Money is tight, but some convenience store operators are finding the means to finance remodels or even acquisitions.
Generally speaking, the availability of money depends on the size of the operator, according to Mark Radosevich, president of PetroProperties & Finance LLC in Miami. “The guys who are moderate size to large generally have relationships with a local bank, so they’re able to do that. It really depends on the magnitude of the project.”
Financing of late has become extremely challenging, Radosevich said. “A raze and rebuild is a different animal than a remodel in that you’re going to knock it down and start over. That’s going to entail some financing, and it’s hard to do that on your own—the environment is still very, very difficult.”
Banks these days just aren’t willing to loan as much as they used to, “and when you can find one to do it they’re charging a premium in rates for money and the term of the loan is shorter,” Radosevich said. “They’re not amortizing the loans out as far as they had been, so you’re having to either refinance the loan in a shorter window or looking to pay it off at a much more rapid pace than you would with a longer amortization.”
While the EMACs and FMACs of the world have come and gone, retailers are finding that old banking relationships still matter. “Smaller regional banks with which convenience store retailers have a relationship are providing financing for upgrades and, to some degree, acquisitions,” said Kevin Shea, executive vice president of Getty Realty Corp. in Jericho, N.Y., which oversees 1,100 convenience and gasoline properties in 20 states. “For the most part, the large national banks have really cut back on their lending sector. A lot of them have closed the offices that did write loans for this sector.”
Alternatively, Shea pointed out, “A lot of folks are turning to firms such as ours that provide sale leaseback financing. We continue to be active in the convenience and gas sector. It’s the only sector that we invest in. We’re still out there, and we are, in fact, actively pursuing sales leaseback opportunities in the C&G sectors.”
Loan-to-value advance ratios from local banks have dropped “precipitously,” said Shea, from approximately 85% earlier this decade to anywhere from 55% to maybe 60-65%. Thus, the bank that would lend as much as $850,000 for a $1-million property just four years ago will probably only go as high as $550,000 today.
Keeping that in mind, convenience store operators may need to fall back on reserves. “Take the money out from under your mattress if you lack the assets,” Shea advised. “Or look for a sale lease-back provider.”
A New Retail Reality
As access to cash continues to get more difficult, experts predict more merger and acquisition activity as smaller chains struggle to grow and keep stores up to date.
“There aren’t many people I know who are building new units now,” said Phil Boyd, managing director of The Energy Exchange, a group within Keller Williams Lincoln Park Realty that specializes in the sale of service stations and convenience stores. “These operators are just trying to stay alive. What a lot of guys are doing is just buying existing units; the unconventional lenders are making our guys put down a ton of money on new acquisitions. A lot of them are having the whole construction loan built into the deal. SBA (federal Small Business Association) has been doing some 504s (loans) for us, but the thing about it is there is a lot of paperwork involved.”
The SBA 504 Loan or Certified Development Company program provides financing for the purchase of fixed assets—usually real estate, buildings and machinery—at below market rates.
“For the remainder of this year and into 2011 we’re going to see a lot of consolidation—a lot of smaller guys becoming bigger guys and single-unit guys getting out of the business,” Boyd said.
According to Shea, all financing institutions have made the underwriting process more rigorous. Many are taking a harder look at the credit of the borrower or tenant, as well as the asset they are financing. For the most part, conventional banks have pulled back substantially from this sector. “They’re looking for things that could be described as mainstream, or ‘down the middle of the fairway’ like office buildings with some strong retail tenants,” he said. “They’re really not doing a lot in the gas business.”
Of Getty’s 1,100 properties, about 800 are leased out to Getty Petroleum Marketing, a subsidiary of Lukoil, a Russian company. The other 300 are leased to single- or multi-unit convenience store operators.
“They are triple-net leases,” Shea revealed, “and our tenants, if they are going to upgrade, typically will fund the work on their own. In certain instances we will provide financing for facility upgrades that we own. In other words, we’re not going to finance pumps and tanks. But if our tenant wants to, say, do a raze-and-rebuild on the property—raze a first-generation, 1,200-square-foot convenience store and replace it with a 3,000-square-foot convenience store—and we believe that’s the right thing to do for the property, we will provide funding for that.”
What Banks Look For
Operators looking for ways to improve their credit ratings in order to get better terms on a loan should know there may be other considerations that are just as important. “It’s not so much improving their credit ratings as it is improving their balance sheets,” Radosevich noted. “Lenders are taking a harder look at the amount of existing debt. Folks have got to have more equity in their businesses to even get a bank to want to look at them.”
When banks do look at the business, they’re more likely to be focusing on the consolidated picture, Radosevich added. “What does the business do as a whole? Many times, depending on what they’re doing on a per-store basis, they look at the site and how it performs in terms of cash flow versus the amount of debt it has on it.”
Radosevich surmised that what is happening to a larger degree now than in the past is that marketers are sharpening their focus on chains and going through what he calls a network rationalization process.
“That’s an oil company term. When you rationalize your network or chain, you look at it and come up with its value. (Operators) now are starting to really force rank their stores, getting a fuller understanding of which sites contribute the most to their profitability,” Radosevich said. “It’s almost like the 80/20 rule, where 80% of your revenue comes from 20% of your chain.”
Many chains are ranking their stores from best to worst, then looking to sell off the marginal properties to improve their overall balance sheets.
“They’re getting rid of low contributors or no contributors,” said Radosevich. “Quite often among chains you will find situations where people have sites they have acquired over the years—maybe they bought a package of stores, say 10 in one deal. Maybe three of them were not profitable when they bought them and haven’t improved. They may have put some debt on, and now they’re struggling to even cover that debt. They’re finding ways to divest themselves of those sites. It’s very healthy for folks who want to add more to their chains to cut loose the stragglers.”
Dealing with the Dogs
There are several effective ways to cut those stragglers loose. One is to sell them outright to another operator or dealer, perhaps agreeing to supply them with fuel going forward. Another is to lease the stores to somebody at a rent sufficient to cover the overhead on the site, effectively shedding the labor expense at the same time. “Many times leasing and selling gas makes more sense for a site than just selling it outright because at least you’re keeping the real estate and someone’s paying the mortgage so you don’t have the expense to carry it,” Radosevich explained.
A third way: “Let’s say a site just doesn’t have legs for this industry anymore. It doesn’t work for a dealer and it doesn’t work for a salary op. Then you’re struggling to find an alternate use for it—a QSR or car wash—so you can recover your costs,” Radosevich said. The fourth scenario, and the last resort, is simply none of the above. All you’re doing is shuttering it to stop the bleeding.”
When it comes to mom-and-pop operations the landscape is even bleaker. “That’s really a tougher scenario right now,” Radosevich said. “The smaller ticket item, the guy who needs a $25,000 upgrade to a $200,000 remodel, that’s where it becomes tricky.”
One area to explore, depending on the amount of the upgrade, would be leasing a property. “If you’re doing a PCI upgrade or putting in new dispensers and canopy, there are some leasing companies out there that would probably consider a deal,” Radosevich suggested. “The thing is a lot of times you need to do that in conjunction with the fuel supplier in some way, where the supplier might guarantee the lease going forward.”
Another possibility is putting equity into the deal. “In the case of an upgrade you might supply 30-40% to cover the cost of the upgrade with the lender taking a 60-75% leverage on the deal,” said Radosevich. “But again, it’s a very challenging environment. The best thing for these guys is to have cultivated a relationship with one or two banks in the area that are fairly reliable.”