Discount retailers Dollar General and Dollar Tree are riding a wave of increasing revenues and store accounts and achieved "record-breaking" development as investors flocked to the sector last year, according to analysis from Landan Dory, VP of Avison Young's US Capital Markets Net Lease Group.
According to Statista, there are currently over 34,000 Dollar stores across the country, and the vast majority are single tenant net lease stores owned by private investors, funds, and REITs. Dollar General accounts for around 17,000, with Dollar Tree and Family Dollar (which Dollar Tree owns) making up most of the rest.
The stores were deemed essential at the onset of the COVID-19 pandemic, allowing them to stay open and reap record profits. Dollar General's revenues have ticked up by between 6% and 9% in recent years, and the brand clocked a 22% revenue increase in the last 12 months. Meanwhile, Dollar Tree's average annual revenue growth has historically increased 2% to 7% on average, and went up 8% over the past 12 months.
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And investor interest in this bright corner of the retail landscape resulted in "significant" cap rate compression, Dory says: "According to comp data from Crexi, cap rates for Dollar Trees were between 7% and 7.5% leading up to the pandemic and have averaged 6% to 6.5% ever since," he says. "Dollar Generals traded in the high 6% to low 7% percent range pre-pandemic but more recently we have seen quite a few trade in the low 5% range."
While the brands have typically operated their locations on a double net basis, with roof and structural responsibilities held by the landlord, they have more recently shifted new stores to a triple net lease model, according to Dory.
"Most of the new-build Dollar Generals are being rolled out on 15 year triple net leases with flat rent for the first 15 years of the lease and 5% rental increases baked into the 5 year options," he says. "Dollar Tree is erecting new build stores usually on a 10-year double or triple net lease with 5% rental increases every five years."
Both brands are rebranding or expanding their offerings as well, he says: Dollar Tree has opened Dollar Tree/Family Dollar dual concept "H2" stores, while Dollar General unveiled a sister brand, Popshelf, to cater to a more upscale demographic, with plans to open 50 by year's end.
The takeaway? "Both of these dollar store concepts make excellent investment properties, but like any net lease investment, be sure you're buying or owning properties that are fundamentally sound despite any hype that has been created around the sector in recent years," Dory says.
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