Up, Up and Away

Coverage of CSP's Outlook Leadership 2013.

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Multiple Mayhem

What started out as a workshop on structuring the financing of a c-store acquisition led to talk of increasingly high multiples, even in the face of a store’s falling fuel volumes.
 
While multiples—or the number placed against a store’s historic cash intake to determine overall value—have been in the range of 5x to 6x in the past four or five years, more recent deals have been in the range of 9x to 11x, said Denny Ruben, executive managing director of NRC Realty and Capital Advisors, Chicago.
 
Cheap capital, a growing number of lenders and the proliferation of master limited partnerships (MLPs), or the splitting of retail assets from semi-major oil companies, has led to deals in California as high as 11x. Other purchases in the Western states have seen 8x to 9x, and in Tennessee recent multiples have been in the range of 7x to 8x.
 
At least one panelist suggested buyers proceed with caution. “We as an industry invite a bubble,” said Michael Phelps, senior vice president of RBS Citizens, Providence, R.I.
 
“There’s a lot of liquidity and cash flow. I see now [proposals] with structures I’ve not seen since the early 1990s. Everyone wants to buy at a 2x to 3x multiple and sell for 6x to 7x. We’re seeing a lot of that.”
 
“What it tells you is demand exceeds supply for quality assets,” Ruben said.
 
Determining factors appear to be quality and nature of the real estate, store size, urban or rural location, predictability of cash flow and strategic fit, which in some cases allows even the old kiosk-style property to sell for a higher multiple. Ruben said that while he’s been seeing this trend grow, “At a certain point you have to ask, ‘Does this make sense in the long run?’ ”
 
The panel of five representing both lenders and retailers reviewed a hypothetical purchase of a chain in Vegas, reviewing the structure of its initial purchase and then watching the value of the asset dwindle over three years. Set up as a 50-store operation, the hypothetical deal broke down into high- and low-performing stores and a third grouping of average “core” stores.
 
Some raised issues to watch out for. Don Bassell, chief financial officer for Mid-Atlantic Convenience Stores, Richmond, Va., which recently was purchased by an affiliate of Sunoco, said, “You have to ask, ‘How steady is that fuel margin and what’s the predictability of that cash flow?’ Reliance on fuel is an issue.”
 
For lenders on the panel, the structure of the deal was sound because of the collateral. “We’ve got the dirt,” said Kevin Shea, vice president of Getty Realty Corp., Jericho, N.Y. “That’s our security.”
 
In the fictional example, the company’s cash flow took a hit. Three years down the line, it showed a drop of per-store earnings of “core” stores from $4,402 to $693.
 
From his perspective, Phelps said his worry with the stores is with management, especially in light of an acceptable amount of fuel volatility. However, any sign of trouble would typically be caught sooner than later because normal reporting between borrower and lender would have triggered the need for immediate discussion.
 
Other panelists included Richard Claes, executive director of Mesirow Single Tenant Properties, Chicago; and Brock Rule, COO of Hopkins Appraisal Services, Independence, Mo.

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