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 EBITDA 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 all of the 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 equally 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.