Wednesday, December 9, 2009

Are the Golden Arches of McDonald's Still “Golden” to Net Lease Investors?

McDonald’s reputation as a company unassailable by the effects of the recession has come into question with the release of recent sales figures. Specifically, McDonalds saw a 0.6% drop in U.S. sales in November, which follows a 0.1% drop in October. Globally, McDonald’s fared better, posting a 2.5% increase in Europe, which caused the company’s total sales to increase by 0.7%. Though these numbers are not dismal, they are quite different from the numbers McDonald’s was posting last year, increases of 4.5% in the U.S. and 7.7% globally in November 2008. This has many doubting the health of McDonalds and the economy in general.

Traditionally, McDonalds has been the one of the gold standards of net lease investments. It’s been given high investment grade credit ratings by both S&P and Moody’s, maintains low cap rates, and always performs well financially. Demand for McDonald’s properties actually increased recently due to the fallout from high risk investments. Investors are now seeking more stable and safe assets rather than risk fueled ones, for many there is no safer place to invest than beneath those iconic gold arches. This perception was enhanced in 2008 when McDonalds continued to post strong sales figures despite the economic fallout of the recession. With recent numbers looking less promising, should investors be worried?

If history is to be our guide than “no”, these numbers do not represent a trend to be fearful of. Even with the dip in U.S. sales, McDonald’s numbers look better than many of their peers and no indication has been made that their credit ratings will be affected. In reality, McDonalds was most likely suffering from its own success. After the shocking growth of a year ago, it would be natural for a cool down phase to occur, especially in a climate with unemployment over 10% and declining consumer spending.

Despite the recent numbers, McDonald’s remains one of the strongest net lease investments when available and should remain as such for the foreseeable future.

No comments:

Post a Comment