McDonald’s TENANT OVERVIEW


Net Lease Advisor Tenant McDonalds

Pros

  • High credit
  • Increases in primary term
  • Low price point

Cons

  • Low cap rates
  • New leases are flat for first 10 years
  • Ground leases don't allow for depreciation

Tenant Description

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, and general lack of supply in the marketplace. While McDonald's, like most QSR brands, franchise the vast majority of their locations(approximately 85%), 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 (5) years each. Previously McDonald's has been willing to offer rental increases of 10-15% every five (5) 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 (10) 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 vacant. 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.

McDonald's Corporation is the world's largest chain of quick-service restaurants (QSR), serving nearly 47 million customers daily. As of December 31, 2016, McDonald’s operated 36,899 restaurants in 100 countries serving burgers and fries. Approximately 85% of McDonald’s restaurants are currently operated by independent franchisees. McDonald’s has set a goal to franchise approximately 95% of all locations.

McDonald's restaurants are either company-owned and operated or operated by franchisees. There are over 14,000 restaurants in the US alone. McDonald’s Corporation’s revenues come from the rent, royalties, and fees paid by the franchisees, as well as sales in company-operated restaurants.

Average Cap Rate
4.19%
12 mo avg with 10+ yr lease term
Average Property & Lease
Average Sale Price $2,205,058
NOI $92,392
$/Square Foot $490
Building SF 4,500
Lot Size 0.75 - 1.25 Acres
Lease Term 20 Year
Escalations 10% Every 5 Years
Stock Symbol MCD
Credit Rating
S&P BBB+
Moody's Baa1
Average Cap Rate Trend
4.15%
2016
4.27%
2017
Rates reflect last 12 mos, short and long-term
Recent Sales Comps
Brook Park, OH 3.85%
Tupelo, MS 5.55%
Carmichael, CA 4.00%