Cap rate 8.75%
Incremental D IV’s first quarter acquisition of 2010 was a free-standing, single tenant, triple-net (NNN) lease project. This asset was identified by I.D. at the end of fourth quarter FY 2009. The seller’s current annualized net operating income being $134,842. While monitoring the market, and seeing that these assets were trading at between 7.8-8.25% caps, Incremental negotiated an offer based off of the NOI, that allowed for them to acquire the asset at an 8.75% cap.
The following factors provided the basis of our internal underwriting and ultimately earmarked this asset as being ripe for acquisition. Respective to this location, the tenant, Advance Auto Parts, is 13 years into an initial fifteen (15) year lease term with two additional five (5) year options. The building being one that was newly constructed in 2007. The terms of the lease and any payments made there-under are backed by the Advance Stores Corporate guarantee. Advance Auto comprises the second largest auto parts franchise groups in the country. Effectively, unless Advance Auto Parts 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 Advance Auto's continues to operate their business out of the location. Incremental was provided with a clean environmental Phase I, and Phase II, demonstrating that there are no environmental concerns associated with the site. In store sales for this location revealed that the store was also over performing the AUV. As it pertains to the physical location of the building, the asset is located 20-25 minutes from Reliant Stadium, on an intersection that is neighbored by such tenants as CVS, and Wells Fargo. Also directly across the street is located a large shopping center. The average daily traffic count for the asset (ADT) is 55,000 cars per day.
Procuring bank financing for the acquisition, given the state of the capital markets, at the outset of the year was a challenge. I.D. took advantage of its lending relationships to procure financing for the asset on the following terms: 70% loan to value (LTV) ratio on the $1,541,051 purchase price, of which I.D. negotiated the interest rate down to 5.75%, amortized over a 25 year period. The “going in” cap rate for the asset based on the new pricing increased from 8.75%. I.D. closed on the acquisition of the asset on April 7th, 2010.?In analyzing the financial aspects of the acquisition the following factors are relevant: Advance Auto Parts is responsible for paying the remaining term on the initial lease, in annual rents of $134,842. Annualized debt service for the loan is $81,048. This leaves Incremental with a first year annualized net income after debt service of $53,794. Thus, the cash on cash return on equity (cash on cash returns) during the period of ownership is 10.47%.
Less than one month after ID acquired the asset, Advance Auto Parts received a credit bump by the S&P, from BB+ to BBB-. Taking the asset's credit into investment grade, and adding substantial value to the asset itself, to be unlocked upon divestiture.