By the fickle flow of luck and circumstance, the store you’re operating may suddenly be worth more today than yesterday—depending on a few variables.
Such variables could include the region, demographic shifts and whether there’s a master-limited partnership (MLP), major-oil spinoff or cash-heavy investor on the prowl near you.
Yet, buoyed by continued low interest rates and a growing pool of willing lenders, operators are seeing multiples—the measurement by which c-stores are valued—inching higher and higher, even for kiosk-only sites left over from major oil’s gas-focused business models.
“My view is that multiples remain strong,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago, tying the trend back to relatively cheap financing. “People can pay more if they borrow more.”
While multiples a few years ago were in the range of 5x-6x, Ruben says recent deals have been in the 7x-8x range; some in California, where many barriers to entry exist, have been as high as 11x. He qualifies the deals as involving owned real estate vs. leased, because a title to the land holds more weight than a leased property.
Still, outside of the issue of “cheap money” and the fact that businesses large and small, public or private, are under constant pressure to grow to meet ever-increasing operating costs (and to make a profit), other factors are influencing rising multiples:
▶ Spinoffs and MLPs. The tax advantages and favorable trading figures that MLPs and major-oil retail spinoffs have enjoyed puts them in a different position than most retailers, providing incentive to bid the competition out of the running. In addition, MLPs have a fuel-distribution focus, putting more emphasis on consolidating wholesale distribution and fueling contracts.
▶ Return to urban centers. A demographic shift back into America’s inner cities, especially by millennials, is spurring demand for options in what have become retail deserts.
▶ Greater demand for convenience. As more people move back into urban areas, the need for convenient access to goods and services increases.
▶ Online retailing pushing smaller-format stores. As a real-estate trend, the blending of online and brick-andmortar retailing is giving rise to smaller formats—e.g., big-box giant Walmart building Express stores.
Trends such as these often affect both buyers and sellers, leading those tempted to sell to test the waters and those hoping to grow to move past kicking tires.
Holding Different Cards
Much of the potential energy building for a new round of M&A is coming from the growing number of spinoffs and MLPs. The new entities are entering the publicly traded arena with a high degree of success, significantly enhancing their abilities to access capital, reinvest and grow, according to Roger Woodman, managing director of Raymond James Investment Banking, St. Petersburg, Fla.
“The existing public c-store companies are trading at elevated multiples relative to historical valuations,” Woodman says. “And MLPs, such as Susser Petroleum Partners and Lehigh Gas Partners, are trading at even higher multiples of EBITDA than the C corporation companies.”
Most conventional publicly traded c-store companies, even those with a petroleum distribution segment, are structured as C-corps, while the MLP is an alternative structure that is gaining favor within the channel.
Woodman cites Lehigh’s recent closing of a nearly $100 million offering as fodder to fuel its “desire to expand its business and grow distributions to its unit holders.”
Under the tax code, MLPs must earn a sufficient amount of qualifying income, which includes profit from the wholesale distribution of refined products to convenience stores, so “there’s a lot more demand for fuel distribution acquisitions than there was in the past,” Woodman says. “That business is as fragmented as the c-store channel, and like in retail, it’s harder for smaller distributors to compete against larger companies.”
Clearly, MLPs, spinoffs and other types of industry consolidators—especially those with tax advantages, strong access to capital and significant scale—operate worlds apart from the vast majority of the industry.
Taking the example of MLPs even further, there’s clear opportunity beyond consolidating the fuel distribution side of the business.
In the past few years, a number of industry players with significant qualifying assets—such as wholesale dealer accounts and real-estate rental income from owned land leased to third-party dealers—have opted to take advantage of the tax breaks associated with the MLP structure, combined with the liquidity of publicly traded securities. Qualifying for MLP status means that the MLP isn’t subject to corporate income taxes, according to research provided to CSP by Raymond James. One of those elements can be land.
Simply put, an MLP has a “cost of capital” advantage because of its tax structure and can realize more accretion than a C-corp from acquisitions given the same price. Put another way, MLPs can often justify paying a higher purchase price relative to a non-MLP for the same assets.
Corpus Christi, Texas-based Susser Holdings is a prime example. Earlier this year, it closed on an $88 million deal to buy the 47-store Sac-N-Pac chain based in San Marcos, Texas.
