CHICAGO — In an era wherein investors are generally bearish on the performance of retail properties, single-tenant, small-footprint assets leased to convenience stores may be an exception to the rule, according to a recent report from Chicago-based Quantum Real Estate Advisors Inc.
The average capitalization rates for convenience stores flying under two brands — 7-Eleven and Alimentation Couche-Tard, which owns Circle K and Kangaroo Express — decreased from 2016 to 2017, according to the report. Despite the cap rate compression, though, investor interest in single-tenant retail properties leased to either of these firms is on the rise.
The report found that the average cap rate for 7-Eleven stores decreased by six basis points between 2016 and 2017, while Couche-Tard stores experienced an average cap rate compression of 74 basis points during that stretch.
Average cap rates for these 7-Eleven and Couche-Tard stores, which typically operate on 10- to 20-year leases, now stand at 5.1 and 6.1 percent, respectively. And while cap rates for both chains appear to be trending downward, they also reflect stability in the sense that they are bucking the larger trend in retail real estate — a key appeal to investors.
As such, investor demand for these properties is on the up. On average, sales prices for single-tenant retail properties leased to 7-Eleven now fetch nearly $3 million per transaction, according to the report. In 2016, such properties sold for about $2.5 million on average.
These two chains have seized dominant shares of the convenience store market in terms of volume of stores. The report identifies the top 10 largest players in the convenience store space, which operate 26,569 stores between them. Of those, 15,535, or 58 percent are either 7-Eleven or Couche-Tard shops.
Irving, Texas-based 7-Eleven, the overall market leader with 8,303 locations, expects to open approximately 1,700 new stores by 2019. The company is also in the process of acquiring 1,108 stores across 18 states belonging to one of its competitors, Sunoco LP. That deal, which is valued at $3.3 billion, is expected to close in January 2018.
“Over the course of 2017, we’ve noticed an increase in cap rates for single-tenant retail properties,” says Kush Patel, an analyst at Quantum. “But with convenience stores, specifically 7-Eleven and Circle K, cap rates have been very stable and in some cases actually decreased.”
At the most fundamental level, Patel adds, these chains are performing well because the products they offer — mostly consumables, like food, alcohol and tobacco — are relatively resistant to e-commerce. 7-Eleven also recently expanded its food offerings to reflect more healthy choices and attract new customers.
But beyond basic product diversification, 7-Eleven’s growth stems from in part from its creditworthiness as a tenant, which is augmented by the fact that the company’s corporate office guarantees the leases on the majority of its stores. The company signs direct licensing agreements with its franchisees — essentially subletting the space to them — so that if a franchise operator runs into financial trouble, he or she can be easily replaced without suffering major harm to the business.
According to Patel, this policy has helped maintain low cap rates on properties leased to 7-Eleven in locations that lack high household income levels and/or heavy population densities. Investors remain interested in these assets, however, because the creditworthiness of the tenant reduces the risk to the buyer.
“You see a lot more value being created through this approach of having the actual company back the real estate,” he says. “This policy makes the tenant and the landlord feel safer and less hesitant to invest in the expansion of the business. As a result, they end up having access to more lines of capital than their competitors do.”
As for Alimentation Couche-Tard, a Canada-based firm with more than 12,000 stores worldwide, growth is also on the horizon. The company reported a quarter-over-quarter increase in earnings of approximately $130 million between 2016 and 2017, with its total revenue from merchandising and service up 23.4 percent.
To read the full report, click here.
— Taylor Williams