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The convenience store market remains incredibly strong as investor demand continues its bullish trend towards 7-Eleven, Circle K, Wawa, & QuikTrip assets.

Despite the consistent cap rate compression we have seen within the convenience store market since 2010, cap rates are beginning to level off for even the most sought after assets, such as 7-Elevens, Circle-Ks, Wawas, and QuikTrips, among others. In fact, the only convenience store assets that have continued to drop in cap rate during the last 6 months are those located in prime real estate markets.

Convenience store chains such as 7-Eleven, Wawa, Circle K, and QuikTrip trade at premiums because the investor world views the industry as recession proof and consumers will always have a need for convenience items. Unlike gas stations, convenience stores will not be affected by the movement towards renewable energy due to consumer demand. Whether it be goods such as tobacco, beer, snacks, or lottery tickets, convenience stores have always focused on “immediate gratification goods” to drive sales and will continue to do so in the future. These are items that consumers want immediately and don’t have the time or patience to order online and wait for shipment. Many investors have shown a preference for convenience stores that sell fuel because of the associated tax benefits gained by taking advantage of accelerated depreciation (for

those that qualify; always check with an accountant before making an investment decision based on tax benefits). Essentially, accelerated depreciation enables an investor the opportunity to shelter more income over a 15-year depreciation period as opposed to the traditional 39-year depreciation schedule.

Convenience store retailers remain in expansion mode as they attempt to strengthen their respective positions in markets throughout the country. As a result, many developers are being provided with substantial opportunities in this sector as major tenants rapidly expand into major metros throughout the country. For example, 7-Eleven has gone back to its build-to-suit developmentprogram after a slowdown in growth over the past couple of years, during which they focused on internal development,fee development, and ground leases. On the other hand,Wawa plans to open over 100 new stores throughout Florida by the end of 2021. Wawa typically signs 20-year groundleases with large rents that average around $224,000.QuikTrip is also heavy in expansion mode throughout theMidwest, largely fueled by their sale-leaseback program.As long as interest rates remain relative to where theyare now or rise modestly, we will continue to experienceaggressive cap rates and demand from the investor world.

CONVENIENCECREDIT RATINGS:

CIRCLE K: BBBWAWA: PRIVATE

QUIK TRIP: PRIVATE7 ELEVEN: AA-

Since 2011, 7-Eleven has been one of the most aggressive convenience store chains in terms of expansion, including a record year of growth in 2012 with over 900 new store openings. They have also made numerous acquisitions such as Open Pantry, Zooms Inc., Sam’s Mart, Tedeschi Food Shops, 48 CST stores, 250 Mobile gas stations, and several others. Circle K relies on their internal, build-to-suit (BTS) pilot in which they prefer to own and control their sites. Circle K also recently acquired the Pantry (the parent company of Kangaroo Express, among several smaller chains), which has over 1,200 locations throughout the Southeast. In addition, Circle K’s parent company, Alimentation Couche-Tard, is in the process of acquiring CST Brands, Inc. (the second largest, publicly traded fuel and convenience retailer in North America with over 2,000 locations in the US and Canada) for $4.4 billion. This transaction would make Alimentation Couche-Tard the largest convenience store operator in the United States. Wawa has already opened approximately 100 stores in Florida over the past 4 years and continues to expand throughout Virginia, New Jersey, Pennsylvania, Maryland, and a few other eastern states. QuikTrip has opened approximately 150 stores since 2012, bringing their total store count to north of 700. Although QuikTrip is privately held and has no official creditrating, investors have continued to display a strong appetite fortheir locations.

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NEW STORE OPENINGS

7-Eleven and Wawa achieve the most aggressivecap rates within the convenience store industryas 7-Eleven’s average cap rate has dipped from5.58% in 2015 to 5.0% in 2016 YTD, with newconstruction sites in major metros trading at4.75%. Wawa’s cap rates have decreased from5.01% in 2015 to 4.68% in 2016 YTD. QuikTrip’shave had the largest dip in cap rates since 2012,as the average cap rate has dipped from 7.56%to 6.0% with new construction deals now tradingat 5.25%. Circle K’s cap rates have decreased by50 basis points since 2015 (6.53% average caprate), dropping to an average cap rate of 5.91%today. As a whole, we are seeing cap rates for newconstruction deals level off, despite the 10-yeartreasury plummeting over 80 basis points sincethe beginning of 2016.

AVERAGE CAP RATES

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CIRCLE KWAWA

7-ELEVENQUIKTRIP

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AVERAGE CAP RATES

* BARS REPRESENT AVG CAP RATES* LINES REPRESENTS AVG CAP RATES FOR NEW CONSTRUCTION

The data proves that as the guaranteed term remaining on a lease wears down, cap rates rise accordingly. In analyzing the data, we noticed only a minor drop off in cap rates for 20-year leases compared to 11-year leases. However, the drop off becomes far more substantial the moment an investment shows less than 10 years of term remaining and continues to drop each year thereafter. We have found that, on average, one could expect about 100-150 basis points higher of a caprate for a 5-year deal compared to a10-year deal.

