Roark, the PE Firm Behind Arby's, Poised to Add Subway to Its Portfolio with $9.6 Billion Deal

Roark Capital is inching closer to a $9.6 billion deal with Subway following a competitive bidding war that began earlier this year. This would add Subway to their collection of prominent brands, including Arby’s and Buffalo Wild Wings.

Deal details: Subway's potential sale was first unveiled in January. Originally projected for a May closing, the deal was rescheduled to July, and now as summer approaches its end, the anticipation grows. Insiders are currently leaning towards Roark Capital as the front-runner, valuing Subway close to its desired $10 billion tag. However, The Wall Street Journal says other players like TDR Capital and Sycamore might still re-emerge with a more enticing offer.

A bite of history: Originating from Milford, Conn., Subway's iconic foot-long sandwiches have solidified its reputation in the U.S. fast-food sector for half a century. In 2020, the brand recorded $9.8B in sales and operated 37,000 global outlets. Yet, the journey hasn't been smooth. Subway witnessed a decline from its $18B peak in 2012. Renewed competition, both from existing rivals revamping their branding and online presence and newcomers like Jersey Mike's Subs, has eroded profits, prompting store shutdowns.

Store closures: Since 2015, Subway has closed nearly 6,000 U.S. outlets. By 2022, its international presence had also reduced, resulting in McDonald’s surpassing it in global outlet numbers. This downturn, combined with valuation concerns and a shortage of strategic purchasers, made the sale process intricate. Adding to this was the notable departure of Subway’s North American president, Trevor Haynes.

➥ THE TAKEAWAY

Zoom out: Atlanta-based Roark Capital is a seasoned player in the food and restaurant domain. Over the past twenty years, the private equity firm has made notable acquisitions, encompassing brands such as Auntie Anne’s, Arby’s, Jimmy John’s, Baskin-Robbins, and Carvel. Their potential acquisition of Subway illustrates Roark's strategic ambition to solidify its position in the fast-food arena further. And with Roark's know-how, Subway might get that fresh boost it needs.

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Tenants Sweat as Biggest US Hospital Landlord Bailout on Hold

The largest hospital landlord in the US, Medical Properties Trust (MPW), is facing mounting challenges as struggling tenants and a halted bailout plan impact its financial stability.

Not so recession-proof: A transaction between MPT and Prospect Medical Holdings, designed to provide crucial financial support, was put on hold by a CA regulator in July, despite MPT announcing it as a done deal. Hospital closures by MPT tenants have resulted in reduced healthcare options and longer ambulance trips in certain communities. MPW shares have plummeted as a direct result.

Halted bailout: A CA regulator ordered the transaction between MPT and Prospect Medical Holdings to be put on hold, raising concerns about the financial stability of both companies. Prospect, which owed MPT hundreds of millions, has already closed hospitals and stopped paying rent. MPT's finances are under scrutiny, and the collapse of the deal would further pressure both companies.

Impact on communities: The closures of hospitals by Prospect, MPT's tenant, have had detrimental effects on dependent communities, such as longer ambulance trips and overcrowded emergency rooms. For example, in PA’s Delaware County, two hospital closures have left a significant portion of the population without access to maternity services, creating a "maternity desert."

Uncertain future: MPW has fallen by half over the past year, and its financial stability is in question. The company has extended financial support to troubled tenants like Prospect and Steward Health Care. The deal with Prospect was seen as a lifeline for both parties, but regulatory hurdles and Prospect's recent ransomware attack have further complicated the situation.

➥ THE TAKEAWAY

Healthcare needs a checkup: The halted bailout plan faced by MPT highlights the financial strains and regulatory hurdles that both MPT and its tenants are struggling with. Hospital closures, unpaid rent, and high debts have impacted healthcare access and all companies' stability. These challenges underscore the importance of stability and support in the healthcare sector to ensure quality care to at-need communities.

📖 Read: SL Green and its partners take control of the ground below 625 Madison Avenue from billionaire investor Ben Ashkenazy, marking the end of a decade-long battle over the site near Central Park. 

▶️ Watch: In this video from CNBC, Marcus & Millichap (MMI) CEO Hessam Nadji, talks about CRE in 2023 and ongoing concerns surrounding rising interest rates and tightening credit.

🎧 Listen: Trader Joe’s founder and CEO, Joe Coulombe, talks with Patty Civalleri about how he created a work environment employees love while also crafting a beloved shopping experience over 60 years.

Public REITs Offer Investors More Than Just Good Risk Management

Publicly traded REITs continue to trade at lower valuations than private ones. But according to the portfolio managers at Janus Henderson, the relative valuation gap is not the primary reason to invest in public REITs today.

Returning to returns: Janus Henderson believes the next decade of real estate returns will rely on real estate fundamentals and operating acumen instead of cheap debt. During the previous decade leading up to the pandemic, public REITs outperformed their private counterparts due to their focus on improving real estate fundamentals while reducing balance sheet debt.

Exposure to diversity: Public REITs offer exposure to a wider range of property types, including non-traditional assets such as cell towers, data centers, self-storage, senior housing, and single-family rentals. Additionally, public REITs invest in single-tenant, net-lease real estate, providing commercial property lease agreements with combined rent and property tax payments.

Stronger operating platforms: Public REITs also have stronger operating platforms, making them well-suited for the investments they make as publicly traded companies. They also have access to unsecured credit and equity markets, which private funds currently lack. In a low-interest-rate environment, public REITs can obtain pricey properties more easily, while private REITs may face challenges in refinancing high loan-to-value ratio properties.

➥ THE TAKEAWAY

Back to basics: Janus Henderson argues that public REITs present a compelling investment opportunity due to an increasingly divergent return outlook. As the next decade of real estate returns is expected to be driven by real estate fundamentals and cash flow growth, public REITs, with their focus on improving fundamentals and access to capital, are well-positioned to capitalize on acquisition opportunities.

Since the pandemic, over 20% of outstanding US apartments were purchased, amounting to roughly $900B during exceptionally low rates. The pace of acquisition surpasses other real estate sectors significantly. While fixed-rate borrowers previously paid 3–4% and floating-rate borrowers paid below 2%, current rates stand at 7%.

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