A Good Walk (Un)Spoiled

Fellow Missourian Mark Twain may have thought the game of golf represented "a good walk spoiled." But he never had the opportunity to play Country Creek, one of Fiducia Properties' most recent listings.

Our firm is representing Country Creek Golf Course in the disposition of nine of its 54 holes in the larger Country Creek/Hoots Hollow complex. The almost 86 acre tract is located equidistant from  the Cass County communities of Pleasant Hill, Harrisonville, Peculiar, Raymore, and Lake Winnebago.

The offering consists of what is essentially the front nine of "The Quarry." Features include zoysia fairways, a 10-acre lake, an irrigation system, and 18 lots approved by Cass Co. for duplex development.

Country Creek will still continue to operate the remainder of its 45 holes, so a successful purchaser will not be able to operate its own fee-based golf course. However, the tract is ideally suited for additional residential development or for an individual home site. In both of these cases some or all of the golf holes could remain for use as a residential amenity or for a private golf course.

Contact us today at 816-862-8005 to learn more about this valuable asset. Or, visit fidprops.com and download an offering memorandum.

11 Cap Dollar General Portfolio

Sperry Van Ness|Fiducia Properties is pleased to announce that our Dollar General portfolio in Southeast Missouri is now being offered at an attractive 11% Capitalization Rate. This attractive yield was made possible because the price was dropped by over $100,000 to $2,295,000 and the NOI was increased by $3,500 annually due to recently-received % rent checks.

Please click here to download the full offering memorandum.

Wal-Mart to open first "Express Store" Tomorrow

Wal-Mart Stores, Inc. has identified gaps in its business model and is taking aggressive steps to fill them. Tomorrow the giant retailer opens its first "Wal-Mart Express" store in Gentry, Ark., a commnunity within a stone's throw of company headquarters in Bentonville.

The Wal-Mart Express concept features an approximately 15,000 s.f. store which sells between 11-13,000 items. It seems the concept will be deployed primarily in markets which are too sparse to support a traditional Supercenter. Other Express stores are planned for markets such as Chicago in which building a Supercenter might be impractical. A key objective for Wal-Mart appears to be regaining market share lost to retailers such as Dollar General and Family Dollar. Besides the store in Gentry, other near-term openings are scheduled for various locations in Arkansas and North Carolina.

No word yet on whether these real estate assets will be company-owned or leased to investors.

(Read USA Today Article)

Thanks to fellow Sperry Van Ness advisor Bo Barron for tweeting this article last week.

Value Investing and Commercial Real Estate

Several months ago I proffered a question for reader contemplation. It went something like this: "Can the concept of value investing in securities be applied to commercial real estate investment properties?" If you recall, that question emerged for me after reading Michael Lewis's book The Big Short. Lewis highlighted how value investing was one strategy that brought certain individuals to "short" the sub-prime mortgage market and make several billion dollars along the way.

In our last post I asked you to provide me with some feedback on the above question. I waited and waited through blizzards and wind chills and finally tornados to conclude that you weren't going to respond. Perhaps I'm pulling the plug on the dialogue a little too quickly, but I figured four months was enough time for my seven followers to weigh in. But alas, you haven't. So now you'll have to endure (if you're still reading) me answering my own question, which is obviously why I asked it to begin with.

Commercial real estate investment properties, particularly net-leased investments, are typically evaluated on what is essentially an income approach. Buyers of these assets typically evaluate capitalization rates when comparing one asset to another. Sometimes investors will look at the underlying demographics or other specific market factors as a way of putting the investment under a three-dimensional lense. But most investors will fixate on the cap rate or cash-on-cash return or IRR which still by-and-large relegates the real estate to the one-dimensional world of paper investments.

There are undoubtedly many concepts that could be applied to the question of value investing in commercial real estate. I've come up with three that I think are worth mentioning. These include:

1. Cost Per Square Foot
2. Residual Value
3. Adaptability

This list should not be considered exhaustive and as we'll see these three factors are very interrelated. Some can be quantified; some cannot. We'll look at them in order.

Cost Per Square Foot
Perhaps no other metric gets at the "book value" of real estate than the cost per square foot (PSF) of the asset. This is probably the only factor of the three that can be objectively known and quantified. It can be measured against other assets. It may and usually has some reflection to the underlying land value of the improvements which should have some correlation to market factors such as traffic counts and demographics. It may reflect the building's age but does not have to. It may only reflect the rental rate of the lease governing the property. Too often when evaluating net leased investments, we find extremely high costs per square which are solely attributable to the income approach. These costs may have no correlation to the building's true value and are only reliable as long as the tenant continues to pay the corresponding rent. Investors should use extreme caution when paying exorbitant costs per square foot. They would be wise to evaluate how closely the underlying lease rates track with market rents in the area. If they are double or triple the market, the investment's value may not hold during its useful life. This leads us to our second factor--Residual Value.

