It all started with a cow.
Rumor has it that Greek immigrants Vasilios and Aphrodite Haseotes bought the cow – and the farm that came with it – for just $84 in 1938.
Through hard work and persistence, that one cow turned into a herd of over 3,000 by the mid-1950s, making Cumberland Farms the largest dairy farm in the area.
Then the Haseoteses came up with a new idea: using cheap milk as a loss-leader to lure customers into stores. They’d make the money back on other higher priced grocery items.
And so Cumberland Farms expanded into the convenience store business.
By the 1990s, the chain had grown to more than 1,100 stores.
Though the founding family sold their stake in “Cumby’s” (Cumberland Farms) several years ago, the brand is still growing, with recent plans to expand into Gulf Coast states.
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market. Convenience stores are often considered a recession-resistant business because customers always need fuel and are more likely to make small purchases along their daily commute rather than making a long trip to a larger grocery store.
Today I want to show you how Cumberland Farms is using a special financing trick to navigate rising interest rates, why convenience stores are a nice cushion for your portfolio, and give you one way to play it.
A Trick to Cutting Debt
The new owner of Cumberland Farms – a company called EG Group – went on a buying spree several years ago, snatching up hundreds of convenience stores across the U.S. It is now the fourth-largest owner of convenience stores in the nation.
It was able to finance everything with cheap debt. But EG Group made one big mistake – it didn’t lock in interest rates while they were low.
Now, with over $9 billion of mostly variable rate debt, its interest expenses are shooting through the roof.
And lenders are worried about its ability to repay them.
EG Group had to get creative. It wanted to keep running its stores, but it needed cash to reduce its debt. And the best way to get more liquidity was by selling its real estate.
So, the company made a deal to do a sale-leaseback. A couple of months ago, I explained how this special form of financing allows companies to get money up front for their real estate but keep using their properties through long-term leases.
Want to guess who took the other side of that deal? My favorite real estate investment trust, Realty Income (O)!
According to the terms of the deal, Realty Income is buying around 400 convenience stores from EG Group for $1.5 billion. That will help it pay off a decent chunk of its debt.
And in exchange, EG Group is leasing those same stores back from Realty Income with a 20-year lease. The initial rent starts at 6.9% of the purchase price, or around $103 million per year.
When you consider that Realty Income’s average cost of capital is around 5.5%, it is earning a healthy spread.
Though this is a fairly sizable deal, after the transaction, EG Group will be a tenant representing just 2.9% of Realty Income’s portfolio. That’s still quite diversified with 11.3% of rent coming from convenience stores.
The rest of Realty Income’s portfolio is also recession-resistant, with a focus on non-discretionary, low price, or service-oriented businesses.
But the fact that Realty Income has 11.3% of its portfolio dedicated to convenience stores means we’d better be paying attention.
And I want to share the name of one real estate investment trust (REIT) that’s setting up to take advantage of higher demand for the sector…
The Convenience Store Craze
The REIT on my radar that is less expensive and has a whopping 16.6% of its rent portfolio coming from convenience stores is National Retail Properties (NNN).
National Retail owns more than 3,400 properties across the United States. 99.4% of its stores are currently leased, and over the past 20 years, its occupancy levels have never dipped below 96%.
According to Grand View Research, the global convenience store market is expected to grow 5.6% annually for the next five years. That means there’s plenty of opportunity for National Retail to expand.
And as of writing, it’s trading at an approximate 9% discount in our estimation.
So if you’re interested in taking advantage of this opportunity, consider giving National Retail a look.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
Buy this small group of unique stocks... never sell them... and make all the money you need... No matter what happens in the market. Revealed here: the name and ticker of the #1 stock.
Source: Wide Moat Research