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.