| Are the Dollar category stores really going to be sustainable businesses for a long term investment? Sure seems investors are paying high prices for these deals. The buildings are not really that easy to convert and many of them are partially metal. Plus they are not exactly at the best locations. Seems to be high risk to me at today's prices. |
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Posted by: House, Tim
Albuquerque
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The dollar category stores business model should be sustainable for the forseeable future as consumers keep a close eye on basic retail purchases.
Investors are able to receive a return of 8-10% (unlevered)with current market pricing for these assets.
In the event the tenant vacates at the end of the lease, the building could be re-purposed for a medical clinic,auto parts, offices or other uses.
The sites chosen for the dollar stores are picked based on neighborhood demographics, visibility and traffic count.The lease rate paid by the tenant is almost always lower than the "market" rate and this is reflected in the property value.
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Posted by: Finley, Greg
Kansas City-MO
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Dollar stores provide viable investment opportunities for smaller investors. They are one of the few net leased assets which can usually be purchased for under $100 PSF and for under $1 Million. Many are moving to NNN leases with 15 year terms, which by-and-large minimize risks related to store closure and/or relocation. These assets can also be purchased new in the upper single digit cap rate range. The higher cap rates, lower costs per square foot, and lower absolute prices should keep the dollar store segment strong during this recessionary environmnet and beyond.
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Posted by: Lynch, Kevin
Arlington Heights
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I like your concerns regarding the Dollar category stores…perhaps because I share these same concerns. What has made me somewhat of a convert is the fact that investors can get into this investment for less dollars than other real estate investments, tenant credit appears to be strong enough to carry the property, the lease lengths are long enough that an investor will be able to receive a decent annual return and property value will grow over time. While I am confident that the land value will grow equal to or greater than the rent escalations, building value may be another question. A skilled broker will be able to evaluate the area demographics and be able to “pick the minds” of the locals to get a flavor for the area. Additionally, a skilled broker will be able to evaluate the lease and work with you to evaluate the building condition so that your risks can be quantified.
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| Why do Walgreen's seem to command such a high price? Doesn't make sense to me. |
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Posted by: House, Tim
Albuquerque
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Walgreens has a current market cap of 33.5 billion and a double digit return on equity. The company is rated at an "A" by Standard & Poors and an "A2" by Moodys. Many investors are willing to pay a premium for the low risk and typically superior retail locations.
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Posted by: Finley, Greg
Kansas City-MO
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Walgreen's is a top shelf retailer with an outstanding reputation. The company's debt is rated extrememly favorably by rating agencies such as Standard and Poors. From a real estate standpoint, Walgreen's leases contain longer base terms (usually 25 years) than those offered by other tenants and the company's site selection process is painstaking, which ultimately provides most landlords with an excellent piece of real estate with great residual value in the event the property is eventually vacated. The company's reputation was also enhanced after being featured in Jim Collin's book Good to Great. Collectively, these factors will often coax investors to pay higher prices per square foot and lower capitalization rates for Walgreen's-leased assets.
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Posted by: Lynch, Kevin
Arlington Heights
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Why own a Walgreens? Excellent question. Walgreens is an “investment grade credit” tenant. The properties have a high residual value and are close to a liquid investment. The safety, stability and passive nature of a Walgreens investment can resemble the ownership of corporate bonds. As mentioned above, Walgreens has a net worth in the billions, S&P rating of A+ and has been around since 1901. Walgreens selects sites at “Main Street & Main Street” for its stores. The sites usually have the highest traffic counts and are among the most sought after locations in the subject retail areas. Walgreens investments are attractive to individual investors, real estate investment trusts (“REITS”), pension funds, and institutions because of the perceived low risk and the passive nature of the investment. As we enter 2011, Walgreens is one of the easiest properties to finance. Lenders like Walgreens. With all that said, an investor must be careful to understand the Walgreens lease. Particular attention should focus on lease length, options and responsibilities of landlord and tenant. Some Walgreens have been built with office space and this must be evaluated as well. Always have a qualified real estate broker work with you when evaluating any single tenant, net leased investment.
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| What factors should be taken into consideration when determining value via a cap rate on a net lease? |
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Posted by: Finley, Greg
Kansas City-MO
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Cap rate differentials are driven my a variety of factors, but perhaps most notably by the tenant's creditworthiness and thus its ability to fulfill the terms of its lease obligations. Other important factors include the length of the primary or "guaranteed" lease term (the longer the better), the tenant's and its business sector's overall performance, and real estate-specific factors like cost per square foot, building age, obsolescence, and physical location.
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Posted by: Lynch, Kevin
Arlington Heights
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Capitalization rate or CAP rate is calculated by dividing the purchase price by net operating income (NOI). Simple yes? NO! The greatest mistake we see investors who buy based upon CAP rates is the assumption that the NOI is really what the seller says it is. Often, the NOI does not include expenses that the buyer will have once they own the real estate. From an investor standpoint, it would be prudent to value the building using other financial formulas such as the Internal Rate of Return (IRR) and Cash on Cash return. Any real estate acquisition should include discussion regarding the hold period, tax rates, estimated property appreciation… If you want to be know more about this, talk to a certified commercial investment member (CCIM) real estate broker as he/she will understand how to evaluate the property from a financial aspect and will be able to give you details as to the local market. Lastly, a net lease investment is only valuable if there is a qualified tenant on the lease, the rent is “right” for the market and the property will have residual value at the end of the lease.
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| Capitalization rates seem to be rising dramatically. What are the driving forces behind this and what should I expect in the future? |
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Posted by: Lynch, Kevin
Arlington Heights
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Capitalization rate or CAP rate is calculated by dividing the purchase price by net operating income (NOI). The driving force on CAP rate values has been and remains tenant strength, lease length, location and landlord responsibilities. We saw CAP rates rise in the second half of 2009 and into 2010 as the pool of investors and willing lenders grew smaller. Investors are back in the game and lenders are lending again. Expect CAP rates to continue to decline through 2012. As we enter 2011 we see that CAP rates cover the whole spectrum from low 6% CAP rates for long-term (15+ years) government properties to mid-7% CAP rates for long-term (20+ years) single tenant “Walgreens” type investment, mid-8% CAP rates for long-term (10+ years) strong regional credit tenants such as BlueCross BlueShield and medical office properties in key metropolitan areas, mid-9% CAP rates for long-term (10+ years) strong regional credit tenants in secondary locations.
CAP rates can easily go over 10% but then the risks rise quickly. In all evaluations, be sure that the lease rate reflects current market values and that you fully understand all lease responsibilities (especially real estate taxes & tax protest fees, roof, HVA/C and parking lot).
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