Dollar Tree to close 390 Family Dollar Stores

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Does this affect your opinion of investing in a Family Dollar or Dollar Tree building? I've been looking at a Family Dollar that claims to be among the top 1% of Dollar Tree stores. I assume if they were going to close one, it wouldn't be this one. But it is in BFE on a reservation. It claims to have a 7.5% cap.

https://www.businessinsider.com/dollar-tree-closes-hundreds-of-family-dollar-stores-2019-3

Hi Mariah,

I typically do not like Dollar Stores for my clients. 

On a quality scale typically Dollar General first, then Dollar Tree, then Family Dollar.

A lot of theses dollar stores like to go in sub par locations ( Weak suburban to rural) and construction for most of them is poor quality (sheet metal sides and back). I would say a small percentage maybe around 15 to 20% are upgraded construction in strong suburban core type areas.

If they are not that great then WHY do people buy them? Typically they are about the ONLY thing sub 2 million close to a 6.5 to 7 cap where some of the brands are investment grade with a new lease and you can get a decent loan rate and terms on them. The higher quality STNL at higher cap rates with newly minted leases tend to be 3,4,5,6 million and up type properties. Sub 2 million you can get into 6 caps but credit quality is marginal with smaller franchisees to mom and pop type non-branded STNL. The loans on these tend to be 40 to 50 basis points higher on rate and more down such as 40 to 45% instead of 30 to 35% for investment grade STNL. That really eats into returns for investors so they dump the money into these Dollar Stores most with flat rent until the option periods. Most investment grade food tenants sub 2 million are in the 4's to 5's for cap rate so you then have to look for the rental increases to hopefully blend the cap rate up over time.

Back in the day before the dollar stores thought they were big stuff and just starting to expand you could get higher cap rates and rental increases in the primary term. Now they tend to beat up the developers on new builds and it's a volume game to make any money. Family Dollar has some cheaper items and some more expensive items so they are not as targeted and focused as Dollar General and Dollar Tree on staying in certain price ranges for that low price consumer shopper. That is one of the reasons they tend to not do as well.

As an investor myself and principal commercial broker I believe in dirt first for location, then quality of tenant, then review of the lease. Dollar stores when they go out most second generation tenants do not want the low quality build so hard to release the space.

If my clients insist on Dollar Stores I try to find them the best one I can in their price range with upgraded construction and strong suburban area. At least then hopefully with flat rents if they decide to not renew the option period with rental increases then the area likely will have higher rents per ft by then to release to the second generational tenant thus preserving the investors initial investment and then some.