Let’s invert the question: How earnings will be impacted if the business leased the land (as well as building)?
- Higher risk of store closure/relocation, which is common in retail, due to non-lease renewal and unbearable rental increase.
- Recurrent rental expense, which usually increases with every renewal.
- Higher expenses such as Interest and D&A compared to owned assets on a perennial basis.
- Inflexibility to modify the building.
By owning the land, a lot of future uncertainty from the earnings gets minimized. Also, lower expenses with time act as the bedrock to fight the competition, using price as the main tool.
As of today, valuation of Dmart business shall be based on earnings and their growth over a long horizon instead of asset/land. However, business has an embedded optionality to become a recurrent asset play in case grocery goes out of fashion or the property becomes highly valuable in the long run.
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