New Assignment
mloi01
6PSGD.docxPeople:
Sunshine Gasoline Distributors Inc., referred to as SGD, is a Florida corporation established in 1987 to acquire and operate both retail and wholesale gasoline operations in southern Florida. SGD is wholly-owned by Maximo Alvarez whom supports the relationship with his full and unlimited personal guarantee of the credits extended. Since inception, SGD has grown to be one of the largest gasoline dealers in the state owning, leasing or supplying nearly 522 retail locations and is a formidable player in the both Dade and Broward counties controlling 28% of the market share by location count. A company breakdown provided by the borrower indicates ownership interests in 329 stations, a leased interest in 46 stations, and 147 independent wholesale accounts. These stations are branded under the Chevron, Citgo, Mobil/Exxon, Marathon and Shell. The industry has generally segmented itself into two models: 1) Company Owned and Company Operated; and 2) Company Owned and Dealer Operated. SGD is a hybrid where a majority of the convenience store operations owned are leased to independent third parties and gasoline services are retained, while the operators provide management services for SGD’ gas operations. This approach affords SGD’s locations the full service approach the industry/the customer has come to expect without the investment in personnel, FFE and non-petroleum inventory; however, SGD is not afforded the substantial operating margins a properly run c-store operation provides and opts for a steady flow of rental income instead.
At FYE 2018, the company generated 66% of revenues from its retail petroleum operation, with 33% coming from wholesale petroleum operations, and 1% coming from car wash activity. Wholesale margins are generally constant at 5.3%, retail margins have moved between 8.6 and 9.5% the prior 24 months. As noted in IbisWorld, both the retail and wholesale petroleum business are considered mature, with substantive regulatory and capital requirements/needs keeping the barriers to entry moderately high. Revenue growth is limited to less than 1% per annum over the next 5 years.
Max Alvarez is joined in the operations by his sons Eddie and Max Jr. whom head up facility management and IT respectively; also, Max’s oldest child Sandra serves as CFO and is next in line to operate the business should Max retire or pass away. Management succession is in place with capable experienced family members whom have been involved in SGD for many years.
COVID Issues:
COVID represents a challenge to SGD and the petroleum industry as a whole, as the work from home environment caused a steep drop in gasoline demand (wholesale and retail), which disrupted the oil and gas market as market price collapsed to less than $20 dollars per barrel, with some futures trading in the negative. This disruption resulted in a countless number of bankruptcy across the industry and sectors servicing the industry. No detailed reports were available for gasoline station closings in Dade and Broward counties. This situation was compounded by OPEC (Oil Producing Export Countries) whom initially voted to not cease production, with the intent of inflicting permanent damage to non-Arab/NON-OPEC producers including the USA, South America, and Russia. Political fall-out and pressure finally resulted in a production pull-back, and price floor. Until such time as business normalizes in the US, both retail and wholesale petroleum operators will face headwinds in terms of pricing and volume. The borrower has not requested a deferral or additional funds.
Purpose:
The proceeds of the loan will be used for working capital purchases associated with the acquisition of cash stations on the open market. The loan is structured as a 10 Year Commercial Term Loan, with monthly payments of P&I based on a 15 year amortization and with interest fixed at 4.85% in the first 5 years, then adjusting to the 5 Year T-Bill plus 2.25% and relocking. There is a rate floor for the term of the facility at the starting rate of 4.85%. The properties are free and clear and this is generally a cash-out transaction other than closing costs.
Protection:
The loan is secured by a FREM on two commercial parcels improved with gas stations with c-stores. Property one, located at 1501 S Flamingo Road, Pembroke Pines Florida, was last appraised by Hopkins Appraisal Services reflects a market value of $5,250M as the Fees Simple of the Going Concern, with a real estate only value of $2,350M, with an effective date of September 19, 2019. The appraisal is above average in quality with a good comparable sales selection and well supported capitalization rates. Property two, located at 15698 SW 88th Street Miami Florida was last appraised by Hopkins Appraisal services, with a market value of $7,050M as a Fee Simple Value of the Going Concern, and a real estate only value of $4,990M with an effective date of September 19, 2019, and the value also is well supported.
Hopkins Appraisal Services is well known in the South Florida appraiser market for his expertise in petroleum related retail operations and has historically referred to the presentation basis of his retail gas station appraisals as “Going Concern” values, which is in conflict with the 2010 Joint Interagency Appraisal Guidance. However, consistent with the guidance, Hopkins Appraisal Service has generally provided a break-down of the Real Estate, FFE and Intangible values. He has now dropped the use of Going Concern and refers to the approach as a Fee Simple interest in the tangible and intangible assets.
The combined real property value of the stations is $7,340M and results in a LTV of 69% based on the $5,000M RLOC provided to the borrower. The bank does not refer to the real estate only value in its collateral description, nor discusses the contributory components to include the Business Enterprise Value, FFE and car washing equipment.
Payment:
The primary repayment source for this debt is normal recurring cash income, or, Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). Other adjustments could include recurring and non-recurring charges and other non-cash charges.
Revenues declined AT FYE 2019, to $1,582MM, from $1,671MM in the prior fiscal year. Gasoline prices averaged $2.60 per gallon throughout the year, which was a 4% reduction, or, 11 cents per gallon over 2018, which compares with the 5% reduction in sales at SGD. GPM’s moved opposite sales increasing from 8 – 9%, as prices at the pump declined slower than average wholesale costs, which allowed gross profits to increase despite declining sales. The improved margin was not sufficient to offset increased operating and non-operating expense, as net Income declined to $20,214M at FYE 2019, versus $22,758M in the prior period. As a result, EBITDA declined to $58,073M at FYE 2019, as compared to $61,148M in the prior period. The annual debt service requirement in 2019 was $33,168M and the corresponding DSCR is 1.75X. Leverage, measured as the ratio of EBITDA to Sr. Debt, exceeded the highly leveraged transaction guidelines at 6.02X based on Sr. Debt Levels of $349,618M at FYE 2019. Regulatory guidance normally precludes real estate debt from the HLTV calculation, however, in the capitally intensive nature of SGD, real estate collateral has been used/leveraged to fund acquisitions and provide working capital over the years.
Balance sheet leverage as a measure of DTW, is moderately well controlled at 2.57X, with assets of $590,432M supported by NW of $165,192M. Liquidity measured as Unrestricted Cash on Hand to Total Operating Expense provide 94 days of coverage, as long as sufficient internally generated working capital can fund inventory purchases with Days Inventory on Hand of 3.11 days.
Though the guarantors have a substantial Net Worth of $591,576M at 3/31/2020 composed primarily of the Value of SGD on a market value basis ( current appraisal including enterprise value), the principals have contingent liabilities of ~$355,000M related to SGD and liquidity of $5,875M is nominal related to these contingencies.
Problems/Prospects/Conclusions:
