Yield Investors Attracted to Valuation of Net Lease Dollar-Store Properties

By Randy Blankstein, President, The Boulder Group

Cap rates for single-tenant, net-leased, dollar-store properties tenanted by Dollar General and Family Dollar compressed by 16 basis points from 8.43 percent in the third quarter of 2011 to 8.27 percent in the third quarter of 2012. For investors acquiring investment-grade net lease properties, dollar stores remain one of the higher-yielding options as they are trading at a 77 basis-point discount to the net lease market as a whole.

In the third quarter of 2012, there were 392 Dollar General or Family Dollar properties on the market, with Dollar General making up 56 percent of the total market share. Dollar General and Family Dollar have a strong retail presence in the southern region of the United States as their corporations are headquartered in Tennessee and North Carolina respectively. The southern region accounts for 50 percent of the dollar stores currently on the net lease market.

Many investors pursue Dollar General over Family Dollar properties due to their lease structure. The standard new Family Dollar leases are double net for 10 years with no rental escalation in the primary term, whereas the majority of new Dollar General leases are triple net for 15 years with a 3 percent rental escalation in lease year eleven. Therefore, new construction Dollar General assets are priced at an 89 basis point premium over new construction Family Dollar assets.

Yield investors are increasingly recognizing that an attractive valuation exists in the net lease dollar store sector. Accordingly, the expectation is that transaction velocity will increase and prices will continue their upward movement until the dollar store sector’s cap rates approach that of the net lease market as a whole.