This summer has been particularly good to dollar stores. Popular retailers like Family Dollar and Dollar General continue to open new stores. S&P even raised Dollar General’s credit rating BB+ in late July. Despite the stagnant economy (or because of it) dollar stores are thriving.
In order to continue capturing market share, the dollar store companies are relocating new stores in existing markets and opening new stores in new markets. These relocations and new stores offer real estate investors an opportunity to own hard assets with bond-like characteristics based on the long-term net leases signed by stable corporate tenants. The current capitalization rates (or yield) for these dollar store net lease assets are in the 8% - 9% range, depending on location, specific lease terms, and credit worthiness of the tenant. With Dollar Generals recent credit upgrade to BB+ Stable, the credit gap between Dollar General and Family Dollar (BBB- Stable) is shrinking.
Even with a lower credit rating, net lease real estate investors are currently paying lower cap rates for Dollar Generals than Family Dollar assets. On average, new Dollar General stores are trading at 8% - 8.50% cap rates, while Family Dollars are often 25 – 50 basis points higher. Both Family Dollar and Dollar General operate with net leases, which provide long-term and stable income streams for passive property owners. Given that Dollar General’s credit rating is improving and both companies operate out of similar locations, the difference in value is predominantly driven by slight variations in the corporate leases.
Dollar General’s new lease is 15 years and truly a passive triple net structure, meaning that the tenant pays property taxes, insurance, and all maintenance associated with the property. Comparatively, Family Dollar signs a 10-year double net lease, requiring the landlord to maintain the roof and structural components of the building. Investor sentiment is that Family Dollar’s shorter tease term and limited landlord responsibility exposure are contributing factor for a slightly higher cap rate when compared to Dollar General properties. Both corporations offer appealing real estate investments, but investors seem to be accepting of a slightly inferior credit and have proven a willingness to pay a premium for longer and more passive lease terms.
FDO: BBB-, Stable (S&P)
DG: BB+, Stable (S&P)
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