Residual Value
The residual value of a real estate investment is simply the asset's value once the original tenant is no longer occupying the space. Once the tenant, be it Walgreen's or Dollar General or whomever, vacates the space due to relocation, closure, lease expiration, etc. questions surface such as What is this building worth to another owner/user? Or, For what amount of rent can I re-tenant this asset? These questions are predicated on the asset's residual value, which may or may not have any correlation to the property's original lease rate and acquisition price. Investors would do well to look into the future to project the asset's residual value in the event the tenant eventually vacates the property. This may seem insignificant when there are 20 years left on the lease, but any long term play should account for the eventual certainty that the property will one day be vacant. While the residual value does not have to be the same or more than the present day acquisition price, great care should be taken to ensure the residual value is not 1/3 or 1/2 of the original acquisition price. This can occur when the property's current rental rate is way out of whack with the market.

Adaptability
The final concept we'll look at is what I call Adaptability. The question we want answered here is what to do with the asset once it becomes vacant?  A popular issue within the worlds of Architecture and City Planning is that of Adaptive Reuse. Adaptive reuse contemplates how an older building which was utilized for one purpose during its early life can be modified to house a completely different use during its later life. When we think of adaptive reuse we think of warehouses turning to lofts or massive train stations being converted to museums, shopping centers, or office buildings.

Our concept of adaptability with investment properties is similar to this larger concept of adaptive reuse. How simple will it be for your asset to house another similar retail tenant if your first tenant leaves? Are there peculiarities or idiosyncrasies with the building that would preclude 90% of other would-be tenants? If so that might be a red flag. Adaptability obviously carries with it both physical and financial components. Many buildings might be vanilla boxes capable of housing other retailers, office users, etc., but they may not financially accommodate many users. The financial component points us back to our concepts of Cost Per Square Foot and Residual Value.

Perhaps the best illustration I can think of that brings these topical issues to reality is to look at the case of a single tenant property leased to Starbucks.  I had a Starbucks deal cross my desk this morning. I'm sure it's a fine property but the asking price was well over $1.5 Million while the size was only about 1,850 square feet on one acre. The investment's NOI was over $120,000.  The resulting cost per square foot was over $854 while the tenant's rental rate was almost $66 per square foot. While Starbucks is a great tenant, this deal does not fare well when evaluated against our three criteria. Its cost per square foot is some three-to-twenty times higher than that of properties leased to other credit tenants. Further, it is doubtful a Starbucks residual value would ever come anywhere close to that of a local market when the rental rate is $66 PSF. And if these two issues were not enough, adaptability comes into question. Restaurant properties rarely can be used for anything besides restaurants. Starbucks might contain even more specialized features than a typical restaurant (think limited seating) which suggests it would miserably fail the adaptability test. Perhaps one could get comfortable with these issues if we were talking a 30 year lease, but this deal's lease had only 6.5 guaranteed years remaining. Any purchaser there might be asking our questions much sooner than he or she should have to.

Hopefully we've given you a few things to think about. Perhaps you've thought of something we haven't. If so, we'd appreciate a comment. But this time we're not going to wait on you for four months....

Value Investing

I just finished reading The Big Short, the book by Michael Lewis which chronicles the demise of the sub-prime mortgage market. In this book, Lewis highlights a few brilliant souls who correctly analyzed the flawed fundamentals in this market and then proceeded to profit handsomely from its crash by selling it short.

One of the investors Lewis features in this book is Dr. Michael Burry, a neurologist turned money-manager who started a firm called Scion capital. Scion eventually made several hundred million dollars by purchasing so-called credit default swaps on sub-prime mortgages. The credit default swaps Burry purchased on mortgage bonds were essentially insurance policies payable upon the default of these bonds. As history has shown us, these bonds failed en masse, and Burry and others became all the richer for it.

Lewis tells us Dr. Michael Burry was influenced heavily by the late Benjamin Graham and a protégé of sorts of Graham's—Warren Buffet. Burry bought in to Graham's philosophy of "value investing," which is essentially a quest to identify stocks of companies which trade below their asset or book values. Presumably it was Burry's passion for value investing that led him to correctly foresee the sub-prime bust.

As I read about Michael Burry and his approach to value investing, I wondered how such a philosophy for picking stocks could be applied to the commercial real estate investment market. Do certain characteristics of a real estate investment suggest it is a poor value and while others suggest it is a good value? Is there a scenario in which a property's "book value" could be higher than its current market value?

If there are fundamentals which could give us some insight into true "value," can they be quantified? Or, are they simply seat-of-the-pants, instinctive, and nebulous sort of criteria that may vary from investor to investor? I may be wrong, but my sense is that most investors don't stop too long to ponder the differences in "value" among certain net leased commercial real estate investments.

What are your thoughts? Give me some feedback in the "Comments" section by providing ways in which you might identify the intrinsic or book value of a commercial real estate investment.

I look forward to your responses!

Available: Southeast Missouri Dollar General Portfolio

Sperry Van Ness | Fiducia Properties is pleased to announce the availability of a six-store Dollar General portfolio in Southeast Missouri. These assets are outstanding retail investment properties and are the subjects of modified gross leases with Dollar General (DG).

The stores are located in the St. Francois County communities of Bismarck, Bonne Terre, Desloge and Farmington and the Stoddard and Bollinger County communities of Marble Hill and Advance, respectively.