Among its related businesses is the MLP Susser Petroleum Partners, which was formed in 2012. While Susser Holdings’ latest investor report did not mention sale-leaseback intentions for Sac-N-Pac, it has a history of doing so with its new builds. So far in the first quarter of 2014, Susser has completed sale-leasebacks for five stores at a cost of $19.5 million. Since its initial public offering, Susser Petroleum Partners has completed sale-leaseback transactions for a total of 38 newly built stores at a cumulative cost of $152.7 million.
Such ability begs the question of whether or not even low-volume, kioskstyle sites eventually go for unusually high multiples. The fuels distribution side of the MLP argument seems to bolster that sentiment, but larger deals always include lower-volume sites that as part of a larger package would typically go for higher multiples.
While the figures for Sac-N-Pac weren’t broken down by site, clearly, by what the publicly held company did disclose, the size of locations varied. Susser offi cials said the company plans to initially operate all 47 stores under the Sac-N-Pac brand. Over the next six to 18 months, Susser may convert some of the sites to the Stripes brand, may add the Laredo Taco Company brand to certain locations or may elect to convert some sites to the company’s wholesale dealer network.
“MLPs with their tax advantages buy at high multiples,” says Jeff Kramer, CEO of Kramer Strategic LLC, Denver. He’s transitioning from Prima Marketing, a company that sold the bulk of its chain—74 c-stores—in 2012 and 2013 to Dallas-based 7-Eleven. “And [MLPs] have a big incentive to grow because that’s what Wall Street likes to see.”
Flush with Cash
MLPs aren’t the only ones armed with tax breaks. Major-oil spinoffs of retail assets can occur tax-free. Most recently, San Antonio-based Valero spun off its 1,900-store chain into separate entity CST Brands. The move came tax-free, with shares doled out to current Valero stockholders at a rate of one share for every nine held in Valero.
While it is unclear what advantages the tax-free transition brings to future acquisition moves, it certainly helps going forward. All in all, CST Brands is positioned to grow in whatever way it decides, having $550 million in bonds, new fuel contracts that freed up $300 million in cash and a credit revolver it hasn’t touched [CSP—Jan. ’14, p. 42].
Beyond tax incentives, willing lenders are also influencing the landscape. Providence, R.I.-based RBS Citizens Convenience and Retail Petroleum Finance Group recently completed the closing of a $32 million, five-year credit facility with Nouria Energy Corp., Worcester, Mass., a c-store operator and wholesale fuel distributor serving the New England region.
The transaction includes term loan facilities to refinance existing debt, a development line of credit that will be used to finance the acquisition or development of new locations, and a revolving line of credit to be used for working capital and letters of credit.
“The RBS Citizens Convenience and Retail Petroleum Finance Group understood our business, which is why they were able to structure a facility that met our needs,” Nouria chairman Tony El-Nemr said in a press release. “This transaction will put us in a great position to meet our growth plans and reach our goal of a half-billion gallons and beyond.”
Buying Frenzy Ahead?
Without even mentioning some of the more active buyers in 2012-2013—such as 7-Eleven, Alimentation Couche-Tard and Casey’s General Stores—the number of new entrants ready to shake up the market seem to be growing by the quarter. And yet market prognosticators such as Ruben of NRC believe 2014 will be more of a market-by-market scenario of fits and starts.
“To me, multiples are a function of two things: where properties are, or the nature of the buyers,” Ruben says. “Certain properties in geographical parts of the country are harder to get zoned and permitted for c-stores … and 90% of the people in the industry rely on local banks and national lenders, who typically require [retailers to come up with] 30% of the equity on their own.”
That said, Ruben believes certain markets are hot, including California, Florida and Texas. He cites “tremendous” interest in Dallas, Austin, San Antonio and Houston. Chicago is another strong market, as is the Northeast because of limit availability and numerous barriers to entry.
Another enticement in many key markets are population shifts back into urban centers, according to Buxton, a real-estate consultancy based in Ft. Worth, Texas. In its “2014 Retail Real Estate Outlook,” the firm cited the trend, especially among the millennial set, which appreciates convenient shopping experiences.
“Convenience is a priority for these young professionals,” the report said. “And smaller-footprint stores give businesses the ability to reach shoppers in previously unrealistic locations, such as downtown areas.”
Given overlapping trends of online retailing and the push by other channels to get into these smaller footprints, the competition for retail properties is only going to intensify, the firm said.
“[Stores there] will go to buyers who can pay more,” Ruben says. “It’s difficult for the average retailer in those areas to grow. There’s a limit to how much they can borrow, so they’ll run into trouble with the big guys.”
