Standard & Poor's Revises Outlook on Franchise Finance Corp.
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New York-Standard & Poor's today revised its outlook on Franchise Finance Corp. of America from positive to stable. In addition, the triple-B-minus corporate credit rating and senior unsecured debt ratings were affirmed.
The rating affirmation acknowledges the company's dominant market position as a financier of primarily chain restaurant properties with a seasoned management team and strong debt service coverage measures. The outlook revision reflects concerns regarding the current health of a number of restaurant chain concepts, the long-term generally negative outlook for the sector, and a modest increase in the amount of income generated from Franchise Finance's less-predictable loan origination business.
Phoenix-based Franchise Finance is unlike other rated REITs in that it more closely resembles a specialty lending business than a typical real estate operating company. Franchise Finance is focused on leasing fee-owned properties to operators of quick service restaurants (75 percent of total lease revenue), convenience stores (18 percent) and automotive parts and service centers (6 percent), and originating and securitizing mortgages for operators in these same sectors.
While a majority of the company's revenue is generated from lease income, the growth emphasis during recent years has been on mortgage origination and securitization. Furthermore, the owned portfolio shows some concentration on quick service concepts, with the top five concepts representing 38 percent of total revenue. These concepts are Burger King (13 percent of revenue), Arby's (9 percent), Wendy's (6 percent), Long John Silver's (5 percent) and Hardee's (5 percent).
Franchise Finance's historically favorable delinquency and collection statistics are the combined result of the company's asset-based lending and investing approach, its success to date in financing higher credit risk operators and currently solid economic conditions. However, the maturing of the U.S. restaurant industry and a potential slowing of the U.S. economy could lead to somewhat weakened financial profiles for Franchise Finance's tenants and borrowers. While the company has demonstrated an ability to effectively work with delinquent tenants, the re-leasing process can often lead to a temporary disruption to cash flow, as exhibited by the recently announced Quincy's restaurant properties. Quincy's (not rated), which accounted for roughly 4 percent of Franchise Finance's revenues, defaulted on its lease obligations in April. While it appears the company will ultimately re-lease these properties to another operator, likely at a lower rent, it has taken Franchise Finance longer than anticipated to resolve this issue. -PRNewswire