The entire six-store package is offered at an attractive $2,400,000 which provides the successful investor with an outstanding 10.4% capitalization rate. In addition to the attractive cap rate, the portfolio asking price amounts to a paltry cost of less than $48 PSF.  Other features include outstanding store sales and staggering numbers returned by percentage rent clauses in the lease. Although being offered as a porftolio, the six stores may also be acquired individually for a small basis point premium.

Please contact us toll free at 888-879-2083 for additional information, or follow this link ( http://docs.svn.com/Southeast Missouri DG Portfolio ) to acquire an offering memorandum on this excellent opportunity.

The Curious Case of Sherwin-Williams

Sherwin-Williams stores have long been considered desirable real estate investments--and for good reason. The company has been around since the conclusion of the Civil War. Since then, it has grown to become one of the largest chemical, paint and coatings companies in the world. Besides its longevity, Sherwin-Williams’ debt is rated "A" (recently upgraded from "A-") by Standard and Poors (S & P). As a real estate investment, Sherwin-Williams retail properties possess many attractive qualities. They are viewed as very stable assets and are generally available at attractive price points--many under $1 Million. Further, the stores are typically located in stable markets at strong locations.

Despite these positives, Sherwin-Williams stores, as a real estate investment commodity, are somewhat difficult to quantify. If currently shopping for a Sherwin-Williams store to add as a last minute stocking stuffer, one might find offering capitalization rates in a range of anywhere from 6% to 10%. This wide range creates somewhat of a schizophrenic trading environment if trying to accurately value a Sherwin-Williams asset. It then becomes somewhat difficult for buyers and sellers to agree upon fair prices and capitalization rates for the investments.

"The stores have a very high lease renewal rate," said one investor, justifying the lower cap rates observed in the marketplace. "I've been told that Sherwin-Williams renews something like 97-98% of store leases," he said. Another factor that seems to drive Sherwin-Williams cap rates lower is the overall scarcity of product. The company does not operate as many stores as many retailers so the universe of potentially available properties is somewhat smaller. Beyond this factor, relatively few of the stores in existence ever come to the market.

While these factors might explain the low end of the cap rate spectrum, they do little to explain the higher end. After all, the lease renewal rates of the stores, very favorable S & P rating, and product scarcity should keep the cap rates of Sherwin-Williams stores down in the 6-8% range. But what explains those stores offered at 8%+?

"I think the (cap rate) diversity can be explained by looking at the wide range of real estate choices found among Sherwin-Williams properties," said another Sherwin-Williams investor. Indeed, this may explain much. It is estimated that approximately 2/3 of the business done in a typical Sherwin-Williams is from contractor sales. Consequently, some Sherwin-Williams stores may not be located at "Main and Main." Since for many Sherwin-Williams is a destination, in some cases the company's stores may thrive in convenient but not necessarily first tier locations. Some of these stores may be located in even what would be considered quasi-industrial locations, rather than trophy retail locations. Whereas retailers such as Walgreen's, Wal-Mart, etc. have no room for error in their real estate decision-making, Sherwin-Williams may in fact be able to survive and thrive with some sub-standard locations due to their reliance on contractor and other non-impulse customers. Such locations, however, may end up being penalized in the net lease marketplace from investors unwilling to buy what they would consider to be inferior locations at low cap rates.

Other factors that might balance out the favorable investor sentiment for Sherwin-Williams properties are the shorter-term and double-net nature of the company's leases. Typically the base term on the company's leases are 10 years and typically the landlord with have modest responsibilities with grounds maintenance, roof, and structural. These factors undoubtedly scare off some investors which might pay lower cap rates otherwise. It has undoubtedly kept many institutional investors away from the product.

Although difficult to pigeon hole as an investment commodity, Sherwin-Williams stores still provide an excellent investment choice for the smaller commercial real estate investor. Many can be purchased at excellent costs per square foot and at reasonable capitalization rates. Although one must evaluate the real-estate specific characteristics of each offering carefully, the eventual Sherwin-Williams investor should be rewarded with a long-term, stable tenant for years to come.

Cap Scratch Fever

Flu season is among us, and many are protecting themselves by heading to their doctor or pharmacy for annual vaccinations. Unfortunately, no immunization exists for a malady affecting many commercial real estate investors. That malady is something we call Cap Scratch Fever (CSF), an affliction affecting legions of investors on myopic quests for ROI.

The first noticeable symptoms of CSF occur when investors toss a comprehensive investment strategy into the wind and only look at a property's capitalization (cap) rate. A quick survey of Loopnet reveals that many single tenant assets can indeed be acquired at prices boasting cap rates well up into the teens. These yields are being offered for a reason, however, as many of the assets are fraught with downstream risk.

Some examples include Dollar General stores which occupy retrofitted, earlier-generation properties (see above photo). Many such stores are being offered for sale at very attractive cap rates. However, since these older properties do not fit into the Dollar General prototype, the company has in some cases abandoned such properties in pursuit of new, relocated, build-to-suit stores which fit into the company's overall brand and development strategy. This has included stores with uniform size (approximately 9,000 S.F.), off-street parking, and consistent architectural elevations (the prototype). No one can blame Dollar General for wanting consistency in its real estate. However, this pursuit has left many investors holding vacant, older properties with residual values which fall well short of the numbers at which they were acquired.

