Dutch Bros vs. 7 Brew

The Battle for Salad and Go

Salad and Go Is Dead. Its Real Estate Is Not.

Everyone seems to be talking about the Salad and Go bankruptcy. Dutch Bros reportedly agreed to acquire at least 51 shuttered Salad and Go leases for approximately $105 million, with subsequent reports putting the number of sites as high as 65. Now 7 Brew has entered the fight, petitioning the bankruptcy court in Houston and arguing that its competing bid could produce greater recovery for creditors.

This could become one of the more interesting Chapter 11 real estate fights we've seen in the QSR space because the rescue value has almost nothing to do with Salad and Go's operating business.

The value is in the real estate.

We analyzed all 65 Salad and Go locations in Arizona and Nevada in DealGround. Annual rents range from approximately $94,000 to $209,000, averaging approximately $116,000 per year. Buildings are generally 650 to 1,000 square feet, and almost all of the leases have more than 10 years of primary term remaining, with most closer to 13 to 14 years plus options.

It is highly unlikely that either Dutch Bros or 7 Brew could assemble 65 new sites in these markets today at average rents of $116,000 per year. With 15 to 25 years of potential lease control, there is significant embedded value in those rents.

Landlords Rooting for Dutch Bros

From the landlords' perspective, Dutch Bros is probably the preferred outcome.

Dutch Bros no longer franchises new locations, meaning the acquired stores would be company-operated. A 7 Brew acquisition would likely involve leases ultimately assigned to franchisees based on existing territorial rights.

Landlords don't get to choose the winner simply because they prefer one tenant's credit. The bankruptcy court is focused on maximizing value for the estate and creditor recovery, not whether Dutch Bros credit produces a lower cap rate and higher resale value for the landlord.

There is, however, an unusual source of leverage for landlords: competition.

Many Salad and Go sites have challenging underlying real estate fundamentals. A 650- to 1,000-square-foot drive-thru building on a small parcel doesn't have an enormous replacement-tenant universe. Without Dutch Bros and 7 Brew, many landlords could be staring at a vacant building that few viable tenants want.

Normally, that would give an incoming tenant enormous leverage to demand rent reductions, free rent, or other concessions.

But this isn't a normal situation.

Dutch Bros and 7 Brew both want the portfolio.

The competition is the landlord's leverage.

The Bigger Lesson

The Salad and Go bankruptcy illustrates something far more important than which coffee company wins these leases.

Tenants come and go. The land is the asset.

Too many investors allow tenant credit to compensate for mediocre real estate fundamentals. That's backwards.

I'll take the single-location franchisee at Main and Main with great demographics and traffic over the 300-location tenant sitting on mediocre real estate every single day of the week.

Ask yourself one question before buying any net lease property:

When the building goes vacant, do you want to pick up the phone and call tenants, or do you want tenants picking up the phone to call you?

And if you're a Salad and Go landlord fortunate enough to have your lease assumed by Dutch Bros or 7 Brew?

Sell.

You got lucky. Time to move on.

Read the full article here.

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Happy hunting. LFG!
The DealGround Team