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  • The hourly wage rate across all industries has increased +10% since 2014 according to government data and we think it is important to note that the current average exceeds $22 per hour.
  • It is not surprising that the restaurant hourly wage rate of just over $13 is growing at a faster rate than the hourly wage for the overall economy. In fact, the restaurant hourly wage rate is up +18% since 2014 vs. +10% for the economy, representing a sizeable 8% gap.
  • All this has had a big impact on labor margins at the store-level which are up roughly +150 basis points over this same period.
  • In this simplified underwriting model base case, we consider a typical QSR unit with a $1.5MM AUV and 4 turns of senior debt. As we can see, a corresponding 1.42 FCCR provides ample cushion to accommodate additional labor pressure given a typical 1.25x minimum.
  • Chris Wren from CIT is not currently making any major underwriting changes because of labor pressure except that he is less likely to provide labor credit for year 1 based upon anticipated post acquisition efficiencies.
  • Most operators are doing a good job at labor cost mitigation as it relates to scheduling efficiencies.
  • In any case, pricing alone is not likely to work to offset labor inflation.
  • As we can see in this slide, it would take a +8% price increase to offset the possibility of another +150 bps increase in the labor margin. It is not realistic to expect more than an LSD annual price increase in today's current operating environment.
  • The answer is not to cut capex either, because it is likely that increased equipment spending is likely required to help offset wage pressure.
  • We can learn from other markets outside the US who are farther ahead the curve in dealing with very high wage rates.
  • Other key points to consider:

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