C Store Cap Rates Rise; Industry Consolidation Continues

ORLANDO-Despite the overall transaction market trend, sales of convenience store/gas station properties were relatively strong last year, according to the first half 2009 single-tenant retail report from Marcus & Millichap Research Services. Rising average cap rates for the property niche – in 2008, they reached their highest since 2002 – is one factor credited with fueling an increase in transactions.

“In 2008, sales velocity…surpassed the levels recorded in the prior year, as investors were attracted to the sector’s cap rates, which increased roughly 80 basis points in that time to the low-8% range,” the report states. “As profitability among operators continues to accelerate, these properties will likely remain a preferred choice among investors.”

That said, sales transactions slowed in the latter part of the year and have yet to show significant signs of picking up thus far in 2009, says Steve Horn, senior vice president of acquisitions for Orlando-based National Retail Properties Inc. At the same time, cap rates are moving in the opposite direction. “Cap rates have edged upward in the c store industry,” Horn says.

The c stores segment is one area of retail that National Retail Properties continues to be particularly bullish about. Horn notes that convenience stores typically have very solid real estate–hard corners and signalized corners, for instance–and that the relatively small individual property price means you can easily gain diversification with multiple purchases.

“We’re actively looking at acquisitions in all [retail] industries, but we’re particularly interested in convenience stores and movie theaters,” Horn says. He adds that the more modern c store formats–those that have expanded capability for food service–are most desirable today, since higher margin food service means the tenant has a greater ability to pay rent.

At the end of 2008, there were more than 144,000 convenience stores in the US, according to the NACS, the Association for Convenience and Petroleum Retailing, a 1% decline from the country’s 2007 c store count. While single-store store operators account for 62% of the industry, they also represented the bulk of last year’s decline in the overall number of c stores operating in the country, according to the NACS.

And the larger operators appear to continue to grow their market share. Dallas-based 7-Eleven Inc., for example, announced last month what it termed “aggressive expansion” plans in the US and Canada, saying it expects to add more than 200 stores this year.

“Plans call for the company to accelerate store development over the next several years through organic growth, acquisitions and its business conversion program,” the company says in an announcement. “7-Eleven has a multi-pronged approach to growth that includes in-line, end-cap space in shopping centers, freestanding stores, urban locations in light industrial sites, city residential areas and suburbia.”

Sanford, NC-based The Pantry Inc. is another c store operator that continues to grow through acquisitions. Back in April, Pantry announced that it had agreed to buy 40 convenience stores, including the underlying real estate of 32 of the locations, from Herndon Oil Corp. The majority of the properties are located in the Mobile, AL area, with several in Florida, Louisiana and Mississippi.

Also in April, Quebec-based Alimentation Couche-Tard Inc. inked a deal with Exxon Mobil Corp. to buy its On The Run c store franchise system in the US as well as 43 of its company-owned and operated sites in the Phoenix market. As part of the agreement, Couche-Tard will purchase the land and buildings of 33 locations and assume or enter into new leases for the remaining 10 locations.

Both Pantry and Couche-Tard said they will pay for their acquisition with available cash on hand. Both have done sale-leaseback transactions in the past.

And in theory, sale-leasebacks could continue to be a way to fund future growth in an industry that continues to find itself in the hands of fewer and larger operators.

“Consolidation is still happening within the industry,” notes National Retail Properties’ Horn, albeit currently at a slower pace than in prior years.