A U.S. bankruptcy judge has granted TGI Fridays approval to exit 78 of its restaurant leases, as well as the office lease for its Dallas headquarters, in a move expected to save the chain about $1.4 million a month.
The departure from the bulk of its corporate-operated U.S. real estate follows the closing of dozens of locations and the chain filing for Chapter 11 bankruptcy protection because of financial challenges stemming from the pandemic and the company's capital structure. The case in the U.S. Bankruptcy Court for the Northern District of Texas doesn't include any of the 122 franchised U.S. locations or 316 franchised restaurants in other countries because they are independently owned.
In exiting leases, TGI Fridays is only left with 39 company-operated restaurants in the United States, down from 117 U.S. locations prior to filing for bankruptcy. An attorney on behalf of TGI Fridays told the court the chain reserves the right to reject additional leases during bankruptcy proceedings. The bankruptcy court also approved an order allowing TGI Fridays interim debtor-in-possession financing of $3.3 million.
"This court having found that the relief requested in the motion is in the best interests of the debtor's estates, their creditors, and other parties of interest," Judge Stacey Jernigan said in her signed final order on the rejection of real estate leases.
TGI Fridays' exit from some of its corporate-operated real estate is expected to leave prime second-generation restaurant space on the market in a tight U.S. retail market. The company, with nearly $37 million in debt, is seeking to sell its assets to the highest bidder through bankruptcy proceedings.
An attorney on behalf of TGI Fridays' franchisees said during the bankruptcy hearing he was concerned his clients could be on the hook for about $49.7 million of outstanding gift cards on the company's balance sheet. Franchisee restaurants are reimbursed from the corporate entity within a certain time for honoring gift cards at any given location, the attorney told the judge. This sum far exceeds what the company has borrowed to restructure its business.
Jason Binford, an attorney representing franchisees with 64 locations, said "even half of the money" from the gift card program dwarfs the debtor-in-possession loan in the case, and he didn't want his clients left "holding the bag."
The bankruptcy judge is allowing TGI Fridays to honor its gift card program on an interim basis, with a final decision expected prior to the Thanksgiving holiday at a hearing scheduled for Tuesday, Nov. 26.
TGI Fridays has also carved out its intellectual property, including its brand used by franchisees, from the bankruptcy process. The company is maintaining franchisee support services until the work is transferred to FTI Consulting, attorneys for TGI Fridays said during the court hearing. There are 56 TGI Fridays' franchisees in 41 countries.
The order for the debtor-in-possession financing includes an additional $2.6 million for a total of $5.9 million of new financing supplied by Texas Partners Bank. Without the funds, Chief Restructuring Officer Kyle Richter told the court, the bankruptcy case would likely convert to a Chapter 7 case, often referred to as a going-out-of-business bankruptcy, because there isn't cash on hand to fund the company's ongoing operations.
"Without access to the DIP facility, I believe the debtors would suffer immediate and irreparable harm and will not be able to successfully conduct a sale process and administer these Chapter 11 cases," Richter told the court. "The DIP Facility is the best financing option presently available to the debtors."
Popular brand
With TGI Fridays having so many franchised locations, Bob Young, executive managing director for retail brokerage Weitzman, said the bankruptcy isn't going to extinguish the brand made popular for its frozen margaritas and loaded potato skins.
"These Fridays restaurant operators have a good thing going, and they will milk the value of the brand as long as they possibly can," said Young, who sits in Dallas and is not affiliated with TGI Fridays, in an interview. "They are going to die hard, and it's a long death. Great brands don't want to die," he added.
TGI Fridays' attorneys hinted at a possible stalking-horse bidder to buy the casual restaurant chain through the bankruptcy court with a few interested buyers for the corporate-owned and operated eateries. If a timeline presented to the bankruptcy court is accurate, the company could exit from Chapter 11 in early 2025 by selling to a third-party buyer after filing a bankruptcy plan by the end of the year.
A potential deal will not include the brand's intellectual property that will be operated by a separate entity to support franchisee locations. Franchisees are expected to continue to pay franchise fees to the separate operating entity, with the bankruptcy having little impact on their individual businesses, said Walter Wahlfeldt, a senior managing director of retail for JLL who is not involved with the bankruptcy case.
Some closed restaurants might "even become potential stores that the franchisees could pick up," Wahlfeldt, who sits in Chicago, told CoStar News.
For the corporate-owned and operated restaurants that remain operational under TGI Fridays, Weitzman's Young said it's difficult to say what they might garner in terms of a bankruptcy sale, and it could depend on what restaurant locations are included in the sale from Chapter 11. For restaurants already closed, he said that's an easier question to answer.
"They will be snatched up rapidly, which could include a redevelopment possibility, but one of the hottest things in the market today is second-generation restaurants," Young said. "They are so hot, with a shortage of retail space, and they are already equipped with grease traps and restaurant equipment, that when they become available, they get snatched up. They are in great demand all over the country."
Landlord loss
Not all real estate executives are optimistic about the future leasing options of TGI Fridays' restaurants. Woodcliff Realty Advisors President and CEO Rudy Milian said the restaurants will need to be torn down to make way for replacement restaurants to occupy the space — a capital-intensive endeavor.
"The landlords not only get stuck with the unpaid rent, but with the downtime and leasing costs to fill those vacancies," said Milian, who sits in Woodcliff Lake, New Jersey, and is not involved with TGI Fridays' case, in an email.
Landlords were among TGI Fridays' biggest unsecured creditors in the Chapter 11 bankruptcy case. Those landlords on the hook for what totals millions of dollars of outstanding rent include Brookfield Properties, Continental Realty, DLR Properties, Amherst Properties and Simon Property Group.
An attorney for TGI Fridays told the bankruptcy court that any valuable equipment had already been removed from restaurants where it has rejected leases as of the petition date. The landlord of its Dallas office has been ordered by the court to allow the company back into what was once its headquarters to retrieve valuable equipment and personal belongings.
TGI Fridays alleged the landlord had prevented the company from claiming its business personal property and personal items. The landlord, Brookwood Interchange Office I LLC and Brookwood Interchange Office II LLC, didn't immediately return a request for comment.