Convenience Stores Market Research Report

MATTHEWSA COMMERCIAL REAL ESTATE PUBLICATION AT THE INTERSECTION OF INNOVATION AND INFORMATION CREDIT RATINGS: CIRCLE K: BBB WAWA: PRIVATE QUIK TRIP: PRIVATE CONVENIENCE 7 ELEVEN: AA-

The convenience store market remains incredibly strong those that qualify; always check with an accountant before as investor demand continues its bullish trend towards making an investment decision based on tax benefits). 7-Eleven, Circle K, Wawa, & QuikTrip assets. Essentially, accelerated depreciation enables an investor the opportunity to shelter more income over a 15-year Despite the consistent cap rate compression we have seen depreciation period as opposed to the traditional 39-year within the convenience store market since 2010, cap rates depreciation schedule. are beginning to level off for even the most sought after assets, such as 7-Elevens, Circle-Ks, Wawas, and QuikTrips, Convenience store retailers remain in expansion among others. In fact, the only convenience store assets mode as they attempt to strengthen their respective that have continued to drop in cap rate during the last 6 positions in markets throughout the country. As a result, months are those located in prime real estate markets. many developers are being provided with substantial opportunities in this sector as major tenants rapidly expand Convenience store chains such as 7-Eleven, Wawa, Circle into major metros throughout the country. For example, K, and QuikTrip trade at premiums because the investor 7-Eleven has gone back to its build-to-suit development world views the industry as recession proof and consumers program after a slowdown in growth over the past couple of will always have a need for convenience items. Unlike gas years, during which they focused on internal development, stations, convenience stores will not be affected by the fee development, and ground leases. On the other hand, movement towards renewable energy due to consumer Wawa plans to open over 100 new stores throughout Florida demand. Whether it be goods such as tobacco, beer, by the end of 2021. Wawa typically signs 20-year ground snacks, or lottery tickets, convenience stores have always leases with large rents that average around $224,000. focused on “immediate gratification goods” to drive sales QuikTrip is also heavy in expansion mode throughout the and will continue to do so in the future. These are items Midwest, largely fueled by their sale-leaseback program. that consumers want immediately and don’t have the time As long as interest rates remain relative to where they or patience to order online and wait for shipment. Many are now or rise modestly, we will continue to experience investors have shown a preference for convenience stores aggressive cap rates and demand from the investor world. that sell fuel because of the associated tax benefits gained by taking advantage of accelerated depreciation (for NEW STORE OPENINGS Since 2011, 7-Eleven has been one of the most aggressive CIRCLE K convenience store chains in terms of expansion, including a WAWA record year of growth in 2012 with over 900 new store openings. QUIKTRIP They have also made numerous acquisitions such as Open 7-ELEVEN Pantry, Zooms Inc., Sam’s Mart, Tedeschi Food Shops, 48 CST stores, 250 Mobile gas stations, and several others. Circle K relies on their internal, build-to-suit (BTS) pilot in which they prefer 2016 to own and control their sites. Circle K also recently acquired the Pantry (the parent company of Kangaroo Express, among several 2015 smaller chains), which has over 1,200 locations throughout the Southeast. In addition, Circle K’s parent company, Alimentation 2014 Couche-Tard, is in the process of acquiring CST Brands, Inc. (the second largest, publicly traded fuel and convenience retailer in 2013 North America with over 2,000 locations in the US and Canada) for $4.4 billion. This transaction would make Alimentation 2012 Couche-Tard the largest convenience store operator in the United States. Wawa has already opened approximately 100 0 100 200 300 400 stores in Florida over the past 4 years and continues to expand NEW STORE OPENINGS throughout Virginia, New Jersey, Pennsylvania, Maryland, and a few other eastern states. QuikTrip has opened approximately 150 stores since 2012, bringing their total store count to north of 700. Although QuikTrip is privately held and has no official credit rating, investors have continued to display a strong appetite for their locations.

AVERAGE CAP RATES AVERAGE CAP RATES 7-Eleven and Wawa achieve the most aggressive 8% cap rates within the convenience store industry 7% as 7-Eleven’s average cap rate has dipped from

6% 5.58% in 2015 to 5.0% in 2016 YTD, with new construction sites in major metros trading at 5% 4.75%. Wawa’s cap rates have decreased from 4% 5.01% in 2015 to 4.68% in 2016 YTD. QuikTrip’s 3% have had the largest dip in cap rates since 2012, as the average cap rate has dipped from 7.56% 2% to 6.0% with new construction deals now trading 1% at 5.25%. Circle K’s cap rates have decreased by 0 50 basis points since 2015 (6.53% average cap 2012 2013 2014 2015 2016 rate), dropping to an average cap rate of 5.91%

* BARS REPRESENT AVG CAP RATES today. As a whole, we are seeing cap rates for new * LINES REPRESENTS AVG CAP RATES FOR NEW CONSTRUCTION construction deals level off, despite the 10-year treasury plummeting over 80 basis points since the beginning of 2016. # OF TRANSACTIONS IN THE LAST 3 YRS