Fortunately for investors, CSF, while dangerous, is not terminal. Recovery rates are quite high for patients who do not tarry and are rushed by police escort to see a competent commercial real estate professional. If a competent commercial real estate professional is not found within your HMO or PPO, then we suggest you follow these homeopathic steps when attempting to rid yourself of CSF:

1. When evaluating a high cap rate deal, evaluate and forecast the property's residual value. Ask yourself what the asset would be worth if and when the tenant vacates the building. Can the building be leased or sold to other users at prices relatively close to the price you're paying for the current income? If a huge chasm exists between the two, then the risk may be too great.
2. Consider looking beyond the cap rate by digging a little deeper. Consider running an internal rate of return  (IRR) analysis with a future sales price at a level below the acquisition price. As an example, if the building is held for 4 years and sold at 75% of acquisition, is it still a reasonable risk given this "worst case scenario."
3. Put your "tenant cap" on. What are the advantages and disadvantages of the tenant staying and/or leaving? In some cases the store manager or district manager or real estate representative may provide valuable information. Beware of this information, however, as often store managers are the last to know what the company's plans may be for your investment.
4. Understand the market rents in the area. Is your net leased asset commanding rent that is out of whack with other available properties in the area? If so, this is a red flag.

Hopefully by following this regimen you'll find the symptoms of CSF will slowly fade away, and you will no longer be fighting the urge to make bad investments.  If you have personally overcome a dehabilitating case of CSF yourself, please post a comment as we'd like to learn how you overcame it.

Factors Impacting Capitalization Rates

I was recently asked to respond to the following question: What factors are taken into consideration when determining capitalization rates on triple-net investment deals?

To answer this question comprehensively, we'd need more time that it will take to analyze tonight's election results. And what's worse, we'd probably be just as boring. But let's give it a whirl--in an abbreviated sense….

Capitalization ("Cap") rate differentials are driven by a variety of factors, but perhaps most notably by the tenant's creditworthiness and thus its ability to fulfill the terms of its lease obligation(s). That's why we see lower capitalization rates, and thus higher relative prices, for solid, national, and recognizable tenants such as Wal-Mart, Walgreen's, and Sherwin-Williams. The converse is true when dealing with lesser known, financially weaker, or even suspect tenants. Investors will typically demand higher cap rates, and thus lower relative prices, for assets leased to a mom-and-pop operation. The mom-and-pop might have a stellar business plan and possess market dominance, but its lack of a track record and deep pockets will penalize it in the marketplace. Too many questions exist regarding the tenant's ability to perform. Combine a lack of track record with a suspect business plan and the cap rates will catapult into the stratosphere. Imagine looking at a sale-leaseback offering from Looney Larry's Liposuction Clinics…. What sort of cap rate reward would you require to weather the risk posed by relying on a monthly rent check from Looney Larry?

Once an investor is satisfactorily comfortable with the tenant's ability to perform, other factors will be evaluated in determining a cap rate. A key factor will be the length of the primary or "guaranteed" lease term. Usually the longer the guaranteed term, the better, although some investors may disagree in that long-term leases may lack protection against inflation. Walgreen's, besides its excellent reputation and financial strength, also usually provides 25 year primary terms. Such leases are typically rewarded in the investment community in the form of lower caps/higher prices. Investors will simply pay a premium to take as much uncertainty out of their investment as possible.

Other factors can be categorized as "real estate specific" and "geographic." These categories may bleed into one another a bit. By real estate specific we might think of things like the overall cost per square foot of the asset or the age and condition of the building. To understand these factors let's assume we have two brand new Pizza Huts for sale. They're located in two similar but different markets. Suppose the land cost at one of the locations was higher than the other and consequently the one with the higher land cost was for sale for $500 per square foot (PSF) while the other was offered at $400 PSF. One would expect the cap rate to be slightly lower for the lower cost PSF building because the overall risk of the investment would be perceived to be slightly lower.

Perhaps a better example would be two Pizza Huts in the same market where one was a new build-to-suit while the other was placed in a renovated, 30-year-old building. Presumably investors would accept a lower cap rate for the newer building because the underlying real estate is perceived to be of higher quality and expected to enjoy a longer useful life.

Geographic factors can be macro or micro. Macro factors would account for cap rate differentials among regions of the country. California, for instance, will typically command a lower cap rate/higher price for an investment than its counterpart in say, Fargo. Micro factors include location factors within a specific community. Is the location "Main and Main" or is it a second tier site where one would have to rely on advance GPS technology to find it? Presumably the Main and Main location would have more residual value and thus command a higher price/lower cap rate.

While these factors should not be considered exhaustive, they will probably be found in most investors' decision-making matrix. We may have missed something, so if you're an investor, know an investor, or simply play one on television, please leave us some feedback in the "Comments" section below. We'll all benefit from your expertise.

And with that we'll get you back to the election results. We sincerely hope you've approved of this message.

Triple Net & Send Me the Check!

