Whataburger's Expansion Plans Could Be Safe Haven for Net Lease Investors During Pandemic
by: Richard Lawson | CoStar News
One year after getting bought by a private equity company, a major Texas-based hamburger chain is expanding to new states and plans to start franchising for the first time in nearly two decades. It's also taking advantage of a property demand shift in the pandemic.
Whataburger, which has 835 restaurants in 10 states, plans to open new locations in Kansas City and Tennessee as well as in some of its existing markets.
The chain said it plans to open 15 stores this year and 25 in 2021. That means more opportunities for real estate investors looking for safe investments as the economy recovers while the coronavirus pandemic rages on.
Since the pandemic's onset in mid-March, real estate investors have steered toward properties with essential tenants such as grocery and pharmacies and fast food restaurants that survived coronavirus lockdowns with their drive-thru business.
These properties tend to be single tenant with a net lease where the tenant pays most or all of a property’s operating expenses. The landlord gets a rent check and return on investment, known as the cap rate.
Whataburger favors ground leases, which means investors buy the dirt under a building that averages about 3,500 square feet. Whataburger ranked No. 6 for U.S. sales for hamburger chains in 2019 with $2.5 billion, according to Restaurant Business citing data from Technomic. McDonald's, which also ground leases properties, ranked No. 1 for U.S. hamburger chain sales last year with $40.4 billion. However, when based on sales per restaurant, Whataburger averages more than $3 million, while McDonald's averages $2.9 million for its 13,846 U.S. restaurants.
The Whataburger chain is ranked behind Jack in the Box, which is No. 5 with $3.5 billion in sales, and ahead of Hardee's at No. 7 with $2 billion, according to Restaurant Business. Most hamburger chains that operate on a large scale basis franchise locations and net lease properties. Franchise locations make up 93% of McDonald's stores, for example. More niche burger joints like In-N-Out and Shake Shack do not currently franchise.
Whataburger, which was founded 70 years ago as a roadside stand by Harmon Dobson in Corpus Christi, Texas, sold a majority stake to Chicago-based BDT Capital Partners last year for an undisclosed price. Members of the Dobson family, which has made Forbes annual list of America's richest families several times, remain on Whataburger's board. BDT Capital has a decade's worth of investments in family-owned businesses and has participated in buyouts and funding for well-known brands such as Sara Lee Corp. and Krispy Kreme donuts.
Whataburger has 128 franchise locations, representing only about 18% of its stores, and last sold a franchise in the early 2000s. Whataburger did not respond to an email about why it is open to more franchisees now but usually it is a tactic for a company to expand quickly.
Whataburger has been franchising locations since 1953 when Joe Andrews Sr.'s company Whataburger of Alice Ltd. opened a location in Alice, Texas. Whataburger of Alice Ltd. received between $2 million and $5 million in April from the International Bank of Commerce as part of the Paycheck Protection Program to retain 500 employees, according to a database from the Small Business Administration.
Whataburger's franchise costs were not disclosed. A Whataburger spokeswoman told CoStar News there are no details yet on potential new locations outside its existing markets. Several entities tied to Whataburger have registered to do business in the past two weeks in Tennessee, Kansas and Missouri, indicating multiple locations in those states, which are all expansions for the chain.
The company is changing up the design of some stores with "reduced environmental impact by using renewable resources when possible" but plans to maintain its A-frame store design with the orange and white stripes that define the brand, according to a statement. One reason for the redesign is to increase capacity, the statement said.
According to CoStar data, three Whataburger-occupied properties have sold since mid-March when the pandemic started taking hold. All are in Texas, where Whataburger has the majority of its locations and its headquarters in San Antonio at 300 Concord Plaza Drive.
CoStar shows at least a dozen Whataburgers are for sale now, split mostly between Florida and Texas. Of the Texas stores, three are new construction. One in north Fort Worth isn’t open yet but is under contract, according to David Kern, a broker with Marcus & Millichap’s The Mansour Group in San Diego.
The Mansour Group listed the property, next to a Texas Health Harris Methodist Hospital, for $2.31 million with a 4% cap rate. The 3,578-square-foot location was estimated to cost a little more than $1 million to build, according to regulatory filings with the state of Texas.
For Tennessee, the plans represent Whataburger's return to the state after about a four-decade absence. Brian Forrester, a retail broker with Colliers International in Nashville, said by email that he believes the chain is looking for sites in the Nashville area.
In the 1970s, Whataburger had two locations directly in Nashville, one along Charlotte Pike on the west side of town and the other along Gallatin Pike on the east side.
The late country music star Mel Tillis is another connection between Nashville and Whataburger. Tillis did television ads for the chain in the 1970s and into the 1980s, delivering the tag line, “It’s not just a hamburger, it’s a Whataburger.”
Even though there are numerous burger chains in the Nashville area now, “there is still more capacity in the marketplace to support other quick service restaurant concepts,” Forrester said.
Locations may not be directly in Nashville, however. Arthur Perlen, a broker with Centennial Retail Services said sites for standalone tenants inside the city remain difficult to find.
“You can probably make that work” in outlying suburbs such as Murfreesboro, Hendersonville and Gallatin, Perlen said.