The brief lull in tenant rent deferral (pay later) and abatement (free rent) requests during the middle of April has come to an end, but now there’s a flood of requests for rent deferrals to be instituted beginning in June.
The most shocking example of this trend is Wawa, the highly touted convenience store brand that brokers claim has an “investment grade” credit rating; a metric used to drive prices up and returns down for landlords that pursue these assets as “passive” triple net leased investments.
The decline in consumer spending resulting from the COVID-19 pandemic shutdown has begun to affect even the strongest tenants and those who remained open as “essential” businesses. This resurgence of requests indicates that the economic decline is wider spread and far more impactful than industry experts and media pundits would have us believe.
Wawa investors bought at very low cap rates and could see substantial declines in 2020 net income.
Wawa landlords bought at one of the lowest capitalization (cap) rates in the country and now they’re left with a high rent tenant asking for a June to August rent deferral to be paid back in 2021. Remember, these landlords paid a premium specifically to assume less risk, and many have large mortgages to pay.
To provide context by way of example, on rent of $300,000 per year ($25,000 per month), a landlord would lose $75,000 in 2020 revenue without accounting for debt obligations.
This would also mean a reduction in the effective cap rate for 2020. Based on a hypothetical but realistic rate of 4.75% ($6,315,000) on the original purchase, the realized cap rate for 2020 is now 3.56%.
Wawa was the safe bet.
Wawa was seen as a fail-safe investment, but insufficient diligence was paid to the quantification of the corporate balance sheet or credit worthiness. Have you ever seen a financial statement from Wawa, or where they provide qualifiable evidence of the “investment grade” credit rating that seems so widely accepted in the market?
The biggest challenge I see is that many Wawa’s are owned by individuals who rely heavily on these properties for income. Additionally, tenant rent may be their sole source of income to repay debt obligations associate with the investment.
Wawa is in a position of strength.
While these owners are savvy enough to have earned sufficient money to afford a Wawa, negotiating with a behemoth tenant in isolation is very hard. Especially with little insight into what is happening with the company and other landlords. In short, most net lease property owners lack the clout, scale, and experience required to negotiate well with national tenants. Contrary to the landlord’s position of “flying solo,” Wawa is well-placed to know the negotiating posture of hundreds of owners.
Further diminishing their leverage, it would be hard for most landlords to find an adequate replacement for Wawa. As a result, they simply don’t know how to handle the rent deferral request.
For Wawa owners.
If you own a Wawa, you’re probably questioning your bargaining power or how to feel about the lease in general. You’re also likely feeling that your “passive” and “safe” investment is currently neither. You may even feel completely unprepared for the impending negotiation with your once marquee tenant.
With all this in mind, I’d like to leave you with two important thoughts. First, don’t lose heart if you’ve received a rent deferral request. There are potential solutions out there. Second, you should contemplate adding power and knowledge to your team. Whether it’s an asset management company like Confidant Asset Management, or some other capable party, I urge you to seriously consider looking for trustworthy partners that have navigated this type of terrain before.
Noah Shaffer is Senior Director of Asset Management at Confidant Asset Management and represents landlords of net lease properties, including Wawa owners. He is a strong believer that net lease properties are not truly passive, and has spoken to Wawa as recently as this week. He can be reached at firstname.lastname@example.org.