SEPTEMBER 29, 2011
Although our recession has many folks really stressed, there are opportunities, when identified and properly analyzed, we can assist you to recognize how to best get through the many complications or "the perfect storm" of our marketplace. I have received many inquiries from folks just like you who have significant insight within your business and it's unfortunate that what is happening to them are happening to all of us. Do qualified investors question about their timing the market? Yes, however with consideration for investing, one question "is it healthy" for any future business model to go forward, with the cash flow to justify the market value? That is where I can be of assistance.
Do you think that we have seen the worst in our current recession? This question that I was asked earlier last week does not have a simple answer, but I have a few that could make a difference. How about the employment and creation of new jobs? When will that occur? How about the impact of distressed real estate and retraction of values? And how about the many recent new taxes for both business and families that have affected each person's spend able income and ultimately the purchasing power of the consumer in the marketplace? Just bringing up these issues has caused a restriction in confidence, and I believe rightly justified.
HOW HAVE C-STORES FARED DURING THE RECESSION?
Overall, the C-Store sector performed above average compared to other major property types throughout the recession. In the depths of 2008-2009, all property types struggled with valuations and sales, however today the market has rebounded quite well. Further, as gasoline remains a staple of the American consumer, C-stores have been a popular target for “necessity based” retail type investors, similar to pharmacy and grocery store sites. With rental increases either annually or every 5 years a fairly standard term in C-store leases, current owners have been able to achieve real appreciation in the value of their property through the combination of rental growth and cap rate compression.
WHERE DO YOU SEE THEM TRENDING IN 6 MONTHS OR A YEAR?
As a product type, we continue to see investors focus on creditworthiness of a tenant in conjunction with underlying real estate and lease terms. Typical gas station and C-stores are often found on hard corner locations, and in higher tract areas, and thus usually fulfill the requirements for quality real estate. On the creditworthiness area though, the industry features operators of all sophistication and credit levels. As the bigger investment community continues to search for yield, their threshold for risk tends to increase, driving significant interest into this sector, often focused on sale-leaseback transactions with medium sized operators. Beyond the credit hurdle, the key driver for these transactions will be negotiating a lease that features sustainable rents, in-line with historical performance, not simply boosting rents to obtain a higher sales price.
WHAT ARE SOME OF THE MAJOR RECENT DEVELOPMENTS IN THIS SECTOR?
We have seen some repositioning from various tenants. 7-Eleven, for example, focused on c-store only locations without gasoline sales during the recession, where they could penetrate markets with smaller locations and lower rental overhead, however of late they have revisited their traditional prototype. Further, a number of operators continue to evaluate their retail operations, shifting towards larger, high volume locations where gasoline volumes and margins can be more competitive. Along those same lines, we have seen some smaller local and regional operators try and increase their total gasoline volume distribution through acquisition of existing locations.
GOING FORWARD WHAT ARE SOME OF THE BIG QUESTIONS IN REGARDS TO THIS SECTORS VIABILITY?
There have long been discussions regarding electric cars, oil independence, hybrid technology, and other “green” initiatives. As C-Stores primarily drive track through their gasoline sales, this is a trend to pay great attention to, as we look for a universal fuel replacement and refueling concept to take shape. Ultimately, adaptation of newer car models and hybrid technology will result in a lower demand for gasoline, but this will be a very gradual effect to be absorbed over time, as merely the purchase price of a vehicle replacement will be much greater than the entry into the computer or internet revolution that created the demise of certain bricks and mortar retailers like Borders.
WHAT TYPE OF INVESTORS USUALLY PREFER C STORES?
C-Stores tend to be the most polarizing property type out there, as investors either love them or hate them. Most of this is derived from the environmental aspects of the gasoline side of the business, even though all tenants completely indemnify their landlords from any environmental issues. Most newcomers to this product type don’t realize that it is common practice for C-store operators to not only indemnify them from contamination issues, but to carry an additional insurance policy specifically for environmental contamination, which is just another way to mitigate any potential environmental risk for the landlord. The investors that stock to C-stores are often drawn in by tax incentives regarding depreciation. The IRS tax code specifies that a property for which over 50% of their gross sales are derived from the sale of gasoline products may depreciate all real property improvements using a 15 year straight line schedule. As net lease investors tend to fall within the higher tax brackets, this additional depreciation can become very attractive.
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