In the NNN world, it’s common knowledge that cap rates rise as the lease term wears off. One of the most important facets an investor should look at is the loss of value or equity that can occur due to the unavoidable rise of cap rates. In our research, we found that the outliers in our data were all tied to location or store performance. There is a compelling difference in cap rates for assets in California and New York versus the income-tax free states and the rest of the country. For example, 7-Eleven’s in California with more than 10 years remaining

on the lease are trading in the high 3.0% to low 4.0% cap range, while 7-Eleven’s in TX, FL, NV, OR, and WAare trading in the high 4.0% to low5.0% cap range. While the rest of thecountry is trading in the low 5.0%to high 5.0% cap range. Therefore,when purchasing an asset, werecommend investors spend timeon the aspects one can predict orcontrol: microeconomics, location,and store performance.

CAP RATE CORRELATION

7-Eleven has the largest number of total branded storescompared to their competitors and have traded significantlymore than other chains over the past three years. Havingsaid that, it must be noted that 7-Eleven owns a substantiallysmaller percentage of their own stores compared to Circle Kand QuikTrip. We could expect to see a tick up in transactionvolume from Circle K with their new franchisee expansion plan.

TOTAL TRANSACTIONS

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# OF TRANSACTIONSIN THE LAST 3 YRS

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Data source: Costar & Real Capi ta l Analyt ics*Al l 2016 data is year to date

Like Wawa, QuikTrip builds large gas stations with approximately 10-20 fueling pumps with an average rent of around $185,000. The typical lease structure is 15 years of flat rent with a 4-5% rental increase every five years. Wawa signs 20-year ground leases with large rents that average around $224,000, typically with 8-10% rental increases every five years. 7-Eleven typically signs 10 or 15-year NNN leases with 10% rental increases every 5 years at an average rent of $80,000 for non-gasoline stores and $130,000 for convenience stores with gasoline. Circle K’s

average rent over the past three years is $84,000, and they typically sign 10 or 15-year leases. Circle K currently has a large expansion plan with its franchisees that could be an enormous opportunity for developers in the years to come.

Franchisee operators are willing to pay much higher rents based on the hard and soft costs involved with new store developments. The average rent for a franchisee development deal is approximately $125,000.

AVERAGE RENTS

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The outlook for the Convenience Store market remains vigorous. We believe investor demand will remain steady considering the general concept of convenience stores is widely viewed as recession proof and U.S. treasuries have room to increase without significantly affecting cap rates. Therefore, we are likely to see nominal changes in average cap rates of convenience store retailers over the next year.The biggest opportunity in the marketplace relates to Wawa’s expansion into Florida and QuikTrip’s expansion throughout the Midwest. Not only is there substantial growth in Florida, but as a whole, cap rates for Wawa’s and properties in Florida tend to trade at premiums compared

to a majority of the industry. This same trend can be said for QuikTrip properties. Wawa plans to open an additional 100 stores in Florida by the end of 2021, while QuikTrip intends to continue to expand its reach and may even look to venture further west. 7-Eleven is also starting to go backto their BTS model as a result of keycompetitors expanding at a rapidpace.The largest threat to the future ofconvenience stores is the “green”movement, where automobileowners become less dependenton oil and substitute gas-poweredvehicles with electric and hybridvehicles. Another likely issue isthe recent dramatic increase in

competition within the convenience store industry. Due to consumers shifting preference to fresh food products, more established convenience store chains like 7-Eleven and Circle K may findsignificant difficulty in adapting tocurrent trends due to the numberof locations they have. With thestabilization of cap rates for theconvenience store sector, it’s highlyunlikely any given conveniencestore property will ever be worthmore than it is today.

FUTURE OUTLOOK

CIRCLE KWAWA

7 ELEVENQUIK TRIP

AVERAGE RENTS

FOR MORE INFORMATION REGARDING CONVENIENCE STORES PLEASE CONTACT:

ARON CLINEaron.c l ine@matthews.com949.432.4509

MATT COATESmatt .coates@matthews.com949.432.4505

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Matthews REIS Disclaimer 2016

This publication has been produced by Matthews Retail Group, Inc. solely for information purposes and the information contained has been obtained from public sources believed to be reliable. While we do not doubt their accuracy, we have not verified such information. No guarantee, warranty or representation, expressed or implied, is made as to the accuracy or completeness of any of the information contained and Matthews REISTM shall not be liable to any reader or third party in any way. This publication is not intended to be a complete description of the markets or developments to which it refers. All rights to the material are reserved and cannot be reproduced without prior written consent of Matthews REISTM.