I did a deep dive into Salad And Go and unfortunately from an outsider's perspective, It looks like some big problems ahead for this chain...
The brand currently boasts 130 locations in markets across the US. There are currently 14 Ground leases and 4 build-to-suits with an average cap rate of 5.81% on ground leases and 6.13% on build-to-suits, listed for sale.
The brand has an average building size of about 800 square feet and average unit sales sitting around $1,100,000 in 2022. This points out what could be a big problem for the brand moving forward, The desired occupancy cost is 10% so $1,100,000 sales * 10% = $110,000 total rent.
So if we approach this from what an ideal Salad And Go deal should look like, Their targeted rent should be $110,000 with a developer targeting an 8.0% return. (2% over the end value for the development "Development Spread"). That means the total budget for a developer to build a Salad And Go is around $1,375,000.
So how does that compare to what it likely costs to build a Salad And Go?
Land = $750,000
Site Work = $650,000
Building = $600,000
Soft Costs = $200,000
Total = $2,200,000
Development return = 8.0%
Development Rent = $176,000
Difference of Development & Targeted Rent = $66,000
That is simple math but shows the massive difference between what Salad and Go wants to be paying to keep a healthy model and what they would need to pay for new locations to be developed and opened in today's market.
So how does this look compared to what is currently available in the market? We view that by comparing available inventory for a buyer to purchase. These are new Salad And Go buildings a passive real estate investor will buy and collect rent from the tenant. A quick scrub on Crexi and Loopnet gave me 14 ground lease locations. On the ground leases, the developer purchased the property and leased the ground. In some instances, the developer may have done the site work while the tenant usually does the rest. There were also 4 build-to-suit to suit listings when I checked. On a build-to-suit, the developer has done everything and delivered the building turn-key for the tenant to put in furniture, fixtures & equipment and start operating.
Tenant out-of-pocket costs on an average ground lease deal is $1,400,000. Tenant's cost of capital is around 9%. Additional money needed to finance these costs would be $126,000. Occupancy Cost is around $99,512 for a ground lease. And then adding the $126,000 finance cost, we get a total of $225,512.15 Occupancy Cost. Way over the healthy $110,000 mark we had set for the brand.
When it comes to the build-to-suit locations, the Average Rent is $147,396. Which is still too far over the $110,000 sustainable rent amount. This number is so low it makes you wonder how/why these buildings were built. Did someone anticipate exiting at a lower cap rate and thus dropping the developer spread?
In all honesty, I think the concept itself is great, The value proposition is awesome. Farm-to-table food in 5 days is amazing! The numbers are concerning though for the brand over the long term... This chain is going to need to get those average unit sales much higher to sustain these rents and future growth. I just hope the Salad And Go team can figure it out before it is too late and another great concept bites the dust...
To learn about investing with the Forza Team, register for our online investor portal here.
Comments