Over the past few years dollar store properties have become one of the more attractive net lease investments for investors. This popular segment is almost single-handedly changing the net lease investment market that has traditionally been dominated by drug store, fast food and automotive retail concepts. It is the only net lease sector that maintains an adequate supply due primarily to the large increase in the number of new stores developed over the last several years. Investors are attracted to them for their attractive price points and higher yields.
These properties offer a strong corporate guaranty, investment grade credit, 10-15 year NN or NNN leases, and can still be purchased above a 6% cap rate. The average cap rate of all dollar store transactions in 2014 is 7.81%.
The three main dollar store operators share very attractive credit profiles. Dollar General holds an investment grade credit rating from S&P (BBB-) and Moody's (Baa3), Family Dollar also holds an investment grade credit rating from S&P (BBB-) and Moody's (Baa3), and while Dollar Tree is not currently rated it has very strong balance sheet with minimal long-term debt. All three brands have grown into large chains that are nibbling away market share from bigger discount retailers like Wal-Mart.
In July, Family Dollar received a merger offer from Dollar Tree in a cash-and-stock deal worth $8.5 Billion. Dollar General shortly thereafter offered a competing bid of $9.1 Billion of cash and stock and has said it would divest as many as 1,500 stores to clear any antitrust concerns. It is believed that the Federal Trade Commission could require Dollar General to divest more than 4,000 stores to win its approval which, if accurate, would likely kill any possibilities of that deal moving forward. It is believed the Dollar Tree deal would result in closure of about 500 stores.
It bears mentioning that the Board of Family Dollar also favors the Dollar Tree merger. While Dollar General and Family Dollar have almost identical business models, Dollar Tree is markedly different. Dollar General and Family Dollar are both low cost retailers however only Dollar Tree prices every product in their stores at $1. Dollar Tree also favors an inline store configuration to freestanding unlike the other two major brands. This is where the large store overlap of a Family Dollar/Dollar General merger comes from and hence the much higher number of stores that would likely need to be closed to eliminate anti trust concerns. The shareholders are slated to vote on December 23, 2014 on the Dollar Tree merger.
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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.
