What is up with Dollar General?

[Red Flint]

A KKR success story, buy Dollar General in 2007, close unprofitable stores, go public and expand during a time of cheap contracting services and lower loan rates.

Putting 9000 square feet of gleaming white walled and ceiling panels, with bright track lighting, transformed many old IGA stores and larger downtown malls (then could lease out extra suites or connected leaseable areas). Or, build the standard model just outside of the development zone where commercial land is relatively affordable at the acreage and frontage needed. Long term leases with renewable options are able to be financed and/or sold.

This may not make the news, but this has been an excellent market penetration and job creator in recent years for Michigan KKR joined with Goldman Sachs and CitiBank, and invested the capital necessary to implement new development. 11,500 stores!

 

[Mark K]

I've appraised several of these and all I can say is I sure wouldn't buy one at the current cap rates, especially those ones in small towns where it's literally about the only retail aside from a gas station/c-store. You could pay close to $1 million for a property with a 10-15 year lease that will be worth about $100,000 if they ever decide to not renew the lease. What demand is there for 8,000 SF of retail space in a town of 2,000 that's out in the middle of nowhere? Also, there's no barriers to entry in a lot of these places so if Dollar General builds a store, Family Dollar won't be too far behind, and vice versa.

I was considering investing some retirement money and was looking at exactly this. Ballpark of $1M, +/-, 8-10% cap rate, 7-10 years left on the leases and then what? Just like you say, 8-10K sq.ft. in the middle of nowhere. A lot of risk, IMO.

The sites in decent areas had lower cap rates, 6-7%, but if/when vacant there was a better chance of re-use.

I'm still looking.

 

[Mr Rex]

This mayor may not help with your fears: http://news.walmart.com/news-archive/2014/02/20/walmart-us-accelerates-small-store-growth

 

[Michael S]

I was considering investing some retirement money and was looking at exactly this. Ballpark of $1M, +/-, 8-10% cap rate, 7-10 years left on the leases and then what? Just like you say, 8-10K sq.ft. in the middle of nowhere. A lot of risk, IMO.

The sites in decent areas had lower cap rates, 6-7%, but if/when vacant there was a better chance of re-use.

I'm still looking.

Any single tenant net leased deal these days is a poor investment. The market is dominated by buyer's who need to invest their money and would rather get a 7% return that stick it in a CD and get half a percent. In addition, a lot of the buyers are using 1031 exchanges and a single tenant net leased property is a popular place to park that money. Who cares if you overpay by 5% if you're avoiding a 35% tax hit. In some cases they may plan to hold it for a decade and hope the tenant renews or they may look to flip it in a year or two to a new investment (using another 1031 exchange) knowing that they can sell that type of asset in just a few months while another piece of commercial real estate could take 6-12 months or longer to sell.

If you can afford to wait a few more years cap rates will rise. With low interest rates and so much money chasing yields if you buy today you could get locked into a below-average yield (historically speaking) and end up losing a lot of value when interest rates and cap rates rise.

 

[Howard Klahr]

Ironically, I received an email from Calkain Cos today highlighting dollar store properties
http://www.calkain.com/nnn-property.php?tnt=dollar

 

[Michael P Jacobs MAI]

SNIP... If you can afford to wait a few more years cap rates will rise. With low interest rates and so much money chasing yields if you buy today you could get locked into a below-average yield (historically speaking) and end up losing a lot of value when interest rates and cap rates rise.

Do you think that some of the national lenders have pulled back in some regional markets for just this reason? I do.

 

[Michael S]

Do you think that some of the national lenders have pulled back in some regional markets for just this reason? I do.

These single tenant deals are often built by merchant builders/developers who can pretty easily get construction financing based on the expectation of selling the completed leased property. I'm not sure what sort of financing terms they're getting but many of the buyers are all cash so they don't care about financing. For a lender who has an experienced builder/developer with a signed build to suit lease from a credit tenant in hand, this sort of deal is pretty low risk.

Even though everyone knows that interest rates will eventually rise, and cap rates along with them, you've got so much money chasing yield, whether equity or debt, that everyone is still buying and lending. Even if interest rates rise 100 basis points cap rates won't necessarily rise the same amount. I haven't checked the spread recently but I recall the last time I looked the spread between cap rates and 10-year T bonds were not at, or near historical lows. There could still be a lot of compression in that spread which would soften the blow to cap rates.

 

[Mark K]

If you can afford to wait a few more years cap rates will rise. With low interest rates and so much money chasing yields if you buy today you could get locked into a below-average yield (historically speaking) and end up losing a lot of value when interest rates and cap rates rise.

On one hand I agree but on the other I tend to think that interest rates will stay low and the US economy is going to mirror Japan's for a while. Very low interest rates, aging population, stagnant wages, gov't that thinks they can manage the economy better than the free market. Until interest rates rise I think more people are going to be hunting for yield and be willing to accept the low cap rates on above average risk investments.

And until I see rates rise I'll probably keep my $ in some very low-no risk investments paying 6-7%. I'd need 11-12% to buy a Dollar Store in the boondocks considering the prospect of eventually owning a piece or real estate worth very little.

Now if it was in the area or path of growth, I'd take less but most small towns with Dollar Stores don't fall into that category.

 

[normando]

General Dollar goes to areas where income is less than $45,000. With the increase in low income people, General Dollar should do well for the next five years.
As for Starbucks, Zillow says homes within a quarter mile has increased faster than other homes in general. I love Starbucks. I hate Zillow.

 

[normando]

General Dollar goes to areas where income is less than $45,000. With the increase in low income people, General Dollar should do well for the next five years.
As for Starbucks, Zillow says homes within a quarter mile hasve increased faster than other homes in general. I love Starbucks. I hate Zillow.