There’s a new player seated at the triple-net investment table, and its ante is being tossed-in from sales of dental floss, shop rags, and Spam to moderate-income Americana. The player, Dollar General Stores (NYSE:DG), is no stranger to the real estate investment community, but until this year its leases had mainly been attractive only to local, regional, or “one-off” purchasers. That changed in early 2010 when DG rolled out its latest investment product—the 15-Year NNN lease. These leases, which require no landlord responsibilities, have attracted sizable attention from institutional and national investors which had previously viewed DG leases as too cumbersome, unpredictable, and/or management-intensive.

“Most REITs, private equity groups and pension funds are not equipped with the infrastructure to manage large portfolios of double-net leases, thus they have not invested in Dollar General properties in the past,” said Wes Forlines, a broker with Tri-Oak Commercial in Atlanta. “The new triple-net lease structure has opened the door to a new pool of investors—the large institutional buyers,” said Forlines.

Dollar General’s foray into NNN deals is viewed as a positive for both the company and the investment community. The current NN format, which for the last couple of years had been DG’s flagship, requires landlords to be reimbursed for taxes and common area maintenance (DG has typically paid insurance directly) while also saddling landlords with roof, HVAC, parking lot, and structural “major repair” and replacement responsibilities. The absence of these responsibilities will now make Dollar General properties viable candidates for even the most passive investors.

The new NNN deals will be even more drastically different than much older DG leases—those entered into prior to 2000. Many of these properties operate under gross or modified-gross lease formats, where landlords are saddled with all or almost all of the costs of operating the real estate. Many of these were struck with only five or seven year original base terms and are now operating in option periods. Many of these landlords, saddled with most if not all of the property responsibilities, are now dealing with mounting maintenance expenses and increasing real property taxes, among other costs.

“Last winter was unusually harsh, and we incurred higher than average snow removal costs,” said one SVN/Fiducia Properties client—an Iowa DG landlord. “I also spent $60k on roof and HVAC replacements for my stores,” said the same landlord. Another one of our clients, the owner of multiple Kansas Dollar Generals, agreed: “I’ve dealt with a number of costs such as taxes, insurance, and major repairs that I wouldn’t have had in a NNN lease,” said the client. “Sometimes I become weary of dealing with some of the landlord responsibilities.”

If, or how soon, these gross leases will be replaced is unclear. Dollar General has demonstrated a commitment to move into more prototypical construction, but with over 8,000 stores in 35 states, it’s unlikely that shift will occur overnight.

The move should help Dollar General by enhancing the success of its preferred developers. “There were so few preferred developers that could sell their finished units for enough money with the NN lease to make the effort worthwhile, so they were starving and dropping out,” said Peter Colvin, a Sperry Van Ness broker in Grand Rapids, Michigan. “So, DG listened and adjusted their leases where necessary to keep their preferred developers healthy with product that could be financed and sold,” said Colvin.

What sort of premium would an investor expect to pay for a NNN Dollar General over that offered in a NN lease? When scanning the marketplace, it appears investors are willing to let go of approximately 50 basis points to be able to sleep easier at night for 15 years of relatively worry-free check-cashing. This might be the difference between an 8.5% asking cap rate for 15-Year NNN stores vs. a 9.0% asking cap rate for a similar deal with a 15-Year NN lease. Both Colvin and Forlines support this notion, although Forlines speculates a larger differential and cap rate “compression” for NNN DGs once the deals become more popular. Currently the 50 basis point premium appears to be reasonable, as the difference in purchase price between NN and NNN stores, both with NOI of $80k, would be a little more than $52,000.

It appears investors will continue to have both choices, as new Dollar General leases are not exclusively NNN and many new NN leases remain in the marketplace. Geographically the NNN deals at this time seem to exist primarily in the Sunbelt, with a handful trickling into the Midwest. Geographic distribution may depend on a variety of things, most notably the geographic concentration of preferred developers and Dollar General’s priorities in new store development.

For now, there are a variety of opportunities for all investor types, as value-added deals flow into the marketplace. Many opportunities for higher cap rate acquisitions exists for those willing to endure the risks associated with Dollar General’s gross and NN leases and the relocation risks which accompany non-prototypical stores (those less than approximately 9,000 SF with no off-street parking). However, we believe the NNN deals will gain traction as investors seek to shed themselves of the uncertainties that are linked to shorter-term and management-intensive leases.

Despite the lease term and type, Dollar General should continue to fill an important niche in the investment marketplace. That niche—national credit for under $1 Million and at less than $100 PSF—should continue to be a reasonable play in this current recessionary environment.

Total State Tax Revnues Increase Slightly While Others Continue Decline

Yesterday our post highlighted a report by The International Council of Shopping Centers and Goldman Sachs which documented slowing chain store sales growth during the week ending July 10, 2010.

Today we feature a post which purports to have a slightly more positive outlook. The Rockefeller Institute reported yesterday that total state tax revenues increased for the first time since 3Q 2008. Apparently by total state tax revenues the Rockefeller Institute meant the aggregate of all 50 states revenues.

Overall this news may not be so positive. Many (33) individual states still report declining tax revenues and all state revenues appear to be below pre-recession levels. Some states even realized double digit declines. The report also shows local tax revenues continue to decline. 

