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Understanding the C-Store Net Lease Sector

What is a C-store?

A convenience-store (commonly referred to as C-store) is a small retail business, often in a single tenant net lease building that stocks an array of everyday items such as groceries, snack food items, tobacco products and over-the-counter drugs, toiletries, etc.  Impulse items consumers want readily available and don’t have the time or patience to venture into a typical grocery store, and while serving the mobile community.  According to NACS, there are over 154,000 stores that account for more than $575 billion in sales.  124,374 of these stores, approximately 80%, sell fuel.

Who are the Dominant Tenants in the C-Store Sector

  • 7-Eleven
  • Wawa
  • Sheetz
  • QuikTrip
  • Circle K

C-Stores within Net Lease

The convenience store (C-store) market has remained strong for the past decade or so.  Investor demand continues to value these credit worthy companies.  As a product type, the market continues to see investors focus on credit worthiness of these convenient store operators in conjunction with underlying real estate and lease terms.

Why C-Stores Make Great Investments

  • Usually ground leases – Investors don’t need to worry about operational aspects of the entity, with all operating expenses paid for by the tenant). Upon lease expiration, you will gain ownership of the building.
  • Tend to have corporate guarantees (lowers investment risk)
  • Leases are usually 20 years with renewal options that have rental increases
  • Generally prime locations on hard, signalized corners or heavily traveled commuter routes and interstate access

As a bigger investment community continues to search for yield, their threshold for risk tends to increase, driving significant interest into this sector, often focused on sale-leaseback transactions with medium sized operators.  Beyond the credit hurdle, the key driver for these transactions will be negotiating a lease that features sustainable rents, in-line with historical performance, not simply boosting rents to obtain a higher sales price.

With rental increases either annually or every five years, current owners have been able to achieve real appreciation in the value of their property through a combination of rental growth, cap rate compression, and often tax incentives.  Whether in boom times or bad times, these C-stores trade at lower cap rates because investors and consumers alike will always have a need for convenience items.  The 2016 Average National c-store cap rate for Wawa came in at 4.73%, 5.12% for 7-Eleven and 6.77% for Circle K, according to Calkain research.

The outlook for the c-store market remains upbeat.  Investor demand will remain consistent because of the growth from certain c-store operators in the past few years.  Seen as “recession proof” by many industry observers the yields will continue to be in excess of other STNL investments and alternative government securities.

Traci BidingerUnderstanding the C-Store Net Lease Sector