Some Considerations for Net Lease Investors Not Afraid to Get Wet Feet

Imagine you are crossing a stream on foot. (Why is your business.) It would help, obviously if you knew where the rocks in the stream were, yes/? 

Such is the case with net lease investments in retail. As we have emphasized before in this space, reports of the death of brick-and-mortar retail, much like reports of Mark Twain’s death (at least before he died), are greatly exaggerated. You simply need to know which rocks to pick: which models are sound, which brands can boast a strong, strategic leadership at their helm and which have offerings that continue to resonate with consumers, even through the depths of the COVID-19 induced recession.

Examples? Easy. Chipotle is opening “at least” 200 new stores this year, according to its CEO, Brian Niccol, a move fueled by their increasing digital sales. In addition, it plans on adding 15,000 new employees.

As we stated in our Net Lease Advisor, “Chipotle is a highly sought-after brand. There is great demand for their freestanding stores as net lease investments. The properties are well located near major shopping centers, university and college campuses and business centers.” Chipotle posts a 12-month average 5.34 percent cap rate based on a general lease term of 15 years, “with four, five-year options with seven to 12 percent increases every five years.”

Mexican fare is apparently hot (you should excuse the reference). Taco Bell is also gearing up, with plans to “pioneer” new formats in as many as 1000 new stores, according to GlobeSt.com.

Primarily a franchisor, Taco Bell, with an average cap of 5.17 percent, typically boasts a 20-year lease term with four five-year options, according to the Advisor. 

Switching sectors, Dollar General, part of the super-star dollar-store sector for net lease investment over the past 12 months, is going Chipotle one better, or actually five better, with lofty eyes on more than a thousand new units this year.

Says Net Lease Advisor: “From a net lease point of view, Dollar General is appealing given its lower price points, respectable sales record and corporate expansion strategy in a growing market segment …. Higher cap rates and lower price points result in a larger pool of qualified buyers.” That cap rate currently stands at 6.75 percent.

Keeping up with its competition, Dollar Tree, too, is opening 600 stores (400 of the flagship brand and 200 Family Dollar units) according to Chain Store Age. Also on the docket is the renovation of more than 1200 of the latter brand. 

With a 6.4 percent cap rate, reported by our Net Lease Advisor, “Dollar Tree is an attractive tenant for the net lease investor who prioritizes a higher cap rate …. Though not as flashy as other prominent net lease tenants, Dollar Tree has found success focusing on its core consumer market of value minded customers.”

Two strong sectors deserve the attention of net-lease investors who are willing to push through the current uncertainty for the betterment of their portfolios. We are always on hand to advise you and help guide you through that stream.