Jonathan Hipp

Travel through a small town or the outskirts of a larger city, and you'll likely pass by the local discount dollar stores. Whether those stores boast the green sign of Dollar Tree, or the yellow-and-black General Dollar signage, they offer aisles of everyday goods, ranging from beauty products, to cleaning essentials, to food, all within a 10,000-square-foot space.

To net lease investors, discount dollar stores offer passive cash flow, thanks to long-term leases (averaging 10-15 years) and credit-worthy tenants. The major players in this sector are Dollar Tree Inc. (which acquired Family Dollar Stores Inc. in 2015) and Dollar General Corp.

In the early going, the discount dollar retail model focused on providing cheap, off-brand goods to lower-income shoppers through no-frills locations. Then came the Great Recession. During and in the aftermath of the financial meltdown, discount dollar stores became popular retail destinations for shoppers of all income brackets. A decade later, consumers from all walks of life consider discount dollar stores the ideal place in which to find great bargains. The stores are still no-frills. But the retailers have increased the quality of their generic brands, while adding name brand products to their collection. Another big change coming into play for Dollar General, is that Fedex is being added as a partner. This strengthens the draw of the store for customers, by adding a reliable service, by a respected partner.

Many times, the discount dollar store is the only game in town. Many of these stores thrive in secondary and tertiary markets, areas that aren't as appealing to other retailers, such as Big Lots! Inc. or Walmart Inc.

Net lease investors in discount dollar stores can benefit from the following.

  • Higher cap rates. According to Calkain, the 2018 cap rate for Dollar Tree was 6.87%; rival General Dollar's cap rate stood at 6.86%. Investors can acquire discount dollar stores at a relatively low price point.
  • Great visibility. Discount dollar stores tend to be on main thoroughfares, highways and streets, with easy ingress and egress for shoppers.
  • National credit backing. Leases are backed by companies with high credit ratings, meaning continuous, steady retail operations, and payment of lease obligations.
  • True Triple Net. Lots of times these dollar stores will come with longer leases in the form of a triple net investment, taking the pressure of maintenance off the owner.
  • Amazon-proof. In small market towns, the convenience of being able to drive to your local store and get necessities will keep customers coming in.

While ownership of net lease discount dollar stores has its advantages, investors need to keep in mind the following caveats.

  • Smaller markets. Secondary and tertiary markets are more volatile than their larger counterparts. Employment in such markets are driven by one or two companies. If one of those companies shuts down, and employees are laid off, this could impact local retail.
  • Empty space. The Dollar Tree-Family Dollar merger was to mean a larger chain. But, due to lagging sales, Dollar Tree recently announced it would shutter hundreds of Family Dollar stores. While net lease investors will still collect rent, they may need to find a new tenant in a small market town.

For the most part, this type of retail can be a great income-producing addition to an asset portfolio. However, as with any kind of investment, investors need to do their research. Geography and corporate plans must be understood before buying a Dollar General, Dollar Tree or any kind of discount dollar store.

The views expressed here are the author's own and not that of ALM's real estate media group.

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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.

National
Net Lease
Retail
Leasing
Southwest