Posted by ray@lcorn on February 05, 2010 at 12:32:21:
In Reply to: Re: Dollar General Stores posted by OhioBill on February 04, 2010 at 22:16:57:
Bill,
Believe it or not the store data you supplied looks pretty good for the two in towns with positive growth. Like I said in the article, DG is a good company and nothing I wrote was meant to disparage them as a tenant.
At the time I wrote the article I was calling into question the valuations on these deals and others like them. I felt at the time people were losing sight of the fundamentals, and DG happened to be the most prolific deal going at the time, and I used them as an example because most readers could drive by one in their hometowns to see what I was talking about.
The point is to find a balance between the guaranteed income stream of a STNL deal and the intrinsic value of the site and improvements, rather than relying solely on a cap rate to establish value.
On the deals you describe the fact that sales are above system average, the leases were renewed and the small town size are all positives. That small town model is their template, for a big reason: below average costs on everything, e.g. land, construction, employee labor, property taxes, etc. fits their business model like a glove. It also cuts avoids big box competition entering those markets. Makes sense now, eh?
Next, I'm not quite following your amortization scenario of "the whole $900,000"... are you saying 100% financing? Probably not, so I'd need clarification on the actual deal structure and individual store LTV to comment.
However, if the loan balances work out to $37.50 psf that's actually about 25% below replacement cost, not counting land. Again, not a terrible scenario if you look at it the right way.
What usually happens with the financing is that the loan term is matched to the lease term, but as a reset rather than a call. So if DG doesn't renew you have the opportunity to reset the interest rate to then market rates, and re-amortize the balance over a new 20 year term, probably also with a 3-5 year term. So the dark scenario isn't disastrous, but you are then subject to the market rate for office/warehouse or flex space rates in that market. Depending on the debt terms your break even could be as low as $5 psf. In my market Office/WH space is priced at $6-$7 psf, with a broad tenant pool (e.g. small contractors, service businesses, etc.) so there is money to be made in the worst case scenario.
Going back to the original point, what is important is to do the initial valuation with the proper risk premium, which includes the residual value; focus your investment plan on establishing the best, worst, and most likely scenarios for exit strategies; and structure the financing to match the investment plan.
ray
- Re: Dollar General Stores OhioBill 14:58:25 02/05/10 (0)