To read the entire report please follow this link: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-07-13-SRR_80.pdf

ICSC Reports Chain Stores Growth Slowed During Recent Week

The International Council of Shopping Centers (ICSC) and investment bank Goldman Sachs reported today that the growth of retail sales at chain stores slowed during the most recent week. The findings were documented in the ICSC-Goldman Sachs Chain Store Index which reported a 1.5% decline in store sales growth for the week ending July 10, 2010.

The overall growth was still positive, measuring 3.2% over the same period last year. To view more information from ICSC please follow this link: http://www.icsc.org/homepage/research_article.php?id=171

About ICSC: Founded in 1957, the International Council of Shopping Centers (ICSC) is the global trade association of the shopping center industry. Its 60,000 members in the U.S., Canada and more than 80 other countries include shopping center owners, developers, managers, marketing specialists, investors, lenders, retailers and other professionals as well as academics and public officials. As the global industry trade association, ICSC links with more than 25 national and regional shopping center councils throughout the world.

Recent Retail Cap Rate Trends

Capitalization rates for NNN retail properties appear to be stabilizing, according to a recently published report by Washington, D.C.-based Calkain Companies, Inc.  The report, entitled 2010 Cap Rate Report, documents movement in transaction volume and cap rates over four primary retail sectors--Dollar Stores, Banks, Pharmacies, and Quick Serve Restaurants. Over 1,600 NNN retail transactions were studied by Calkain in the study.

The Calkain report identified several factors that appear to continue to force upward pressure on cap rates. These include persistently tight credit markets and lingering concerns over the economy.  However, other factors appear to be pointing to at least a modest stabilization in cap rates, if not during the second half of 2010 then into 2011. These include perceived improvement in economic indicators, scarcity of quality inventory, and slight influx of 1031 tax deferred exchange money and a flight to quality investments.

In looking at the four studied sectors, only Quick Serve Restaurants (QSR) experienced cap rate "compression" in 2010. It is presumed that this was the case due to the fact that most QSRs are located in major markets and have strong brand recognition although other factors were cited as well.

Apparently the largest beneficiary of recent market trends is the Dollar Store sector. This sector is composed of three primary tenants--Dollar General, Family Dollar, and Dollar Tree. These retailers have actually added a significant amount of new stores over the past year, apparently due to their role as a "Substitute Good," or more specifically a "Substitute Retailer." (See previous blog post) Dollar store cap rates averaged approximately 9.5% in 2010, up slightly from their 2009 average of 9.2%.  These higher cap rates are attributed to the fact that dollar stores are generally located in secondary or tertiary markets and that most of their leases have been NN rather than NNN.

Pharmacies continue to be viewed as quality investments and remain stable. The perceived creditworthiness of tenants such as Walgreen's and CVS has driven demand in this sector. Walgreen's, perhaps the "flagship" pharmacy investment, had an average cap rate of 7.7% in 2010, some 50 basis points below the pharmacy sector average of 8.2%. Demand for pharmacy investments are typically driven by long lease terms, tenant stability, and strong locations/market presence.

One noteworthy issue is the continued bid-ask spread among all net leased retail sectors. We at Sperry Van Ness/Fiducia Properties have experienced this phenomenon acutely.  Although the re-entry of buyers into the market is noteworthy, getting those buyers to agree with sellers as to the worth of a specific asset is extremely challenging. We've observed an approximate 40-60 basis point difference of opinion between buyers and sellers of net leased assets, specifically in the Dollar Store class.

Although the Calkain report suggests more of a return to normalcy and cap rate compression in 2011, others are not so optimistic and anticipate continued upward pressure on the returns for NNN retail investments. Undoubtedly many factors will come into play which will affect specific cap rates in specific markets for specific assets.

You may review the Calkain report in its entirety at http://calkain.com/reports/CAP-Rate-Report-2010.pdf.

For more information on specific investment opportunities in the retail NNN market, please contact us at 888.879.2083 or via email at greg.finley@svn.com.

Old Friend Returns to Market

Sperry Van Ness/Fiducia Properties welcomes a familiar friend back into the folds of its listings. The friend? B and D Auto and Truck Plaza in Lebanon, Missouri.

SVN Fiducia Properties marketed this asset during even tougher economic times--when the nearby interchange was under construction back in 2008--but is rolling the property back out at a lower price and better price to gross profit ratio.

B and D is a full service truck stop with restaurant and convenience store and is located at mile marker 127 on Interstate 44 in Lebanon, Missouri. Lebanon is located less than an hour NE of Springfield and about 2.5 hours SW of St. Louis. Lebanon is the county seat of Laclede Co. Located nearby are a variety of recreation-related entities such as Bennett Spring State Park, a well known haven for trout fishermen.

B and D enjoys little competition in the area and has operated at its current location for over 45 years. It is a well known and frequented destination for truckers and other travelers who utilize busy Interstate 44.  Speaking of Interstate 44, does anyone remember C.W. McCall's hit song "Convoy" from the mid-'70"s? That song mentions Interstate 44, but sadly, not B and D.

B and D's new price is $2,750,000 which represents a multiple of 2.88 times gross profit. The asset is located on 10.75 acres of prime real estate. To learn more about this outstanding business opportunity, please contact us toll free at 888.879.2083 or shoot us an email at greg.finley@svn.com.

