In our first article, published March 26, 2020, we explored the anticipated impacts of COVID-19 on petroleum and c-store (convenience store) retailers and car wash operators. In those three weeks since, the nation has marched in place under continued quarantine measures including limited retailer operations and social distancing. Unemployment claims crescendoed to 22 million folks applying for unemployment benefits.
We would like to take a minute to observe some of the standout numbers and practices. Isolation measures see an orchestra of institutional services also halting such as school systems shutting down for the remainder of the academic year and financial institutions delaying typical procedural functions such as the Fed interim rule to defer appraisal and evaluations for real estate transactions affected by COVID-19. Overseas; France will see a shelter-in-place until May 11, 2020 whereas Germany may consider reducing public restrictions as early as April 19, 2020 as the Country records its smallest increase in the month suggesting signs of slowing. Stateside we are seeing how fragmented the impact of COVID-19 is having with New York suffering the worst with a reported 195,655 confirmed cases followed by New Jersey with 64,584 confirmed cases and Massachusetts at 26,867 confirmed cases. California trails in at 6th in the nation with 24,139 confirmed cases. Lower density and spread states such as Wyoming, North Dakota and Alaska supporting the lower end of the 50 states at 373, 331 and 277 confirmed cases, respectively. Unsurprisingly, state and local governments and authorities are also assessing their own practices and actions; and in such a recovery linked to location may be observed as commerce finds a post COVID-19 normalcy. There are 17 states in total that have banded together for a partnership effort to reopen the economy.
Before that glass is half full it’s half empty. We can expect to see continued applications
in unemployment benefit requests as larger entities make heavy decisions with
their work force including United Airlines announcing significant layoffs
starting as early as October 1. This
isn’t the say the $25 billion awarded for continued payroll is in vain, it
certainly buys time to plan and there may still be another injection. But when travel is down 97%
and the scrutiny of the aerospace industry will come under a microscope – could we see nationalized air travel this time around. General Motors managed and delivered us one hell of a new Corvette after all.
The SBA small business rescue loans have also hit their $349 billion cap with 1.7 million applicants seeking some sort of reprieve due to COVID-19. Congress may yet approve another $250 billion in the next stimulus relief package. Disney World is planning to furlough some 43,000 House of Mouse employees of its 125,000 member strong organization beginning April 19 – and according to JPMorgan Chase analysts this could save the company some $500 million. Anticipated loses with a closure through May are estimated at $1 billion without cost cutting measures.
Elsewhere we are seeing companies begin to sell unnecessary assets to raise capital, perhaps in a nod to experience of prior economic traumas fanning the opportunistic. That is potential for a paradox. Can participants change lanes to modify typical market cycle trends? Or will the system run its course regardless of new modus operandi.
Financing is increasing steadily in difficulty for deals to get done in the face of near zero interest rates in conjunction with an injection of those (soon to be 6+) trillions of dollars to float companies suspended in the flow of commerce. Move another lane over and households are experiencing a crunch as well with some lenders such as Wells Fargo & Co are offering fewer home loan products, pausing such loans as cash-out refinance, home equity loans above $250,000 on properties worth in excess of $1 million or for 2-4 unit multi-family and other riskier non-conforming applications. Back on the appraisal side; we’re experiencing some changes on interior property inspections, a burden tougher on some than others. In all this momentum of change, we believe there’s going to be an impact on the REIT marketspace. Get into the FastTrack lane and we can envision how the commercial mortgage backed securities (CMBS) focused on non-essential and underperforming retail enter forbearance suggesting Wall Street has the potential to come knocking with debt-service coverage ratio (DSCR) triggers to recover what is available. Such practices are already observed in the hospitality industry. We’ve long had this concern with fueling facilities packaged as too perfect triple net lease sale leasebacks predicated rents largely upon gross profit performance driven by unprecedented fuel profit margins and volume over the 2016-2019 era. There’s going to be some hard dodging like doing 95 on the 5 at 5:00. Oil is still hovering around $20.00 per barrel (WTI Crude Oil on NYMEX) and rack pricing sinks to record lows. The flow downstream from NYMEX to Spot Markets to Rack to Retail starts on the global scale with those geopolitical moves does have a new ray of hope in OPEC+ reaching a new tentative deal as of April 13, 2020 to cut output to stabilize the trade market. The next meeting won’t be until June, 2020 and Saudi Arabia has no intention of slowing sales in its biggest market (Asia) by reducing pricing further while agreeing to cut output. The throttle may be lifted by the brake pedal remains untouched. When you factor in California’s national leading gasoline tax assessment of $0.6120 per gallon on top of the federal $0.184 per gallon, the average retail price of $2.879 per gallon for the week of April 13th it isn’t hard to see how operators are seeing in excess of $1.20 per gallon fuel profit margin with sticky pricing as of the date of this article. But much like bell bottoms, pay phones and smoking on planes, it isn’t going to last. They are simply unsustainable margins to meet any sort of reasonable volume; either competition for limited COVID-19 induced marketspace fueling compresses retail prices or the economy comes back online and retailers will fight tooth and nail to make up for lost dollars and cents and hit their supplier volume goals. A natural dwindle is expected either way.
