Wednesday, November 25, 2009

Buffalo Wild Wings Has Keys to Success

The Restaurant Association's performance index may show that the restaurant industry has been shrinking for the past 23 months but Buffalo Wild Wings (NYSE: BWLD) has continued to profit and expand, bucking that trend. According to new analysis by MSN Money, Buffalo Wild Wings tops the list of restaurants that are succeeding during this recession. It offers an atmosphere which contains both value based products and entertainment, perfect for the climate of negative news today.

This year, Buffalo Wild Wings has seen profits increase 34% and overall revenue increase by 31%. This growth is not contained to recent events, but in-fact has been a measurable trend. Over the past four years Buffalo Wild Wings has seen revenue growth of at least 19% per year. Last year it pulled in $422 million in revenues, by 2014 Value Line predicts yearly revenues to increase to $1 billion.

Expansion has been a key to Buffalo Wild Wings success. Currently it owns 197 stores and 363 franchises. According to its 2008 report, Buffalo Wild Wings aims to grow that number to 1000 outlets nationwide. In order to reach this goal, it plans on opening 60 stores a year. So far this expansion has been both achievable and profitable. Last year the company recorded revenues of $2 million per store.

Though many companies are finding it hard to maintain operations, let alone flourish in this economy, Buffalo Wild Wings has done so. It is always encouraging to look upon those that have managed to find success and companies such as Buffalo Wild Wings demonstrate that the correct business model can function in this climate. It also represents a rare opportunity to invest in an expanding business in an environment marred by foreclosures and bankruptcies. This is why we have seen a continued supply of Buffalo Wild Wings flowing through the net lease investment market, investors like profitable and successful companies.

Wednesday, November 18, 2009

Can Commercial Real Estate Have a “Debtless” Recovery?

Like so many things over the past decade, commercial real estate experienced a boom by way of unprecedented debt financing. This debt was securitized and transformed into CMBS bonds, lending otherwise unsavory debt high credit ratings. Thus, people were allowed to have their cake and eat it too, taking out huge amounts of debt while retaining investment grade status. The loans this debt was culled from are now fast approaching their due dates, with over half predicted to default. Without a new source of debt financing, it is clear the commercial real estate market will be rocked by a gale force crisis.

Currently, our economy is already suffering from many ailments. Unemployment stands above 10%, our government is trillions of dollars in debt and the dollar is weakening. Many say a commercial real estate crisis would crush what little recovery we have experienced and we should go to all lengths to stop it. However, this is a flawed premise. The outstanding debt on commercial real estate is not like some group of foreign barbarians ready to sack our recovery, it is an integrated part of the economy. It is tied to things like unemployment and low consumer spending; there is no feasible way for commercial real estate to recover unless the economy itself is healthy. Conversely, a crisis in commercial real estate would naturally impact the rest of the economy as well; it is a complex ecosystem of interrelations. It would make no sense to throw our gold at it and hope it simply goes away appeased.

According to the MIT Real Estate Center, commercial properties have dropped close to 42% over the past 2 years, leaving 55% of the outstanding $1.4 trillion worth of commercial mortgages underwater. This in turn has caused the delinquency rate to increase to 5%, up from 0.77% a year ago. These are the effects of an economy suffering from the collapse of a bubble fueled by reckless debt. There have been some positive recent developments such a $400 million offering of CMBS bonds (enhanced by TALF financing) but these properties represent the exception rather than the rule as they were conservatively underwritten. In-fact the Wall Street Journal goes as far to say “it will likely provide little solace to owners of tens of billions of dollars of office buildings, shopping centers and other commercial real estate that are now worth less than their mortgages.”

This is not the time for illusions about security, they are what got us here in the first place. The level of debt leveraging that occurred in the past is simply not a feasible business model. Furthermore, those properties and loans which are now under water due to that model should default as their positions are obviously untenable. These are not horrible abnormalities but necessary corrections dictated by the market. The bubble has collapsed. Only through intelligent investments, prudent decisions and a revived economy can commercial real estate rebound.

Wednesday, November 11, 2009

Net Lease Insider Pulse: Richard Ader on Commercial Real Estate

Net Lease Insider interviewed Richard Ader, Chairman and Founder of U.S. Realty Advisors, LLC, one of the largest owners and acquirers of single tenant net lease real estate transactions. We asked him five questions dealing with the present and future of commercial real estate, his answers proved both insightful and thought provoking.

