Dollar General Is A Bonafide Star In The NNN Marketplace
Investors To Tap Expertise To Navigate Competitive Buying Environment.
Dollar General Corp. has made a name for itself by selling an assortment of low-priced goods, but it’s market cap is by no means cheap. The $51 billion company is a powerhouse that commands attention on both Wall Street and Main Street, and it has emerged as one of the most highly sought-after assets for triple net lease (NNN) real estate investors.
Dollar General is arguably the hottest NNN tenant in recent years. Investors like them for the same core reasons that they want to see in all NNN assets – a long-term guaranteed passive income stream, no management responsibility as a landlord, and the opportunity to have a high-caliber company as a tenant. With its “Save Time. Save Money. Every Day!” tagline, a 75-year history of delivering value to shoppers and a store base of almost 18,000+ and counting, Dollar General (NYSE:DG) is a clear leader in the dollar store sector. The company hits the bulls-eye for what investors want in a NNN tenant – a Solid Business Model, Strong Growth Trajectory and Stellar Corporate Credit.
1. Solid Business Model: Above all else, investors like tenants that have a good, sustainable business model. The Dollar General model of delivering a convenient, value-priced shopping option to small town America is proving to be both ecommerce-proof and recession-proof. A key part of its strategy is to open in rural areas and tertiary markets where there is little direct competition. Whereas consumers are willing to travel further for a biweekly or monthly trip to Walmart, or in other cases just not having access to similar offerings locally, Dollar General customers often visit their local store 2-3 days a week for everyday essentials such as milk, laundry soap and toilet paper. In addition, its base of discount goods with most items priced under $10 ensures that its sales do well in both good and bad economic cycles.
2. Ecommerce & Recession Proof: Investors have been gravitating towards “Amazon proof” retail assets that can withstand competitive pressures from online sales. That shift elevated demand for restaurants and services-based businesses. However, those same businesses were among the hardest hit during the COVID-19 shutdown. Meanwhile, Dollar General’s business boomed during the pandemic. Investors that normally gravitated to Quick Service Restaurants pivoted to “essential retailers” such as Dollar General, Walgreens, Firestone and others. Dollar General’s core operating metrics, such as gross sales, operating profits and net income, jumped a whopping 17-50%+ throughout quarterly earning periods in 2020 & 2021.
3. Impressive Growth Trajectory: Dollar General has been in growth mode for the past several years, which is evident in its sales, profitability and store expansion. In fact, the company has been recognized as one of the fastest growing retailers in the country. Its new store count has grown consistently by 900+ new stores per year from about 12,400 at the beginning of 2016 to nearly 18,000+ stores today. The company sees more growth ahead with an opportunity to add as many as 13,000 additional Dollar General stores across the U.S.
4. Stellar credit: Tenant credit is key to NNN asset investment, and Dollar General’s credit is top notch, including a BBB rating from S&P and Baa2 from Moody’s. Having a signed lease guarantee from a highly credit rated company like Dollar General is a bit like holding a golden ticket. The corporate lease guarantee ensures that even if a store is struggling – or even closes all together – Dollar General Corp. would still be responsible for the rent payment obligations. That corporate guarantee reduces investment risk and gives investors confidence that their investment will continue to deliver consistent income over the entire lease term.
5. Passive income: One of the big incentives for NNN investors is buying an asset that delivers a steady stream of passive income. You can sit back, enjoy life and wait for “mailbox money” to roll in to supplement other sources of income. Although no real estate investment is entirely risk free, a Dollar General NNN asset takes many of the traditional real estate risks off the table. Dollar General frequently signs long-term leases of 15 years, as well as securing options for lease renewals, meaning that steady, passive income may be in place for 25, 30 or 40+ years.
Demand drives competitive market
It is no surprise that investor demand for Dollar General NNN properties have gone through the roof following the pandemic. Despite the 900+ new stores being built each year; the persistent demand far outstrips supply. As a result, valuations have greatly increased, and the resulting capitalization rates have compressed by 100+ basis points. For example, a typical Dollar General located in the Midwest with a yearly rent (Net Operating Income or NOI) of $100K is now seeing a price increase of more than $270K – from $1.538M to $1.818M within the past year, resulting in a drop in cap rate from 6.5% to ~5.5%.
Pricing and terms for brand new Dollar General investment properties generally fall in the below range:
Pricing: $1.5M - $2M+
Cap rate: ~5% - 6%+
5-year (absolute NNN); 3 to 5 of 5-year renewal option
Investors need to be prepared to act quickly. A typical Dollar General property that hits the NNN marketplace will likely have an executed Letter of Intent (LOI) (buyer agreeing to buy with seller) within a few days. That is a blistering pace considering that Dollar General is opening 15-20 stores per week around the country. With so much pent-up demand and buyer competition, a lot of these properties are snatched up in off-market deals between buyers and sellers before ever making it to the general marketplace.
That heightened competition makes it more crucial than ever for investors to partner with a seasoned net lease broker – ideally one that has experience helping investors buy/sell Dollar General properties in the NNN marketplace, has a deep pulse of the market activity knows the ins and out of Dollar General NNN assets. Andrew Vu and his team have a long track record of helping buyers and sellers complete Dollar General transactions throughout U.S. In addition, the team has collaborated with a network of Preferred Dollar General developers across the country to help investors acquire new build-to-suit properties. With the strong relationships established, we have direct lines to the builders, and you can leverage our market access to get a first look at the upcoming inventory, in many cases well before the new stores reach construction delivery milestones.
For more information on Dollar General and to learn more about how Dollar General triple net lease (NNN) investment opportunities, contact Andrew Vu at 415.539.1120.