Calkain Research is implementing a change in how we present our data going forward. Capturing and accurately synthesizing the data which goes into these reports is difficult, to say the least. Complete data on many deals is often not obtainable. Additionally, some of the categories we track have limited transactions each quarter, which can result in a distorted average cap rate for each category and in turn the overall net lease average. This change will aid us in our objective in providing these reports in the most accurate way, and as bias free as possible.
To that end, the data in this report (to include a restatement of the first quarter of 2017 figures), and all subsequent reports will continue to reflect a rote average of all the sectors, however, each of the sectors will have a different computation performed under certain circumstances to obtain the “average.”
The standard metric used for determining how far from being a normally distributed dataset something is, is something called the skew. By convention, a data set with a skew of greater than |2| is considered “skewed” and therefore not normally distributed. In these cases, using the median (or middle value) in the dataset gives a better approximation of the dataset than the mean.
We will apply this test to all categories individually and where a category is skewed we will replace the mean with the median. The individual categories mean or median will then all be averaged as has been done in the past to compute the overall average.
With housekeeping now out of the way, the second quarter of 2017 saw very little movement in cap rates overall. Sectors such as Automotive and Dollar Stores saw a small compression in cap rates while Pharmacies and QSRs experienced a slight increase in cap rates just enough to bring the net change to near zero.
|Q1 2017||Q2 2017||Change in:|
|Sectors||Avg Cap||Low||High||Avg Lease Term||Sample Size||Avg Cap||Low||High||Avg Lease Term||Sample Size||Average Cap Rate (bps)||Lease Years Remaining|
|Total Sample Size||602||513|
1 Other retail includes retailers who don’t otherwise neatly fit into one of the above categories such as grocery stores, cellular stores, mattress stores, and fitness centers.
- As part of our market research, we collect sales price, cap rate, and lease years remaining for all publicly advertised and sold STNL properties.
- We are not able to capture 100% of the off-market transactions that occur; however the nature of off-market transactions typically limits their value as true market comps.
- Sources include public records, sales announcements, Calkain sales, and appraiser obtained sales amongst others.
- Our collection process, while thorough, is not all encompassing and there may be biases in the data as it relates to geography, tenancy, or brokers involved in the transaction.
- Public records often lag behind when transactions actually close, months in some cases. Consequently the data supplied here for any given quarter is likely to miss a material amount of transactions that actually closed in it.
The Automotive sector saw a compression of 37.8 bps. From quarter to quarter, there was a larger number of sales than usual originating from California in Q2. Properties in California typically have lower cap rates than the rest of the country.
The Banking sector saw near zero movements in the cap rate but what did trade had fewer years remaining compared to the previous quarter. The higher number of ground leases offset any increases in cap rates associated with fewer years remaining on a lease.
In the Big-Box sector, competing trends led to an increase in the number of lease years remaining while cap rates were very stable. An increasing percentage of properties sold were in premium locations demanding a lower cap rate. At the same time, a higher percentage of sales were from double net properties, which typically sell at higher cap rates. These offsetting factors combined with an increase in the number of years remaining kept cap rates very stable.
The Quick Serve Restaurant (QSR) sector features a variety of tenants that trade at different cap rates. Over the last two quarters, a change in term remaining and lease type were the main drivers of a changing cap rate. In the chart above, the change in cap rate tended to be in the same direction as the change in number of lease years remaining. Another driver of a changing average cap rate was a change in the lease types that were sold. The proportion of ground leases, which typically have lower cap rates than other types of leases, decreased from first to second quarter.
For Dollar Stores, the sector average fell slightly, while the tenants with the largest portions of net lease market share experienced an increase in cap rates. These contradictory numbers are due in large part to the skew of the data. The cap rates feeding the sector mean were found to have a high skew, resulting in the use of the median to describe the sector average.
When dealing with only sales that had at least ten years remaining on the lease, the differences in cap rates are less dramatic. Dollar General experienced a near zero change. Family Dollar’s change was significant, moving +38.6 bps. This movement was driven by fewer Family Dollars trading in premium locations, Florida, and an outlier double net deal that accounted for +23 bps of the shift by its inclusion during Q2.
In the Pharmacy sector, the average cap rate rose 46.6 bps while the number of years fell by 1.3 years. When looking at all CVS and Walgreens, there appears to be very little movement. Together they represent over 80% of the pharmacy sector sales captured in this report. The gains in average cap rate are influenced by the raising cap rate of the third largest pharmacy, Rite Aid. Their cap rate skyrocketed from Q1 to Q2. This +240 bps movement had a large effect on the overall average. The quick growth in cap rate was caused by a drop in the number of lease years remaining, no sales in the second quarter had over 10 years remaining, and the average number of years left fell from 13.5 to 5.5.
When looking at the 10+ lease years remaining, the cap rates for CVS and Walgreens grew from Q1 to Q2. The 10+ year cap rates in the second quarter are not far off from the average cap rates. Driving the numbers behind both charts is a high percentage of double net deals and deals with 10 or just over 10 years left trading during the second quarter. In the second quarter, the average number of years remaining for both CVS and Walgreens fell for average and 10+ years remaining groups.
STNL Tenant Change in Average Cap Rates Quarter Over Quarter
Advance Auto Parts
Advance Auto Parts sales in Q2 tended to be in either premium markets or triple net when compared to their Q1 counterparts in average markets and a mix of double and triple net deals.
The number of years fell from Q1 to Q2. A sale in California, which typically has lower cap rates than the rest of the nation, was balanced by only 10 years left and not being a ground lease.
Denny’s cap rate appears to move up greatly, but many of the sales from Q1 were in CA, which typically has lower cap rates compared to the rest of the nation, this created a false increase in cap rates for Denny’s.
The difference in cap rates from quarter to quarter for Starbucks can be linked to a change in the markets in which they sold. During Q1, a sub 4% cap rate sale skewed the average much lower, causing a return to more normal cap rates to look like an increase. An increase in the number of double net leases from Q1 to Q2 also aided in swinging the cap rate up.
Wendy’s has experienced a falling number of years and fewer ground leases trading from Q1 to Q2, putting upward pressure on cap rates.
|Tenants||Q1 2017 Avg Cap Rates||Q2 2017 Avg Cap Rates||Change in Avg Cap Rates (BPS)|
|Advance Auto Parts||5.66%||5.28%||-37.5|
*All calculations are based upon available comps for each specific quarter with 10+ lease term remaining. The total number of sale comps for respective tenants in each quarter also varies significantly.
STNL Cap Rates vs 10 Year Treasury Rates
The spread between STNL cap rates and the 10 year treasury rates has remained small, remaining under 4%.
The Federal Reserve announced a raise in target interest rates on June 14. This was late in the quarter, the effects of the rising interest rates will most likely be felt more fully in Q3.