CAO.G0114 (C-Store Market Penetration Alert)
COLLATERAL ADVISORY OPINION Florida C-Store Real Estate Collateral - Abundance of Caution Alert Property Type: C-Stores Geographic Market: Florida Potential for Collateral Value Loss Aestumatio: Significant (4 out of 5) The Table below Illustrates Capital Bank’s current loan portfolio exposure for the Florida C-Store Property Types. Special asset loans comprise 32%, or $61.5 million of the bank’s total $189.5 million dollar exposure for this property type.
I have been following the Florida market penetration activity of new competition for this C-Store property type, which is highly susceptible to competition, especially from the recent Florida market entrant -WAWA (Philadelphia, PA). I have short and long term concerns regarding both 1) new and 2) renewal loan collateral and 3) special asset loans in the bank’s portfolio. Market Penetration of Observed New Florida Market Entrant: WAWA has indicated a desire to build 100 new WAWA C-stores in Florida by 2015. According to wawa.com, some 15 new central Florida stores are scheduled to open in 2014, with a projected 25 by year’s end. In addition, throughout the Orlando / Tampa markets, another 25 stores are scheduled for 2015. Their open and airy store layout and automated touch screen food ordering service is the market trend setter. Corporate Background/Store Operations: Wawa is privately owned and does not franchise its stores. Employees own about 29 percent of the company. Wawa said it does not confirm site locations until construction begins; saying site approvals can take several months. It does not franchise stores. The new stores will each employ more than 35 associates in full- and part-time positions that receive competitive salaries and health benefits as well as the opportunity to enroll in Wawa's employee stock ownership plan.
Store Features: The design principles include visibility to food service through glass (floor to high ceilings); colors, materials and textures that complement the look and feel of the "Sunshine State"; attention to building design, lighting and landscaping; a focal point of the kitchen area, featuring food service, fresh beverages and the fresh express case; natural light, modular displays and shelving for an open, uncluttered look; and warm Florida materials and colors. Site/Facility Strategy: A preferred lot consists of about 2 acres for the standard building size of 4,000 to 6,000 square feet of space, parking for 50-60 cars and space for eight or more multiproduct fuel dispensers. Other size sites might be considered, but none less than 1 acre. • The locations should feature adequate nearby residential population to support retail sales; a nearby daytime population that includes employment centers, retail, office and commercial traffic generators; and a minimum traffic count of at least 25,000 vehicles a day with access to the site. • It prefers a freestanding location at a corner at a signalized intersection, outparcels and pads at shopping centers, and other sites with a hightraffic volume. • Wawa will consider purchasing or leasing the property. Site acquisition will be contingent upon receiving all approvals to construct and operate the proposed Wawa Food Market and gasoline facility. More than 300 of the more than 600 convenience retail stores offer gasoline. Most stores are open 24 hours a day, 365 days a year. Personal Observations: My observations are that Wawa seeks the best locations (corner or adjacent to Walgreens/CVS, where land prices are significant). It appears their market penetration strategy is to dominate the “convenience” in convenience stores by being the most visible, for which they will pay higher land values, often considering assemblage for the right location. It is my understanding that Wawa will lease the site and own the improvements which maximizes market penetration dollars. Some Wawa C-stores leaseholds are sold by the land owner/developer as is the case for Walgreens/CVS developments. A typical NNN cap rate is 6%. Other market participants include Race-Trac and Thurman’s, but Wawa is the one to watch.
CAO.G0114 (C-Store Market Penetration Alert)
Potential Negative Effect on Capital Bank Collateral Values: It is my concern that we should watch closely the market penetration efforts of Wawa, but also closely monitor the existing C-store loan portfolio real estate assets for possible lower trending real estate C-store values in these two areas outlined below: 1) Owner-operated C-store collateral in submarkets where Wawa develops new stores: This owner-occupied collateral is dependent upon the income generated by the owner-operator and ultimately the value of our collateral. Such revenue could be negatively affected by Wawa’s expansion into local markets, especially south Florida. 2) Leased C-store collateral in areas where Wawa develops new stores: Leased C-stores in our loan portfolio could be negatively affected by the lessee demanding a reduced lease rate as a result of lost market share. Suggested Actions for Management Consideration: 1) C-Store Loan Portfolio should be on a “watch list” with annual monitoring of the sub-market movements of new market participants. 2) All re-appraisals at loan renewals should include a separate land value as this may be the potential market value of an aging C-store. 3) Additional separate Loan-to-Value Ratios using the land-only values should developed and reported to management at loan renewal by the portfolio managers as this could reflect the future benchmark values of income-affected C-store collateral. This CAO Monograph was prepared by: Michael Sprouse, MRICS - Florida Appraisal Review Manager Date: 7/12/2014