A word about interest rates. Popular and now conventional thinking is that the Fed will begin raising rates in Q2-15. (Some so confident/arrogant as to be forecasting the month!) We're not so sure. Fed policy on the matter as stated by Janet Yellen is couched firmly in the employment data. If the economy is not creating jobs and raising the real (not nominal) income level, she'll be hard-pressed to raise rates. In fact, now that the last QE program is officially terminated and that liquidity is removed from the market, the economy is more dependent on the "free economy". In reality, the QE look-a-like programs rolling out from the EU and Japan are flowing benefits in the U.S. as capital in-flows. When this spigot turns off, and it will, we'll look a lot like the EU and Japan today. At that point, you might expect a re-introduction of then another QE effort ... and there we'll go again. When you may ask? We don't know, but some respected folks in the field suggest perhaps as early as a year or so from now ... it depends.
May 17, 2014 (The following report is excerpted from the Spring 2014 Blue Paper, an MJG publication.)
What's my business worth? Continuing as one of the top 3 or 4 questions that comes up in our discussions with both sellers and buyers is the value of the business, generally including the real estate. Some helpful comments here addressing that question come indirectly from our friends at American Business Appraisers (ABA) via their May 2014 Newsletter, KC Conrad owner and appraiser. (Space doesn't permit listing all of his credentials and qualifications. You can check them out at www.ABAvalue.com .)
It's important to recognize that if you're selling a gas station/c-store business that includes the real estate as an asset, the real estate is valued separately, and differently, from the business. The basis for this is that you don't need to own the real estate to be in the gas station business; you could lease the real estate, thus committing far less capital to the investment.
The severe decline today in the business values is driven primarily by a decline in any, or all, of the financial metrics used with multipliers, percentages, etc. to derive the value. For instance, if you priced your business at 2.58 times (actual national average) the EBIDTA (you might also use adjusted cash flow or seller's discretionary earnings) when you bought it in, say 2008, and the EBIDTA was $300,000, you paid $774,000 for the business. If today your business has eroded to where your EBITDA is $200,000, that same multiple may apply, but the value would calculate to $516,000. The thief here isn't the multiple, but the decline in the business performance. In fact, data from ABA shows that today for businesses valued at less than $1,000,000 the multiple of EBITDA is 2.25 times. The differential between 2.58 and 2.25, or .33, represents a loss in value fo $33,000 for every $100,000 of EBITDA.
The other, and perhaps more meaningful fly in the ointment is: the value of real estate. This is where most value has been lost since the 2008-2009 economic decline. Nationally for all segments of CRE, values bottomed about 2009 with CRE industry-wide losses in value of 40-45% depending on market segment, geographic location, quality of the property, etc. This would include gas station and c-store properties. The dynamics of CRE value recovery is more complex that envisioning a recovery of your business as a function of improved sales and profits. The basic relationship, however, is that the value of CRE is determined primarily by the net income it produces. For investor/landlords, their bottom line that they capitalize (cap rate) is the rent they collect less their operating expenses, termed net operating income or NOI. If you own the real estate where your business operates, the most direct influence you can have in increasing the value of your property is to increase your bottom line, or more properly EBIDTA or seller's discretionary earnings.
News & Reports contains current-at-the-time news items considered important to the gas station and convenience store owner-operator, and real estate investor. News items will generally be more frequent and shorter in content. Reports will typically be less frequent and longer in content, oftentimes of an indirect significance and strategic in scope. Reports are in a separate section below our News articles. Your feedback and comments are welcome ... Contact Us at your convenience.
Dec. 13, 2017
As widely expected, the Federal Open Market Committee (FOMC) raised the Fed Funds rate today to a 1.25-1.50% target range. (Prime rate is now 4.5%.)
This is the 3rd hike in 2017, and the 5th since the end of 2015. Post-meeting forward guidance reiterated the forecast of 3 more raises in 2018 - anticipated to be 1/4 point each. Also raised was the Fed's 2018 GDP estimate from 2.1% to 2.5%. Nov. PCE (the Fed's inflation gauge.) came in at 1.4%, a low point trending down since the first of the year - the self-proscribed inflation target remains unattained. Unemployment is expected to fall below 4% in both 2018 and 2019. Wages, however, have hovered just over inflation for the last 2 decades! None of the forecasts factor in any results from the newly passed tax reform legislation.
