If you're traveling through a small town or the outskirts of a larger town, you will likely come across the local discount stores. Whether these stores have the green Dollar Tree sign or the yellow and black General Dollar signage, they offer 10,000 square feet of aisles filled with everyday goods, from beauty products to cleaning supplies to groceries.
For net leasing investors, discounters offer a passive cash flow thanks to long-term leasing contracts (10 to 15 years on average) and creditworthy tenants. The main players in this sector are Dollar Tree Inc. (which Family Dollar Stores Inc. acquired in 2015) and Dollar General Corp.
Initially, the discount dollar retail model focused on delivering cheap off-brand goods to lower income buyers through no-frills locations. Then came the Great Recession. During and after the financial crisis, discount stores became popular retail destinations for buyers of all income levels. A decade later, consumers from all walks of life see discount stores as the ideal place to get great bargains. The shops are still no frills. But retailers have improved the quality of their generic brands while adding branded products to their collections. Another big change for Dollar General is that Fedex will be added as a partner. This makes the business more attractive to customers by adding reliable service from a reputable partner.
The discounter is often the only game in town. Many of these businesses thrive in secondary and tertiary markets, in areas that are not as attractive to other retailers, such as: B. Big Lots! Inc. or Walmart Inc.
Net leasing investors in discounters can benefit from the following advantages.
- Higher cap rates. According to Calkain, the cap on Dollar Tree in 2018 was 6.87%; Rival General Dollar's cap rate was 6.86%. Investors can purchase discount stores at a relatively low price.
- Good visibility. Discount dollar stores are typically located on major highways, highways, and highways, with easy entry and exit for shoppers.
- National loan support. Leasing contracts are secured by companies with high credit ratings, which means continuous, steady retail operations and the payment of leasing obligations.
- Real triple net. Often times, these dollar stores will come with longer leases of three times the net investment, relieving the owner of maintenance pressures.
- Amazon safe. In small market towns, the convenience of driving to your local store and getting your essentials will keep customers coming back.
While owning net lease discount dollar stores have their advantages, investors must be aware of the following limitations.
- Smaller markets. Secondary and tertiary markets are more volatile than their larger counterparts. Employment in such markets is driven by one or two companies. If any of these companies shut down and lay off employees, it could affect local retailers.
- free space. The merger of Dollar Tree and Family Dollar should mean a bigger chain. Due to declining sales, Dollar Tree recently announced it would close hundreds of Family Dollar stores. As net rental investors continue to cash in rent, they may need to find a new tenant in a small market town.
For the most part, this type of retail trade can be a great income generating addition to an asset portfolio. However, as with any type of investment, investors need to do their research. Geography and business plans must be understood before purchasing a Dollar General, Dollar Tree, or discount store.
The views expressed here are from the author and not from the ALM real estate media group.