The larger issue will be when opportunity and objective meet, says Kramer of Prima Marketing. “There are always companies on the lookout for acquisitions that fit, particularly if it offers synergies,” Kramer says. “If you’re paying what might appear to be a high multiple, the overhead savings, improved buying power and today’s low-cost financing may make the numbers work. It’ll be an especially solid deal, if it’s a strategic buyer expanding to an area that’s hot for them.”
Kramer also alludes to a more powerful buyer within the c-store ranks. It’s not any known chain or spinoff; it’s the aggregation of independent hopefuls who want to get into the business. While he sold the bulk of his chain last year to 7-Eleven, he also sold 14 as one-offs.
Ruben of NRC concurs. In a recent portfolio of 140 stores, NRC saw 3,000 prospects. “There’s an appetite for stores at all levels of the industry,” he says. “We may have fewer interested in Butte, Mont., than Tampa, Fla., but there’s way more demand than supply.”
Of course, these trends influence c-store value on a level outside of any operator’s control. Retailers want to manage their own destinies, says Leo Vercollone, president of VERC Enterprises, Duxbury, Mass. Operators such as himself, he says, are interested in “profitability for today, the short term, say 30, 60, 90 days out; and second, how I’m doing as a company. What am I doing to be more profitable? Is the asset growing?”
Making Your Own Luck
While Vercollone has no interest in selling, he says his company also assesses the market for the sake of the other stakeholders, especially in the event of a sudden change, be it the death of an important employee, a new regulation or threat from a formidable competitor.
Those ongoing, base assessments provide an important perspective, Vercollone says, because what he values in a location may be different to another operator.
“Sometimes I see markets I won’t want to operate in—say, places where you can’t get a [certain] markup on cigarettes because of the competition, where the politics of the area aren’t favorable or neighborhoods where my employees won’t feel safe,” he says. “But a publicly traded company may look at things differently.”
At 25 stores, Vercollone, in his words, “is not in that class of organization,” but he has no doubts that many of the publicly traded companies and newly formed spinoffs and MLPs “by definition are strategically in a position where they can do it.”
He sees that as a plus, saying, “At the end of the day, it’s a rising tide.”
Hot Markets for Retail in 2014
In determining what areas of the country were ripe for retail heat in 2014, real-estate consultancy Buxton, Fort Worth, Texas, says one mitigating factor is population migration. Citing 2010 U.S. Census data, it said the 10 fastest-growing “metropolitan statistical areas” over the past 10 years were primarily in the South and West, in states such as Florida, Utah, North Carolina and Texas.
Citing Los Angeles-based IBIS World, Buxton says the majority of real-estate activity going forward will likely take place in the Mid-Atlantic, West and Southeast.
Buxton researchers said they examined 2013 site scores run by a sample of approximately 100 current clients, primarily in the retail and restaurant industries, and identified markets drawing interest for potential investment in the coming year. These markets are:
▶ Dallas/Fort Worth
▶ Houston
▶ Austin, Texas
▶ Los Angeles
▶ San Francisco
▶ Phoenix
▶ Seattle
▶ Chicago
▶ Atlanta
▶ The Northeast corridor (New York City, Boston, etc.)
Other large markets also generating interest include Minneapolis; Milwaukee; Portland, Ore.; Denver; Salt Lake City; St. Louis; Kansas City, Mo.; and Nashville, Tenn.
North Carolina continues to grow. There was a heavy concentration of site scores in Charlotte, Raleigh and surrounding cities. And in a much-needed good report for the bankrupt Motor City, retailers examined a large number of sites in the Detroit area, the Buxton research indicated.
A Seller’s Advice
Retailers looking to take advantage of growing multiples must still take the time to plan ahead, according to Jeff Kramer of Kramer Strategic LLC, Denver. He suggests several steps to take:
▶ Review tax options. Retailers can do many things to save on or defer taxes in light of any deal, he says. For instance, sometimes a buyer is more interested in taking over an operation, so leasing the land may be a better way to go in terms of taxes.
▶ Review all environmental issues. Planning on this matter is instrumental. Many concerns can be mitigated by tools such as new, creative insurance policies.
▶ Keep up with potential transaction partners. They may not want to do a deal today, yet they may decide to do so in the future.
▶ Know what you can do well. To maintain the value of any business, retailers need to know what they do well so they can guard that quality against the competition.
Kramer has faith that knowledgeable retailers can thrive, even against the most formidable competitors: “You can have a phenomenal niche in the most competitive market.”
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