That's a big 10-4, Pig-Pen. C'mon.

What Do Dollar General, Arthur Laffer, and Pulled Pork Have in Common?

We've posted here a number of times about the real estate investment opportunities of owning properties leased to Dollar General Stores. We think Dollar General offers the investor an excellent, low cost per square foot investment at a lower-than-average price point.

Today we're offering a look at the lighter side of Dollar General. If you're interested in a humorous excursion from today's brutal marketplace, follow our link to our sister blog, the (hopefully) humorous Finley River.

Enjoy!

http://www.finleyriver.com/

Retail Investment Property Capitalization Rates

A recent survey conducted within Sperry Van Ness revealed some interesting trends regarding the capitalization rates being delivered by properties net leased to leading national retailers. The survey, while providing primarily anecdotal information, contained a large enough sample size that it should be considered reliable for investors seeking to compare returns among various retailers' real estate. The study period included sales closed during 2009.

A table documenting the results of the survey is presented below:

Tenant                 Approx. Cap Rate
Dollar General                9.00%
Family Dollar                  9.00%
Applebee's                     9.00%
Macaroni Grill                9.00%
Advance Auto                8.20%
YUM (Taco Bell/KFC)      7.75%
Walgreen's                     7.75%
Best Buy                        7.50%
McDonald's                     7.25%

The results displayed represent averages for the various property categories. Obviously capitalization rates are affected by a variety of factors such as lease term, tenant credit, specific location, and regional economic environments. It was noted that information on McDonald's investments was primarily composed of ground leases. Ground leases, all other things being equal, often provide as much as a 50 basis point higher return than do their brick-and-mortar counterparts.  Bank ground leases, while not presented in the table, were reported to be yielding cap rates of around 8.0%. Similarly, FedEx (not reported here because considered industrial) net leased sales, were tracking at a similar return.

Several "take aways" result from this information. First, cap rates continue to inch higher. They have reached 10% for good shopping centers and gone up into the teens for struggling ones.  They are likely to creep higher for single tenant sales before stabilizing.  Second, good returns are being provided to owners of reasonably strong retailers. More and more investors are realizing it will be difficult to approximate 9% returns for investments which provide significantly less risk than does a Dollar General, Family Dollar, or Applebee's guarantee.  Finally, many retailers are adding new product to the investment pipeline. While not plentiful, there appears to be some choice in the marketplace. For some of the retailers above as many as 50 sales were utilized in the analysis. Some of this product is new construction, others are sale-leaseback situations.

Please contact Sperry Van Ness/Fiducia Properties to see how we may assist you in tapping into the retail net lease product line. We're available toll free at 888.879.2083 or via email at greg.finley@svn.com.

Dollar General Initial Public Offering

Sperry Van Ness/Fiducia Properties has had a number of questions about the nature of the credit standing behind Dollar General Stores. Some of these questions have revolved around whether or not Dollar General is publicly traded.

Dollar General was a publicly traded company until early 2007 when Kohlberg Kravis Roberts Co. (KKR) took the company private.  After owning the company for some two-and-a-half years, KKR took Dollar General back public, with an initial public offering (IPO) this past November 13.  Dollar General now trades under the ticker symbol "DG" on the New York Stock Exchange. DG's shares were brought out at the November 13 IPO at $21 each. They were trading at slightly higher than $23 per share intraday January 4, 2010.

Dollar General's credit is still rated slightly below investment grade by Standard and Poor's. The company's debt is currently rated BB-. Typically BBB- is the lowest rating considered investment grade.

For more information about the DG's IPO, please follow this link http://www.cnbc.com/id/33893679 for an article from CNBC.

Dollar General Plans 600 New Stores in 2010

The CoStar Group reported last week that Dollar General Stores intends to add 600 new stores in 2010. The discount chain currently boasts over 8,700 properties and has thrived in the current recessionary environment.

Dollar General reported net income figures for the first 9 months of 2009 were almost 300% higher than for the same period in 2008. Total net income for the 2009 period was posted at $63.7 Million.

A particularly noteworthy metric was Dollar General's same-store sales growth of 10.3% over last year. Same-store sales growth provides an excellent picture of the chain's core performance as it eliminates growth measurements attributed to new store development, thus providing a better snapshot of what type of growth is occurring in existing markets.

To view the CoStar article in its entirety, follow this link: http://www.costar.com/News/Article.aspx?id=91BB9984AD97B16AE0F5CDCEF7A53996

For investors, Dollar General Stores provide a stable tenant with relatively long-term leases at excellent price points (under $1 Million--often under $750,000) at outstanding costs per square foot (usually under $100).  In 2010 Dollar General began to introduce 15 year primary lease terms and is rumored to be moving from NN leases toward absolute NNN leases.

Sperry Van Ness/Fiducia Properties has assisted several investors with the acquisition and disposition of Dollar General investment properties. We also attempt to keep abreast of other brokers' inventories so that we can identify the best opportunities for our clients and customers.