85 TOTAL TRANSACTIONS 7-Eleven has the largest number of total branded stores compared to their competitors and have traded significantly 36 more than other chains over the past three years. Having said that, it must be noted that 7-Eleven owns a substantially 18 smaller percentage of their own stores compared to Circle K and QuikTrip. We could expect to see a tick up in transaction volume from Circle K with their new franchisee expansion plan. 376

CAP RATE CORRELATION The data proves that as the In the NNN world, it’s common on the lease are trading in the high guaranteed term remaining on a knowledge that cap rates rise as 3.0% to low 4.0% cap range, while lease wears down, cap rates rise the lease term wears off. One of the 7-Eleven’s in TX, FL, NV, OR, and WA accordingly. In analyzing the data, we most important facets an investor are trading in the high 4.0% to low noticed only a minor drop off in cap should look at is the loss of value 5.0% cap range. While the rest of the rates for 20-year leases compared or equity that can occur due to the country is trading in the low 5.0% to 11-year leases. However, the drop unavoidable rise of cap rates. In our to high 5.0% cap range. Therefore, off becomes far more substantial research, we found that the outliers when purchasing an asset, we the moment an investment shows in our data were all tied to location recommend investors spend time less than 10 years of term remaining or store performance. There is a on the aspects one can predict or and continues to drop each year compelling difference in cap rates control: microeconomics, location, thereafter. We have found that, on for assets in California and New and store performance. average, one could expect about York versus the income-tax free 100-150 basis points higher of a cap states and the rest of the country. rate for a 5-year deal compared to a For example, 7-Eleven’s in California 10-year deal. with more than 10 years remaining

CAP RATE CORRELATION 20

15

Lease Term 10 LEASE TERMS (YRS) LEASE 5

0 2% 4% 6% 8% 10%

CapCAP RATE Rate

Data source: Costar & Real Capital Analytics *All 2016 data is year to date CIRCLE K WAWA QUIK TRIP 7 ELEVEN

$80K $100K $120K $140K $160K $180K $200K$220K $240K AVERAGE RENTS

AVERAGE RENTS Like Wawa, QuikTrip builds large gas stations with average rent over the past three years is $84,000, and they approximately 10-20 fueling pumps with an average rent of typically sign 10 or 15-year leases. Circle K currently has a around $185,000. The typical lease structure is 15 years of large expansion plan with its franchisees that could be an flat rent with a 4-5% rental increase every five years. Wawa enormous opportunity for developers in the years to come. signs 20-year ground leases with large rents that average around $224,000, typically with 8-10% rental increases Franchisee operators are willing to pay much higher every five years. 7-Eleven typically signs 10 or 15-year rents based on the hard and soft costs involved with new NNN leases with 10% rental increases every 5 years at store developments. The average rent for a franchisee an average rent of $80,000 for non-gasoline stores and development deal is approximately $125,000. $130,000 for convenience stores with gasoline. Circle K’s

FUTURE OUTLOOK

The outlook for the Convenience to a majority of the industry. This competition within the convenience Store market remains vigorous. We same trend can be said for QuikTrip store industry. Due to consumers believe investor demand will remain properties. Wawa plans to open shifting preference to fresh food steady considering the general an additional 100 stores in Florida products, more established concept of convenience stores is by the end of 2021, while QuikTrip convenience store chains like widely viewed as recession proof intends to continue to expand its 7-Eleven and Circle K may find and U.S. treasuries have room reach and may even look to venture significant difficulty in adapting to to increase without significantly further west. current trends due to the number affecting cap rates. Therefore, we 7-Eleven is also starting to go back of locations they have. With the are likely to see nominal changes in to their BTS model as a result of key stabilization of cap rates for the average cap rates of convenience competitors expanding at a rapid convenience store sector, it’s highly store retailers over the next year. pace. unlikely any given convenience The biggest opportunity in the The largest threat to the future of store property will ever be worth marketplace relates to Wawa’s convenience stores is the “green” more than it is today. expansion into Florida and QuikTrip’s movement, where automobile expansion throughout the Midwest. owners become less dependent Not only is there substantial growth on oil and substitute gas-powered in Florida, but as a whole, cap rates vehicles with electric and hybrid for Wawa’s and properties in Florida vehicles. Another likely issue is tend to trade at premiums compared the recent dramatic increase in

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This publication has been produced by Matthews Retail Group, Inc. solely for information purposes and the information contained has been obtained from public sources believed to be reliable. While we do not doubt their accuracy, we have not verified such information. No guarantee, warranty or representation, expressed or implied, is made as to the accuracy or completeness of any of the information contained and Matthews REISTM shall not be liable to any reader or third party in any way. This publication is not intended to be a complete description of the markets or developments to which it refers. All rights to the material are reserved and cannot be reproduced without prior written consent of MatthewsTM REIS.

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