It's been widely discussed for years that the Fed's model, the now-infamous Phillip's Curve, is outdated and empirically shown by Milton Friedman to be unreliable. Yet the Fed persists in calling the monetary shots based upon relevant Curve data. Raising the Fed Funds rate most directly affects the short end of the yield curve, raising short term rates out to abut 3-5 years. Raising GDP forecasts and lowering unemployment expectations, however, affects the long end of the curve driving those rates higher also. Both of these have the affect of strengthening the dollar, making exports less competitive. It's been thought for several years that the Fed was behind the rate curve in raising rates as the economy went through it's lethargic recovery since 2009-2010. This late in the economic cycle, it's now discussed with some concern that the Fed is raising rates so as to be able to reduce rates once the imminent recession is upon us. The concern is that raising rates at this time will in fact catalyze the recession it hopes to mitigate! It appears the Fed is more interested in fixing a recession it may in fact be helping to cause, than to prevent it in the first place! The newly-passed tax reform package signed by President Trump in late December will undoubtedly have an impact on monetary policy and the behavior of the economy, but the timing and magnitude remains to be seen.
June 3, 2016
This is Mike's 10th consecutive year of being acknowledged by BBP as an industry Expert, and awarded with this designation.
BBP publishes the annual Business Reference Guide that serves the business brokerage industry as a desktop reference resource for business brokers. As an acknowledged Expert, this year’s Guide will include Mike's data and comment on the gas station and c-store industry. The publishing will include his name, industry specialization(s), company name (MJG), and contact information. Mike will also be included in BBP’s listing of Industry Experts on their website (www.IndustryExpert.net)
Michael readily acknowledges that he could not have arrived at this position without you, his associates, clients, and prospective clients who have supported him and MJG, and allowed him to develop his skills and talents in his profession.
Dec. 16, 2015
Well, it finally happened. After 9 years since the last interest rate hike, and nearly a year in anticipation, the Federal Reserve (Fed) finally raised it's Fed Funds rate by 1/4%, from 1/4% to 1/2%. After driving rates to essentially zero in Q4-08, they've taken the first step to alleviating financial repression and artificially disrupting the fair market value of money. To echo the popular consensus, the basis for the rise after engineering about 7 years of a muddling-along economy, is that the economy has sufficiently recovered to absorb the rise and continue the momentum to further economic progress without monetary stimulation. Although acting in anticipation of actually seeing a 2% inflation rate (a stated requirement for the increase), economic data is said to be sufficiently visible to support the increase at this time. Also, employment data (spun or otherwise) has shown to have created sufficient jobs and reduced unemployment to calculate to the mystical 5.0% goal, which today is considered "full employment". Continuing incremental increases in the rate are expected on a "data dependent" basis, i.e., as long as the economy continues to improve, rates will be "inched along" toward normalization.
Observations & Analysis:
Almost universally within the CRE industry, the experts are heralding the move as appropriate, expected, and of no immediate consequence to a disruption within the industry. While CRE cap rates are low, there is sufficient spread between these and conventional market investments to absorb this increase, and possibly additional raises. There is also an abundance of investment capital available to support any price slides that may be in the offing. Additionally, an already strong dollar will be further enhanced by the increase, thus attracting still more foreign currency into the U.S. markets. While rents typically increase with rising interest rates, the pronouncement of a strong and expanding economy is seen to be more helpful to increasing rental demand for space, even with potential rent increases. Although the Fed raised the Fed Funds rate and this will raise in sympathy other short-to intermediate rates, CRE industry experts expect the long end of the yield curve to have no effect. (Hum-m-m ... if short term rates increase and long term rates stay unchanged, this begins to invert the yield curve. Inverted yield curves traditionally have forecasted recessions!)
Public securities markets, primarily the stock and bond markets, have been elevated beyond economic justification by the excess liquidity provided by the Fed for the last 7 years. To suggest they are a bubble is a gross understatement. It's widely anticipated these bubbles will burst - correct valuations; the only uncertainty is when. Until they do (or the hold together long enough for the economy to improve sufficiently to support current values - unlikely, but possible) they'll likely continue to exhibit the volatility we've seen for the last (several) year or so. (Gas station note: the bubble pricing in the stock market where a share represents ownership in the underlying company has not transitioned to privately held companies. That is, the multiples that gas station businesses with specific markets in AZ sold at prior to 2007-08 has not changed notably over this period. The change in pricing is largely due to increases in the real estate.)