Please contact Greg Finley at 888.879.2083 or greg.finley@svn.com for a more thorough discussion of available Dollar General and other commercial real estate investment opportunities.

Dollar Generals and Ground Chuck

The overall market for net leased retail properties remains sluggish. However, one tenant has commanded respectable demand among investors because of its recession-resistant business model. The tenant? Dollar General Stores.

Dollar General seems to do well in good times but even better in poor times. The Goodlettsville, Tennessee-based retailer has seemed to thrive in the current economic climate as the company's discounted price-points have attracted penny-wise consumers. If you were awake during Econ. 101, you might loosely connect these dots to an economic concept called "substitute goods." Think buying ground chuck when you can't afford filet mignon.

The real estate investor community has taken notice of DG's business model. The model, coupled with attractive price points (often under $1,000,000) and lower costs per square foot (often under $100), have enhanced the attractiveness of this once ho-hum investment.

But we've noticed an interesting phenomenon in the current marketplace. There is little, if any, adjustment in capitalization rates among Dollar General stores being offered in communities with differing demographic profiles.

As an example, we looked at two Dollar General stores being offered in Missouri. One in Garden City, a small, "exurban" location about 50 miles south/southeast of Kansas City. The other in Rolla, a medium-sized community located in south-central Missouri.

Both of these stores are new or under construction and possess 15 year leases with Dollar General (the 15 year leases are a relatively new phenomenon for DG investors as most previous leases did not exceed 10 years). Both are being offered at capitalization rates of 8.75% despite two drastically different demographic profiles.

We recognize that many believe an investment is an investment and Dollar General credit is Dollar General credit whether the asset is located in Katmandu or Tucumcari. True enough in one sense, but we're somewhat surprised that at least minor adjustments in price aren't factored into varying demographic community profiles.

After all, at some point in the future--perhaps 15, perhaps 50 years--Dollar General will no longer desire or be able to lease the particular building which the investor might be evaluating today. At that point the investor/landlord will have some decisions to make. At that point the asset’s "residual value" will come into play.

The residual value of a leased asset essentially answers the question: What is the building worth when my current tenant is no longer paying me rent? Other questions stem from this one. Is the rent I'm getting from Dollar General today achievable in 15 years, if vacated, given various supply and demand factors in the particular community? Can I sell the building as a warehouse to a local business? What other types of tenants are likely to desire this property? Did I pay too much per square foot to ever sell to any reasonable buyer in the future? Did I pay too much per square foot to be able to realize a reasonable ROI from “Tenant B?”

In the case of our two DG examples, we see identical offering cap rates (8.75%). However, the Garden City store has access to only 1,733 persons within a five mile radius while the Rolla store has access to almost 14,000 persons within a similar concentric five mile radius. At first glance this phenomenon could be attributed to the fact that these two stores are being offered by the same brokerage company on behalf of the same owner. After all, this is very common when offering a portfolio of properties. Often similar asking prices are offered for multiple properties with the assumption that the market will take care of differences among the individual properties when final prices are negotiated.

The 8.75% cap rate, however, appears to be somewhat of the asking norm when evaluating other similar Dollar Generals around the country and is not specific to one owner or broker. Indeed, a new, 15-year leased Dollar General in Amarillo, Texas was observed with an asking cap rate of 8.75% as well. This is so despite the whopping 76,837 persons located within five miles of this store. This offering is by a different brokerage company and owner than those of the Missouri stores.

So what does this mean? Perhaps owning a Dollar General in the little berg of Garden City, Missouri is just as attractive as singing Amarillo by Mornin'. Perhaps there's no more difference in geographic ownership of a real estate investment "commodity" than there is receiving a company stock certificate from Edward Jones or Merrill Lynch.

Over the next few months we'll be doing some more sophisticated analyses in an attempt to evaluate whether or not the marketplace is rewarding the perceived benefits derived from more attractive demographics and other factors. We'll also attempt to see what else is going on with other metrics like cost per square foot, etc. In short, we'll try to determine what the market is saying about some of these factors and whether or not it should matter to buyers and sellers of these assets.

We'll probably release a little information at a time. This won't be a doctoral dissertation but hopefully a fluid investment advisory tool released in useful vignettes. In between blog posts on this topic, feel free to contact us at our toll free number (888.879.2083) if you have any questions or comments about Dollar General stores or any other topic pertaining to commercial investment real estate.

Kmart Sub-lease Opportunities

Sperry Van Ness/Fiducia Properties is participating with other SVN Brokers in the offering of excess Kmart space for sub-lease.  This effort is happening in conjunction with the Chicago office of Grubb and Ellis and is undertaken on behalf of Sears Holding Company.

Sperry Van Ness/Fiducia Properties is marketing seven properties in Missouri and Iowa. Each of these excess spaces are former automotive service centers and range from 4,000 to 10,0000 square feet in size.

The specific properties which are being marketed by SVN/Fiducia Properties include St. Joseph and Sedalia in  Missouri and Cedar Rapids (2 stores), Des Moines, Ames, and Dubuque in Iowa. The photo above displays the space available at the Kmart in Ames, Iowa. The Ames store is the largest Kmart in the state of Iowa.

Contact us toll free at 888.879.2083 to learn more about these properties.