Our conversation with an Orange County Mobil operator
highlighted that concern when interviewed on April 9, 2020 about their stations
operations including c-store sales, fuel volumes and margins. They acknowledged volumes have compressed
significantly since the beginning of March and in a new twist bucking our previous
projections for c-store revenue, sales were also down in store. We’re considering it a precursor to the
nuances of location and consumer behaviors linked to infrastructure,
technologies available ala delivery options and spending abilities. One example of the dynamism of the retail
sector is the partnership of McDonalds and Aldi grocery stores in Germany,
allowing employee sharing for the quick serve restaurant giant to ‘lend’ its
workforce as temporary workers to the grocer solving the limited service and
business surge simultaneously. The OC operator’s
insight was poignant, to paraphrase: “today is manageable, tomorrow is
uncertain and thankfully I don’t have a big note on this property otherwise I don’t
know what I’d do.”
Brokers in the M & A side have been quoted as calling the retail petroleum business as “resilient” even in our troubled economy, yet, plugging to the gas station broker community we’re hearing some on the ground details about transactions. In particular a discount (~20%) may be in order to facilitate a cash sale today without financing available. This may connect back with the Fed guideline on deferral of the commercial real estate appraisal, a fact we sympathize with, to our own detriment, but for the simple fact that a value today is inherently risky and extraordinarily difficult to predict as we do not yet have solid transactional data to support adjustments. Call it a stand-off between the chicken and the egg; speculators want to pick up good deals with strong discounts, lenders want precise values fully supported by the appraisers to push forward with activity and appraisers are frantically waiting for data to become apparent to make the right call on value. And that ties back to those previously mentioned opportunistic players sitting on the side lines cash flush, the proverbial Berkshire Hathaway waiting for Coach Buffet to call them in with four minutes to go in the fourth, market turbulence and volatility can bring out the bold. We’re told fueling facility and car wash deals negotiated pre-COVID-19 may still be closing and without discount, reason being there are simply too many players involved (seller/supplier, vendors, etc.) to rock the boat and potential for litigation. Penalties ranging from $100,000 on single unit deals to $300,000 on multi may deterrent enough. Lawsuits citing force majeure are popping up in Los Angeles County with a spotlight example of Pacific Collective and ExxonMobil in Culver City.
The matter of the fact is speculation is high and that
can only mean data is limited. In
keeping with our car wash property projection we were able to confirm with a
savvy California exterior-express car wash operator across three facilities
pre-COVID-19 the volumes supported around 1,400 cars per day, now it is hitting
less than 800 cars per day; a 43% plus drop in volume averaged across their
stations. Many stations are simply
closed as car washes are not considered an essential-retail operation with law
enforcement reactively shutting down operations such as in San Jose. Will this volume come back? To be seen if those pre-COVID-19 numbers will
return and how long, certainly the revenue won’t appear upon reopening. Depending on margins a lost month of revenue
may take one year’s profit to replace should stabilization return. Much like a haircut, most people will only
get one car wash after quarantine is lifted, not purchase four at a time to
make up. There is no pent up demand to
get back these lost sales once the picket is turned back on, same with fuel
volumes. Grocery and c-store sales are
relatively stable given demand for these items and the fact we all have to eat.
Lastly on the commercial land real estate transaction front we have yet to see material data or even anecdotal evidence of change yet we know something is there. Our inquiries with CoStar did not return hard data to provide conjecture with no sales identified having been listed after March 15 and sold in the entire US. We are as curious as the rest to see what adjustments are going to be required to move units during COVID-19, or, if there will simply be such a suspension in both disbelief and commerce, that activity will simply wait. We hope to have some more insight sooner than later to share with you all.
Stay Safe, Stay Healthy
Stephen J. Morse, Colin Langeveld & the RPC Family