailers outpacing them at 19 percent, according to research from brokerage firm Colliers International. Daily restaurant sales in the U.S. currently stand at $1.4 billion, says the National Restaurant Association.
That is why GE Capital, one of the largest net lease players in the market, has been focusing on expanding its restaurant business for more than a year, says Joseph French, senior vice president of institutional retail sales with Sperry Van Ness, a national real estate investment brokerage firm.
The company’s Franchise Finance group is based in Scottsdale, Ariz., and has an $11 billion asset portfolio in the U.S. and Canada. The group services approximately 6,000 customers and holds 20,000 locations belonging to the restaurant, hospitality, branded beverage, power sports and automotive after-market industries. It has built a portfolio through sale-leaseback deals, such as one in May where it bought 34 Burger King restaurants from franchisee Simmonds Restaurant Management for $50 million.
The acquisition of Orlando-based Trustreet will enable the Franchise Finance group to bolster its presence on the East Coast, said the spokesman for GE Capital Solutions.
“Restaurant real estate is a business they were late to get into and the deal with Trustreet is a great way for them to expand,” says French. “Restaurants are a huge business – more and more franchisees are opening up Burger Kings, and Dunkin’ Donuts and Wendy’s. Americans are eating out more and cooking less and GE being the smart operators that they are and having plenty of money to loan, saw that this is a great business to expand.”
In addition, private equity firms have been buying out restaurant chains and franchises and then pushing for sale/leasebacks on the real estate. There have been about 30 buyouts since the beginning of 2005.
Since its formation in February of 2005, Trustreet has grown as a REIT, but the fact that 65 percent of its capital base was made up of debt and preferred equity caused concern on Wall Street. Analysts believed that Trustreet could not engage in further growth without selling some of its properties or selling additional shares of its stock – something the company was reluctant to do. In July, the research and rating site Morningstar downgraded the REIT’s fair value estimate from $17 a share to $15 because of re-capitalization concerns. The large amount of variable rate debt that Trustreet carried has caused it stock to under-perform, analysts say, in spite of an otherwise solid performance.
The buyout deal will put an end to those concerns with a fresh capital infusion. As part of the deal, GE Capital Solutions will assume or refinance Trustreet’s outstanding debt.
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