CINCINNATI — For the second time in six months, the Frisch’s Big Boy restaurant chain is in the middle of a major downsizing, with eviction filings that could force the closure of a dozen Greater Cincinnati locations.
The company has blamed “unforeseen circumstances and various other factors.”
However, some say these problems were the predictable result of a sale-leaseback transaction that followed the company’s 2015 purchase by an Atlanta-based private equity firm.
NRD Capital paid $175 million for the publicly traded company that established Frisch’s Restaurants Inc. in 1939. Four months after that sale, a Florida-based company paid $47 million for 74 of the company’s 121 stores. That company, now known as NNN REIT LP, is trying to evict Frisch’s from at least 12 of its Greater Cincinnati locations.
“There are plenty of examples of companies who went into this type of real estate strategy with good intentions and it just didn’t work out,” said Carl Goertemoeller, executive director of the University of Cincinnati’s Real Estate Center. “I hope that’s not the case with Frisch’s but we’ve seen this movie before.”
Goertemoeller is a former Macy’s executive who resisted attempts by activist investors to force Macy’s to pursue sale-leaseback deals for its department stores.
“If you own the real estate, that gives you control,” he said. “If you have an underperforming location, it gives you the ability to monetize it by selling it. And it allows you as an ongoing enterprise to avoid having to pay rent.”
Goertemoeller said sale-leaseback arrangements are particularly risky for the volatile restaurant industry, where changes in consumer tastes lead to a steady flow of new competitors. Sale-leasebacks require annual rent increases that make it harder for companies to adapt to rising food, energy and labor costs, Goertmoeller said.
Lease documents filed with its eviction cases show Frisch’s now pays about $1.2 million per month for 66 locations it still rents from NNN. That works out to $18,379 per store. When it signed the deal in 2015, it was paying 38% less per store, or $13,363.
RELATED | More than a dozen Tri-State Frisch's locations could be shut down amid eviction hearings
“These are not short-term deals,” Goertemoeller said. “I believe the Frisch’s arrangement was for 20 years. So, you are locking yourself into 20 years of escalating rent payments. That’s a lot of time for a business to potentially go off the rails.”
The I-Team asked NRD Capital Managing Director Aziz Hashim if its sale-leaseback transaction threatens Frisch’s future. His answer: “I don’t believe the company has made any reference to it not being a going concern — not sure why you would ask that. The evictions certainly don’t represent the totality of the company.”
NNN did not respond to the I-Team’s call.
The I-Team spoke to several experts in retail and commercial real estate to identify what went wrong at Frisch's. The company ranks among Cincinnati's legacy brands like Skyline, LaRosa's, Graeter's and Montgomery Inn. Many of its local customers have a strong attachment to the brand.
The experts pointed to industry trends, including a recent string of casual-dining restaurant closures at Denny's, Applebees, Outback Steakhouse and TGI Friday's. They also cite damage caused by the pandemic, which shut down restaurants for months in 2020 and caused food inflation and labor shortages after that.
But the experts also said Frisch's 2015 sale-leaseback deal made it harder for the company to recover from those problems.
Restaurant industry veteran Jim Moehring said NNN might be trying to cull its portfolio of weaker performers, in hopes that Frisch’s stronger restaurants will give its investors the return they want.
“Having seen this happen before, I think the last thing (NNN) wants is for (Frisch’s) to go into bankruptcy,” Moehring said. “So, I would assume that they’re trying to say, ‘OK, we have these properties that are performing well. Let’s keep those running and take it from there.’”
Moehring entered into a sale-leaseback deal for one of the eight local Popeyes locations he owned several years ago. Holy Grail at The Banks is now his only restaurant.
“We needed some cash to do other things,” Moehring said. “It is a mechanism that a lot of small businesses use.”
Xavier University marketing professor Scott Beck said NRD Capital appeared to be off to a strong start in 2015, when former Frisch's CEO Jason Vaughn reversed an unpopular decision to replace Coke with Pepsi and refreshed Frisch’s menu without diminishing Big Boy’s most popular offerings. But Vaughn’s replacement, James Walker, seemed more interested in cost cutting Beck said.
His LinkedIn bio says Walker ended his role as Frisch's CEO in July. He remains chief culinary and concept officer for Experiential Brands, another NRD Capital company.
“It doesn’t appear that the current ownership frankly cares about it,” Beck said. “If you go to some of the physical locations, they’re not in the best of shape. I went to the investor's website (for NRD Capital). They talk about some of the investments they’ve made in their portfolio. Frisch’s is not up there. It’s not one of the companies that’s highlighted. It almost feels a little dismissive.”
Moehring agrees that ownership makes a difference. Frisch’s became a Cincinnati legacy brand because it was controlled by the Maier family for generations, even after it became a publicly traded company.
“I remember when (former CEO) Craig Maier was driving sales through there. When it’s your passion, it’s your family business, it means a lot more,” said Moehring.
