In the May/June issue of NPN, I discussed the opportunities for buyers of real estate in the current economic climate. This month, let’s look at the opportunities for sellers. Yes, it’s true, these are challenging economic times. But it isn’t all doom and gloom.
NRC Realty Advisors is involved in the buying, selling and financing of petroleum retail properties nationwide. In the course of our business, we are able to see not just individual transactions, but also trends. Currently, we are seeing three major types of properties being offered for sale: excess real estate, including non-strategic stores; distressed real estate (primarily owned by companies in bankruptcy); and continuing divestitures by major oil companies who are exiting direct retail. We are not seeing a whole lot in the way of sales of entire companies.
The really good news is that there is still a great deal of interest in buying properties. Buyers are still able to get financing and deals are getting closed. Yes, the financing is more challenging, sales transactions are taking more time, and there are fewer lenders. But there has not been a dramatic impact on purchase prices – something that is particularly true for prime properties.
With that as background, here are some ways to capitalize on the opportunities if you have real estate you want to sell:
- Make your properties stand out from the crowd. Many companies in expansion mode are paying particular attention to the market right now, looking to buy rather than build. While there are more “distressed properties” on the market now than usual, those aren’t the deals that are getting financing and closed. Good properties can get financed and closed; distressed properties are more difficult. So now is a good time to divest those non-strategic or “excess” properties. It’s probably not as good a time to be off-loading your dogs.
- Consider some carry-back financing. Compared to a few years ago, lenders are less willing to make funds available for either buying existing stores or building new ones. Sellers who are able to carry back some of the financing are at a significant competitive advantage over those sellers who cannot do so – and they may be able to realize higher purchase prices as a consequence.
- Break the sale into smaller pieces. There are major financing challenges for mid-sized to larger companies that want to sell their entire operation intact. Financing is particularly difficult right now for the “big deals.” There just aren’t lenders out there – or even consortia of lenders – to finance the $100+ million deals. Lending for smaller deals – often through local and regional banks and specialty finance companies – seems to be less affected by the current economic climate. Even there, though, we’re seeing $25 to $30 million as the “bright line” over which few lenders will venture, and the local/regional lenders are frequently willing to lend only to current customers. Another factor is that many of the companies in expansion mode continue to be able to self-finance some growth; they are looking to buy rather than build stores as part of their natural growth pattern, and they can self-finance purchases of a few stores but not a large number of stores. For all of these reasons, it may make sense to split a sale of multiple stores or an entire company into smaller pieces, where you’ll have more potential buyers who are more likely to be able to get financing and close the sales.
- Reach out to “non-traditional” buyers. There are a significant number of foreign investors with ready capital looking to acquire retail petroleum properties in the United States. In fact, NRC represents several of them. These are buyers whose ability to close on a deal isn’t contingent upon financing. Sellers willing to reach out beyond the “obvious” potential buyers may be pleasantly surprised.
- Capitalize on how the majors have been doing it. Over the past five or six years, and continuing into the present, several of the major oil companies and other convenience store companies have utilized NRC’s sealed bid process to divest stations and stores – giving our “buy one, some or all” format a great deal of credibility with buyers. This has created the opportunity for other players to utilize NRC’s system. Individual companies – or, with NRC’s assistance, groups of companies – can aggregate properties into a significant-sized sale that gets lots of attention from the trade press and potential buyers, even when those properties may eventually be sold individually.
- Manage your expectations. Real estate values – and, thus, sales prices – are largely driven by what a buyer can get financed. Sellers need to manage their expectations, given the current climate. What do I mean? Especially if you’re selling poorer performing stores, you will find them hard to sell and harder to finance, and you can expect lower EBITDA multiples in the selling price than would have been the case a couple of years ago. The selling prices of even good stores may be down slightly from yesterday’s values.
The bottom line is that there are plenty of opportunities for sellers in today’s market. While properties being sold under distress may be an exception, sellers of prime real estate that we’ve dealt with over the past 12 months have generally been very pleased with the offers they’ve been receiving, and a very high percentage of those offers are ultimately closing.
Ruben is managing director with NRC Realty Advisors, LLC (www.nrc.com), based in the firm’s Scottsdale, Arizona office. The company has been involved in the purchase, sale, and/or financing of more than 10,000 properties since its inception in 1989.