Cap Rate 10.30% on a 2009 NOI
Incremental D III's third quarter acquisition was a free-standing single tenant, triple-net (NNN) lease project. This off market, restaurant franchise location was identified by ID midway through the third quarter. The following elements helped foster Incremental Development’s acquisition strategy and further reinforce that this asset was ripe for acquisition: Of significant note is the fact that the lease maintains a corporate guarantee, whereby, the terms of the lease and any payments made there-under are backed by Wendy’s/Arby’s Corporation. Arby’s, which recently merged with the Wendy’s brand, in combination with Wendy’s comprises the third largest restaurant franchise group in the country. Effectively, unless Arby’s/Wendy’s corporation is declared insolvent or adjudged bankrupt, rental payments that were contractually negotiated when the lease was signed are due and payable to Incremental Development regardless of whether or not Arby’s continues to operate their business out of the location.
In addition to the corporate guarantee, there are still 8 years remaining on the initial lease term followed by 2 additional five year options with 5% base rent bumps at 5 year intervals during the initial term and at the inception of each option period. This fact is particularly relevant regarding ID’s short term hold strategy and will be subsequently discussed in further detail. The rent for this asset is paid as a function of both base rent and percentage rent. ID strategically engineered the financing that it procured in acquiring the asset to ensure 100% debt service coverage solely by virtue of the base rental payments. In addition, ID’s significant upside potential was conservatively underwritten by charting the last three years worth of sales figures in addition to FY 2009 year to date sales figures.
Per the terms of the lease, once in store sales figure reach $736,000, ID is contractually entitled to receive 8% of annual gross sales in excess of that number as percentage rent above and beyond any base rental payments. As this particular Arby’s is projecting to achieve sales in excess of 1.2 million dollars or nearly 30% above average unit volume (AUV), Incremental Development conservatively was able to present a model that returned a better than 10% cash on cash return to its partners. In addition, the ask price for the asset, in a cap rate driven industry, was predicated on 2008 sales figures which were lower than 2009 sales figures as sales have continued to experience a significant year over year upward trend.
By acquiring the asset at this point in time, ID was able to harness the intrinsic value in the deal by acquiring the asset on what is effectively 2008 pricing with $247,000 worth of equity built into the deal. As stated, the strategy with regard to this asset is to continue to bolster the NOI and divest the asset in the first quarter of FY 2011. This will enable Incremental to experience the benefit of the percentage sales over 2009 and 2010, book the depreciation during its ownership of the asset and re-trade the asset in 2011 at a highly competitive cap rate.
In completing all company mandated due diligence on the asset, an Environmental Transaction Screen, Survey and Title report were ordered in addition to an extensive site visit. The results of those third party reports clearly indicated that the property was environmentally clean and free and clear of potential encumbrances.
Lastly, because of our commitment to close this deal in a timely manner the deal cycle took 27 days from identification to acquisition clearly denotes Incremental’s industry savvy and its ability to quickly mobilize its resources when opportunities in this rapidly changing economic environment present themselves.