What went wrong at Frisch?

CINCINNATI – Frisch’s Big Boy restaurant chain is in the midst of a major downsizing for the second time in six months. with eviction filings that could force the closure of a dozen Greater Cincinnati locations.

The company blamed “unforeseen circumstances and various other factors.”

But some say these problems are the predictable outcome of the sale-leaseback transaction that followed the company’s 2015 acquisition by an Atlanta-based private equity firm.

NRD Capital paid $175 million for the publicly traded company that founded 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 locations in Greater Cincinnati.

“There are numerous examples of companies that went into this type of real estate strategy in good faith and it didn’t work out,” said Carl Goertemoeller, executive director of the University of Cincinnati Real Estate Center. “I hope that’s not the case with Frisch, 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 enter into 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, this gives you the opportunity to make money by selling it. It also allows you to avoid having to pay rent as an ongoing business.”

Goertemoeller said sale-leaseback arrangements are particularly risky for the volatile restaurant industry, where changes in consumer tastes lead to a steady stream of new competitors. This is because they require annual rent increases, which makes it difficult for companies to adapt to rising food, energy and labor costs.

Lease documents filed with the eviction lawsuits show Frisch is currently paying about $1.2 million a month for the 66 spaces he rents from NNN. This works out to $18,379 per store. When he signed the deal in 2015, he was paying 50% less per store, or $13,363.

“These are not short-term deals,” Goertemoeller said. “I believe Frisch’s deal is for 20 years. So you’re dooming yourself to increasing rent payments for 20 years. “That’s a long time for a business to potentially go off the rails.”

The I-Team asked NRD Capital Managing Director Aziz Hashim whether the sale-leaseback transaction threatens Frisch’s future. His response: “I don’t believe the company has made any reference to this not being a going concern – I’m not sure why you’re asking this. “The evictions are certainly not representative of the company as a whole.”

NNN did not return the I-Team’s call.

The I-Team spoke with several experts in retail and commercial real estate to determine what went wrong at Frisch’s. Cincinnati’s legacy brands include Skyline, LaRosa’s, Graeter’s and Montgomery Inn.

They noted industry trends, an overall decline in casual dining restaurants and restaurant closures in 2020 and the subsequent pandemic that exposed them to higher food, energy and labor costs.

But the 2015 sale-leaseback deal made it harder for Frisch to get out of all those problems, three experts said.

Restaurant industry veteran Jim Moehring said Frisch may try to separate NNN’s weakly performing portfolio in the hope that its stronger restaurants will provide investors with the returns they want.

“Having seen this happen before, I think the last thing (Frisch) wants is to go bankrupt,” Moehring said. “So I assume they’re trying to say, ‘Okay, we have these features that are performing well.’ Let’s keep these running and go from there.’”

Moehring signed a sale-leaseback agreement several years ago for one of the eight local Popeyes locations it owns. The Holy Grail on The Banks is now his only restaurant.

“We needed some money to do other things,” Moehring said. “It’s a mechanism that many small businesses use.”

Xavier University marketing professor Scott Beck said NRD Capital is off to a strong start in 2015 when it reverses former CEO Jason Vaughn’s unpopular decision to replace Coca-Cola with Pepsi and revamps the Frisch’s menu without reducing Big Boy’s most popular items. He said he did it. But Vaughn’s replacement is more interested in cost-cutting, Beck said.

“The current owners frankly don’t seem to care,” Beck said. “If you go to some of the brick-and-mortar locations, they’re not in the best shape. I went to the investor’s website (for NRD Capital). They’re talking about some of the investments they’ve made in their portfolio. Frisch isn’t there. It’s not one of the companies highlighted. It almost sounds a little bit condescending.”

Moehring agrees that ownership makes a difference. Frisch’s has become a Cincinnati heritage brand because it has been 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 there. When it’s your passion, it’s your family business, it means so much more,” Moehring said.