This business is simple. Generating 27% annual returns for shareholders year after year is NOT. It's extraordinary. Let me show you how the MDC works:
The company opened for business in 1970. It currently owns 1,929 properties in 48 different states. Convenience stores and fast-food restaurants combined make its largest holding. But it also leases property to theaters, day-care centers, gasoline stations, and auto shops. Here's the breakdown:
Auto-related
18.9%
Restaurants
17.8%
Misc. Retailers
17.3%
Convenience Stores
14.1%
Theaters
9.4%
Child Care
8.9%
Other
13.6%
Occupancy is the single-greatest concern for a landlord. An empty building is like a dairy cow that doesn't produce milk. A few vacant buildings will rip holes in your monthly dividend payouts. The MDC achieves long-term occupancy rates of 98.5%. Through inflation, including the hyperinflation of the 1970s, recessions, wars, long bond rates from 18% to 4%… the MDC has never had more than 2.5% of its property vacant. Right now, 98.7% of its properties are occupied. These rates are the best in the industry – by far – and the chief reason the MDC is such a successful company.
So what's the secret to high occupancy?
This isn't the Cape Cod vacation-rental business. The MDC seeks retailers to occupy its properties and pay rent for 15 to 20 years at a clip. Selecting the right retail chain is the first step... and definitely the most important.
The MDC invests primarily in retailers that provide basic human needs... like cheap food, gas, or auto repairs. These businesses are the last to suffer in a recession. The MDC does not put more than 20% of its portfolio in any one industry or more than 10% of its portfolio in a single retail chain.
The industry divides retailers into three classes: venture, middle, and upper market. Venture-market retailers are the smallest chains, with fewer than 50 outlets. Typically, they sell a new retail concept. They don't have geographic diversity or experience in softer markets.
Middle-market retailers have between 50 and 500 locations in more than one geographic area. They have a proven, reliable concept and experience trading in different economic conditions. Credit ratings may border on junk. Middle-market retailers tend to be more recognizable. Depending on where you live, you've probably heard of National Tire & Battery (car parts and service), Children's World (day-care), Wawa (convenience stores), and Zaxby's (restaurants).
The upper market is made of national chains with mature products and more than 500 outlets. They have investment-grade credit ratings and long trading histories.
The MDC likes middle-market retailers. Here's why:
Middle-market retailers need cash to fund growth. But unlike the national chains, poor credit ratings make other financing options expensive.
They have experience overcoming the managerial and operational obstacles that often trip up the venture retailers.
They can spread corporate expenses across a large number of stores.
They have the critical mass to survive even if some locations close.
Middle-market retailers grow stronger financially as their businesses mature. That means, given the risks, middle-market retailers offer the best investment returns of any market class, the MDC believes.
Even if the worst happens and a retail chain falls on hard times, the MDC still has little to worry about. It hasn't loaned any money to its tenants... just leased land. Worst-case scenario, the tenant is unable to pay the rent. Even this is unlikely. The company only invests in the best locations. These will be the last properties a retail chain shuts down in a reorganization or downsizing. The banks and bondholders may not be so lucky.
The company opened for business in 1970. It currently owns 1,929 properties in 48 different states. Convenience stores and fast-food restaurants combined make its largest holding. But it also leases property to theaters, day-care centers, gasoline stations, and auto shops. Here's the breakdown:
Auto-related
18.9%
Restaurants
17.8%
Misc. Retailers
17.3%
Convenience Stores
14.1%
Theaters
9.4%
Child Care
8.9%
Other
13.6%
Occupancy is the single-greatest concern for a landlord. An empty building is like a dairy cow that doesn't produce milk. A few vacant buildings will rip holes in your monthly dividend payouts. The MDC achieves long-term occupancy rates of 98.5%. Through inflation, including the hyperinflation of the 1970s, recessions, wars, long bond rates from 18% to 4%… the MDC has never had more than 2.5% of its property vacant. Right now, 98.7% of its properties are occupied. These rates are the best in the industry – by far – and the chief reason the MDC is such a successful company.
So what's the secret to high occupancy?
This isn't the Cape Cod vacation-rental business. The MDC seeks retailers to occupy its properties and pay rent for 15 to 20 years at a clip. Selecting the right retail chain is the first step... and definitely the most important.
The MDC invests primarily in retailers that provide basic human needs... like cheap food, gas, or auto repairs. These businesses are the last to suffer in a recession. The MDC does not put more than 20% of its portfolio in any one industry or more than 10% of its portfolio in a single retail chain.
The industry divides retailers into three classes: venture, middle, and upper market. Venture-market retailers are the smallest chains, with fewer than 50 outlets. Typically, they sell a new retail concept. They don't have geographic diversity or experience in softer markets.
Middle-market retailers have between 50 and 500 locations in more than one geographic area. They have a proven, reliable concept and experience trading in different economic conditions. Credit ratings may border on junk. Middle-market retailers tend to be more recognizable. Depending on where you live, you've probably heard of National Tire & Battery (car parts and service), Children's World (day-care), Wawa (convenience stores), and Zaxby's (restaurants).
The upper market is made of national chains with mature products and more than 500 outlets. They have investment-grade credit ratings and long trading histories.
The MDC likes middle-market retailers. Here's why:
Middle-market retailers need cash to fund growth. But unlike the national chains, poor credit ratings make other financing options expensive.
They have experience overcoming the managerial and operational obstacles that often trip up the venture retailers.
They can spread corporate expenses across a large number of stores.
They have the critical mass to survive even if some locations close.
Middle-market retailers grow stronger financially as their businesses mature. That means, given the risks, middle-market retailers offer the best investment returns of any market class, the MDC believes.
Even if the worst happens and a retail chain falls on hard times, the MDC still has little to worry about. It hasn't loaned any money to its tenants... just leased land. Worst-case scenario, the tenant is unable to pay the rent. Even this is unlikely. The company only invests in the best locations. These will be the last properties a retail chain shuts down in a reorganization or downsizing. The banks and bondholders may not be so lucky.
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