For the multiunit operator, managing a retail real estate portfolio is tricky business. Keeping winning stores in tip-top condition - both physically and financially - is the key to long-term success. The best multiunit operators actively prune their portfolios in a proactive way and over time; minimize the organization from becoming saddled with legacy, underperforming stores that become dead weight for the company. Understanding which units are continually contributing accretive EBIDTA to the overall assortment of stores is critical for maintaining the health of the enterprise. Not only do the high-performing stores contribute to today's bottom line, but add substantial value at the time of selling the chain.
While
some real estate portfolios consist of owned properties (with or without a
mortgage), others are made up of leased properties or a combination of the two.
In either scenario, the manager should be working in concert with operations to
determine which properties should be divested and which properties should be
kept and improved, perhaps through capital investment. Here are some key areas
that should be front-and-center for the real estate manager:
Know
Lease Term Dates: Knowing
the term dates is simply not enough. A prudent manager needs to know the entire
key trigger dates that lead up to the term date. Working from those milepost
dates, the manager should set up a game plan to evaluate the long term
viability of the property - especially if this is a leased property. Hanging on
to dead weight properties is the ruin of any multiunit operator.
Stay On
Top Of Exercise Dates: Missing an exercise lease date may obligate the chain to another 3-to-5
years at an undesirable location or even worse, inadvertently fail to maintain
a high-performing store. As with the term dates, there are many steps leading
up to the decision date - including a thorough vetting by the operations team
on the long-term viability of the unit. Real estate should lead this exercise
in order to keep the organization on track with the key deadlines and time the
process so that a discussion can take place with senior management prior to the
exercise date.
Manage
Remaining Options: As with
everything, negotiations should take place when key critical deadlines are
near. When a potential change may be enacted - either artificially or a hard
deadline - levering that time period to negotiate remaining options is optimal.
If the store is an under performer, simply do not exercise the next option. On
the other hand, if the store is a long term strategic "must have",
then asking for additional options buys the company peace of mind.
Renegotiate
Rents: In
addition to managing options, it never hurts to present a market assessment to
the landlord to renegotiate the rent - using the trigger date of the option as
the "call-to-action" catalyst. Everything is up for negotiation,
provided that you have done your homework and can make a compelling case. In
today's up-and-down economy, a lot can change since the company exercised their
last option some 3-to-5 years ago. The squeaky wheel gets the oil and being
proactive with your negotiations will produce a more viable portfolio.
Divest
And Re-Locate:
Sometimes, the best option for a site is to sell or relocate the store. If
fee-based owned, selling the store is an option and reallocating the capital
proceeds back into strengthening the existing portfolio makes sense. With
regard to a leased site, letting the option expire and redirecting the existing
customer database to a nearby store can improve two areas of the company - stop
the bleeding at the underperforming store and moving a suspect store over the break-even threshold of
profitability.
Managing
a retail real estate portfolio takes a lot of forethought and coordination with
the operations staff, but by properly instituting an ongoing pruning strategy,
the organization can continue to prosper. Falling in love with legacy stores -
despite their underperformance - is the detriment to the chain. In the end,
letting go may be the best strategy and improve the ongoing viability of the
chain.
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