To all this, we at MJG are skeptical. The data dependence the Fed glows over has been spun to a point past disingenuous. Globally, many if not most of the G-20 nations are in some state of recession and/or deflation, and the U.S. will not - cannot - decouple from the world. We believe there's better than a 50/50 chance that the U.S. will be in a recession in 2016. (Recession-calling being what it is, it's likely to be 6-9 months after we actually enter a recession until it's called ... by many measures we're already in one!) The last thing you want to do in a recession, or economic downturn by any other name, is raise interest rates. If the economy stalls (which it was already doing prior to this increase) the Fed, if it has an ounce of integrity, will have to back-peddle and loosen again. This doesn't mean a reduction of the rate they just increased, although they may, they may instead choose some other method of monetary accommodation, e.g., the next QE program.
At any rate (pun intended), what passes for public consumption and advertised by industry experts may contain just a tad of self-servitude.
Q3-15, COUNSEL MORTGAGE ANNOUNCEMENT
We're pleased to announce that Counsel Mortgage is now licensed in California for the origination of both residential and commercial mortgage loans. Requests to or through MJG for residential mortgages will be referred to a licensed residential originator at Counsel Mortgage - Counsel Mortgage Loan Officers who are also AZ real estate licensees will work only with commercial mortgages.
(CA DBO# 60DBO43873; CA MLO# CA-DBO179539)
Completed small-business convenience store transactions declined in therms of the number of deals and median sale price in 2014 compared to the prior year, per BizBuySell in it's 2014 Insight Report. (The data offered may be considered exclusive of multi-site mergers that were not part of the BBS listing universe, typically one-off transaction. Note that the prices shown are exclusive of real estate, i.e., tenant-occupied businesses. Data is national is scope.)
A total of 266 small-business c-store transactions closed in 2014 at a median sale price of $140,000, compared to 350 such transactions at an average sale price of $195,000 during 2013. Median revenues of the c-stores sold in the most recent quarter were $540,000, with a median cash flow of $94,000. This compares to $595,000 and $104,172 in the prior year, respectively.
Yesterday the Senate voted to consider legislation that would give the go-ahead for construction of the Keystone XL pipeline. The House passed it's measure last week. Expect the Senate to doctor it up with amendments, but ultimately get a vote - something that never happened in prior years when Harry Reed ran the Senate. A final version is expected to pass, after which it will be sent to Obama for signing, which he won't do. All expect a veto here, and it isn't expected that the Republican majority in both houses can persuade enough Democrats to jump ship and vote for the measure so as to over-ride the veto.
Comment: This issue as well as many other legislative measures that have been stalled in Washington, is grist for the political mill. Seemingly it's purpose here is to demonstrate that Obama is the barrier to legislative accomplishment, and not the congress. To that end it will probably suffice
The 3rd version of PCI (Payment Card Industry) policies and procedures become effective Jan. 1, 2015 (next month!). This latest version of rules initially introduced 3 years ago These newer rules focus on not just securing the server, but on the data itself. Because more companies are now relying on 3rd party providers that receive cardholder data and store it in the cloud, the latest PCI rules expand the responsibility to all involved ... read that to be you, the merchant. Companies show to be non-compliant risk losing their ability to process credit card transactions.
Comment: We suggest you contact your insurance company to be sure your new exposure to this risk is adequately covered in your policy.
OPEC had their annual meeting last Thursday, Thanksgiving here at home. With crude oil prices dropping rapidly over the last several months, the expectation was that they would vote to reduce production in an effort to create a shortage (supply), thereby stabilizing or even increase prices. Such was not the case - surprise! They voted to keep their collective production unchanged at 30 million bbls/day, and in effect creating an oil war. Going into the meeting WTI was about $71/bbl. Friday after the vote was known, WTI collapsed to close at $66.15/bbl.
As mentioned before, the fracking folks break-even in the mid-to-low $70's /bbl. If the sub-$70 price holds (which we don't expect), you can look for some reduced production from fracking producers, and a knee-jerk reaction at the wholesale & retail levels. Reduced production will likely lead to lay-offs in the affected markets - not good for the local economies, or the national consumer attitude going into Christmas season.
Comment: In any event, expect more volatility in fuel pricing. Technically, from historical pricing charts, if pricing in the low $60's fails, next longer term support is in the low $40s.