(1) Will the commercial real estate market bottom out in 2010?

I do believe the first six months of 2010 will continue to show a decline in value and rents in most sectors of the real estate market. I believe the commercial real estate market will start to bottom out in late 2010 or possibly into the first quarter 2011. A key determinant will be how the growing shadow of maturing mortgage loans is handled.

(2) Is commercial real estate’s fate tied to unemployment or any other pertinent economic factors?

Commercial real estate is tied to all economic factors due to the fact that real estate is
capital intense, and supply and demand driven. Job creation and unemployment directly impact all aspects of commercial real estate: vacancies impact rents for office buildings, and we assume that retail demand will continue at lower levels which will affect both retail and distribution properties. In addition, until the real estate capital markets are re-started, new real estate development is likely to remain at the current depressed level. In the background is the potential for increased inflation, which would impact the cost of operating properties and financing properties, but may not affect rents which are more demand driven.

(3) When recovery does begin, what areas will grow first and fastest?

I think the first areas to recover in the real estate market will be retail and distribution, with office being last. I believe when the recovery comes, people first will start shopping again. This pent-up retail demand will trigger distribution to meet greater retail demand (and permanent changes in retail patterns). Office space will trail the recovery, as companies will first re-occupy large volumes of currently unused space before starting to lease new space.

(4) Are there segments of commercial real estate that you find appealing even in this economy, including the net lease market?

We find net leases to be appealing. Like most real estate assets, cap rates today have increased substantially compared to the over-heated markets of two years ago, and lease terms are longer. There also are opportunities to buy mortgage debt at good discounts with the objective of owning the real estate or achieving equity-type returns.

(5) Would you prefer to invest: Close to home or in a stronger metro market? If yes, what are your top two choices?

I think the preference today for investments in multi-tenanted office assets should be in the stronger metro markets. Distribution should also be in the stronger distribution areas, and retail should be based on prior performance. Net leases should be driven by corporate credit. How the lessee uses the asset in its business and what alternate demand for the asset would exist if the lessee were to move out.

Wednesday, November 4, 2009

Does the Market Still Crave Inferior Goods? Dollar General's Upcoming IPO

Kohlberg Kravis Roberts & Co (NYSE:KFN), recently set terms on a $750 million IPO for their discount retailer, Dollar General (NYSE:DG). If all goes according to plan, 34.1 million shares will sell for between $21 and $23 providing cash which KKR will use to pay down debts. How the market accepts this offering may betray its true feelings towards the economy. As a discount retailer specializing in value goods, Dollar General will only continue to see growth as long as people’s incomes continue to drop. Thus a strong showing at Dollar Generals IPO could indicate the market believes the recession will continue to impact people, in spite of recent positive GDP numbers.

While most businesses have been enduring hard times, discount retailers such as Dollar General and Wal-Mart have enjoyed an economic boon. In-fact, Dollar General has announced it will open 500 new stores and renovate 450 others in their fiscal year 2009. This expansion is bolstered by Dollar General’s strong earnings, in the half year ending July 21st; Dollar General saw net sales increase 13.3% over the same period a year earlier to $5.7 billion, raking in a profit of $176.6 million.

These numbers make sense economically, as one would expect a time of higher unemployment and lower incomes to translate into more business for discount retailers. However, many analysts are announcing the end of the recession due to a GDP increase of 3.5% in the third quarter. If this were true, Dollar General’s expansion would be somewhat unviable. How could one sustain its recent growth if the economic conditions which permitted it were abating? It seems Dollar General is betting that demand for their product will continue for the foreseeable future and thus so will our recessed conditions. If the market receives Dollar General’s IPO well, it would be saying Dollar General is on firm financial grounds, its expansion is on firm financial grounds and therefore the economy is on weak financial grounds.

Conversely, should Dollar General receive good results at the IPO, its individual properties could witness cap rate compression. This would only make sense because, in essence, the company would be receiving a vote of good faith from the market which would be both substantial and measurable, translating into higher prices. The trend has already been towards discount retailers; a strong IPO would confirm this trend for the near future and lend credence to Dollar General as an investment opportunity. The question is whether this spike will renew investor demand for Dollar General real estate interests.