In every town, city, and metropolis in America, you will find a national chain discount retail store. The “dollar store” sector is expanding, profitable and competitive. These establishments bring value to their customers in various ways. They are renowned for discount pricing but they also excel in convenience. They deliver the prior by volume purchase contracts; the latter, by occupying quality real estate – real estate that in some cases is at a key intersection or crossroad, almost irreplaceable. The real estate departments of Family Dollar, Dollar Tree, and Dollar General do not stumble into their strategic locations. The battle for the value market customer requires that these corporations implement a high science involving spending patterns, demographics, and geography.
It does not take a trained eye to observe that dollar stores stay busy from the time they open to the time they close. Steady flows with rushes in the evening. They enjoy brand loyalty with customers. It is evident that these tenants know their customer profile extremely well and have come to expertly serve them.
Real estate is a major contributor to their success. In small towns, it is common to find a dollar store tenant near the hustle and bustle. This real estate is often overlooked by institutional investors because of its rural nature. Due to this bias, the sector remained dramatically undervalued prior to the COVID-19 pandemic. During the stress of the pandemic Dollar General became the darling of investment circles as sales rose and rent payments continued. Today, it is not uncommon for Dollar General to trade in the rarefied mid-four cap range with the likes of Starbucks. At this price, both are overvalued.
But it is not too late to catch this wave. Running in the wake of Dollar General’s investment euphoria is a new concept advanced by Dollar Tree. Real estate investors call the product FDT – a co-location of a Dollar Tree and a Family Dollar. Four years ago, Dollar Tree took a risk and leveraged itself into a downgrade of its BBB bond rating to acquire the struggling brand Family Dollar. The management team at Dollar Tree closed hundreds of underperforming Family Dollar stores and as a result, has seen financial success with the overhaul. The company has returned to exceptional profitability and Wall Street has rewarded Dollar Tree by restoring its BBB credit rating. Now armed with two powerful brands the company has created the future of discount stores with a co-branded Family Dollar/Dollar Tree prototype and they are taking on Dollar General head to head by out positioning their older well-performing stores in select markets. The institutional real estate investors have not yet caught onto the imminent success of this strategy. Quality new FDTs can be acquired for a full percentage point higher than Dollar Generals.
In 2017 when Millcreek Commercial began we were ahead of the wave and were delivering TIC interests in Dollar General real estate between 5.4% and 6% returns. Today we are once again ahead of the wave and delivering TIC interests in quality FDTs in the mid 5% returns.
If you have an interest in Safety Security and Stability in your investment portfolio visit Millcreek Commercial.com to learn more about FDTs and other quality investments.
To explore dollar store options we have available in our portfolio, visit our available properties page.