Real Estate Investing: Dollar General Stores as Sound Investments

Understanding Why Dollar General May be the 1031 Exchange Option That You’re Looking for.

If you’re looking for a sound 1031 exchange property as your next commercial real estate investment, Dollar General stores may be an opportunity that you’ll want to explore. Pickett Sprouse brokers have found them to be low-risk investments with a reliable return for a healthy company that’s showing no signs of slowing down. That’s why we’re looking at Dollar General stores as a sound 1031 exchange option for commercial real estate investors.

Dollar General Development Strategy

Dollar General is a discount retailer based in Goodlettsville, Tennessee. It had 16,094 stores as of November 1, 2019¹, most of which, according to the Daily Trade Alert², are based in the eastern half of the United States. Most of those, Westwood Net Lease Advisors says, are in rural communities where there are fewer shopping choices³.

The company’s fourth quarter financial report⁴,which was released on March 12, 2020, shows that during fiscal year 2019, 975 new stores were opened, 1,024 stores were remodeled and 100 stores were relocated. Todd Vasos, Dollar General chief executive officer, had said previously that commitment to growth is expected to continue through 2020. “We are excited to accelerate our real estate growth plans in 2020. We continue to see a significant number of opportunities to serve more customers and communities with our innovative mix of store formats⁵.” The company’s fiscal year 2020 ends on January 29, 2021. By that point, it plans to execute another nearly 2,600 real estate projects, including 1,000 new store openings, 1,500 mature store remodels, and 80 store relocations⁴.

Pickett Sprouse Commercial Broker Vernon Averett has experience in finding Dollar General stores as an investment property for clients. He says that the company bases its development strategy on working with preferred developers who understand the company’s market requirements. Since Dollar General prefers to invest in their business and not in real estate, the company relies on the developers to take the chosen sites through permitting, acquiring the property, and building Dollar General’s prototype stores. Dollar General leases the properties from its developers. While the developers may hold the stores, they also sell some of them.

Why Dollar General is a Sound Investment

Pickett Sprouse brokers say that there are several reasons why Dollar General is a sound low-risk passive investment.

Steady growth

According to the company’s fourth quarter financial report⁴, net sales increased 8.3 percent to $27.8 billion in fiscal year 2019 compared to $25.6 billion in fiscal year 2018. This included positive sales in new stores as well as growth in same-store sales. Because of this growth, Pickett Sprouse REALTOR® and Commercial Broker Brad Gregory says "Dollar General is in a big expansion mode" and doesn’t appear to be slowing down anytime soon. This means that many of the buildings available for sale in the southeast are new construction.

Location

Brad’s experience with Dollar General comes from the location identification side. He knows firsthand that the company wants to be on “the best corner” with good visibility and high traffic. As the company’s steady growth has shown, its formula for identifying these types of locations has been fairly accurate and very successful.

Corporate guarantee

Vernon cites this as a major advantage from an investment perspective. Dollar General does not franchise and operates all of its stores directly, which is why it can guarantee its leases.

Triple-Net (NNN) Lease

According to Net Lease Advisor, new Dollar General stores typically have a triple-net lease⁶. This means that in addition to rent and utilities, Dollar General as the tenant is responsible for paying the building’s property taxes, building insurance, and the cost of any maintenance or repairs the building may need over the term of the lease. While that typically means the rent will be lower than with a single net lease, it also results in a fairly low-risk steady stream of income for the investor.

15-year lease

The standard lease term for Dollar General’s new properties is 15 years. A long-term, strong single tenant means reliable payments coming in for the foreseeable future.

Strong cap rate

According to Vernon, most Dollar General returns are in the 6.5 percent range – a strong rate that can mean a solid return on investment.

Dollar General as a Good 1031 Exchange Option

Vernon recognizes that investors want to put their money in as safe an investment as possible, which is why he believes that “Dollar General answers that goal.” In fact, he helped one client sell their grocery store-anchored shopping center that had leases expiring in three to four years. The client decided to do a 1031 real estate exchange so they could defer capital gains taxes. Vernon found them three Dollar Generals – two in North Carolina and one in Georgia.

In addition to Vernon’s involvement in Dollar General transactions and Brad’s work with the regional Dollar General developer, other Pickett Sprouse brokers also have experience with Dollar General transactions. That’s how we, as a company, can recommend them as a sound investment opportunity. Whether it is Dollar General or some other form of real estate investment, Pickett Sprouse’s experienced brokers can try to help you attain your goals.