Net-Lease Nirvana

When Daniel Hurd joined commercial real estate brokerage firm Marcus & Millichap’s Tampa office seven years ago, he thought about carving out a niche selling mobile home communities.

But he quickly realized there might not be enough deals to keep him busy.

That was a problem, because he wanted busy, and to develop a book of business with a product type he could scale nationally.

He found it one day on his drive to work.

“All up and down the road, there were single-tenant stores everywhere,” says Hurd, 35. “I just knew there was opportunity there.”

Breaking into net-lease investment sales wasn’t easy, though.

Better-established brokers had a head start selling Starbucks coffee shops, Burger Kings, gas stations with attached convenience stores and Walgreens where tenants pay rent plus expenses to landlords.

It took a while, but Hurd eventually stumbled into a deal to sell a Dollar General store. At the time, there wasn’t much competition there.

Investors were largely sour on dollar stores like Dollar General, Family Dollar and Dollar Tree. Who wanted to spend about $1.25 million to buy a store in a typically rural town of 10,000 people or less? 

Hurd’s timing, however, was impeccable.

Thanks to a growing acceptance of the product type by consumers, Dollar General was entering a growth mode. The company, which operated roughly 13,000 stores in 2017, indicated it wanted to open 1,000 new stores annually.

Its goal was to have more than 30,000 stores nationwide. Even better, for Hurd, it didn’t want to own its real estate.

Hurd soon discovered that most Dollar General stores were built by company-selected merchant developers who, in turn, sold them upon completion to individual investors, who garnered yields of about 7.5% to 8% through typically 10-year, double-net lease commitments — meaning they had to pay taxes or some other agreed upon expense. Many bought the stores through tax-deferred 1031 Exchanges, adding to their appeal.

As Dollar General’s sales grew, so did its real estate footprint — and its aspirations.

The company’s newer stores tend to be larger, and it’s become willing to sign 15-year lease terms under so-called “triple net” arrangements, which are more passive investments for landlords.

As more investors began hunting for the deals guaranteed by the company, prices rose and capitalization rates — yields — fell, to around 5% or 6%. Still, that was better than a T-bill, nearly every bank CD and many stocks and bonds.

Hurd developed a database of potential buyers and owners, and dug in on how the company’s stock performed, overall sales, customer perception, store rental rates and investor interest. He also boned up on population shifts and traffic counts, too, so he could better inform buyers and sellers.

His phone then began ringing — with calls from the very investors who wouldn’t have thought of buying an often stand-alone store in a small town previously.

Owners of older Dollar General stores started inquiring, too, about how to trade out of their properties into the newer, larger stores with longer leases.

Best yet, institutional buyers came knocking, looking for portfolio diversification, and lenders that had offered only risk-intense loans tied to dollar stores began providing more attractive leverage to increase investor yields.

“The numbers were shocking to me, how they ramped up so quickly,” Hurd says.

To date, Hurd has sold 84 Dollar General stores, primarily from Texas to Florida, for more than $74 million. Last year alone, he participated in 29 sales, valued at $23 million.

Thus far in 2021, he’s closed another 15 and has 13 additional outlets either under contract of sale or coming to market.

Because Dollar General was labeled an “essential retailer,” it was largely unaffected by the COVID-19 pandemic.

“Never in my wildest dreams did I think that a three-sided, aluminum building often in tertiary locations could keep me so busy,” Hurd says. “I’ve been very fortunate.”

In recognition of the niche he’s carved out, Hurd in November was promoted to First Vice President—Investments in the Tampa office of Marcus & Millichap, a national brokerage firm that last year closed nearly 9,000 transactions valued at $43 billion.

Mike Marshall first encountered Hurd when he owned a handful of Dollar General stores in Florida, about five years ago.

“He asked me if he could provide me with an analysis of what the stores were worth,” Marshall says. “Well, I ended up selling those five and I bought another four from him. He’s so honest and sincere and he doesn’t blow any smoke up your dress, so to speak. I’ve found that in dealing with triple-net properties, you have to be careful. Sometimes the cap rate that’s advertised isn’t the cap rate that you receive once the deal is done.

“But with Daniel, he wants you for a long-term customer and treats you accordingly.”

Looking ahead, Hurd sees a bright future in Dollar General transactions.

He’s recently begun selling the stores in new states like Illinois, Oklahoma, Virginia, Indiana, Kentucky, Ohio — even New York.

“Five years from now, I’ll be very disappointed if my team and I aren’t selling 100 Dollar Generals a year,” Hurd says. “Because now, we’re very much in an advisory role for clients, helping them by looking 24 to 36 months down the road.”

Part of his optimism stems from the product. Newer Dollar General stores measure about 9,000 square feet, and many contain refrigeration as the company expands further into the grocery business.

Prices have increased — on average to $1.5 million (while generating about $80,000 in rental income annually) vs. an average of $900,000 for older properties — but not significantly, Hurd says.

And while some investors say they are skittish that success means Dollar General will either outgrow its current stores or relocate to a higher-trafficked areas, Hurd says that’s not typical.

Last year, for instance, the company opened 1,000 new stores and remodeled or expanded another 1,600 — while relocating just 110. Net closures, he says, have been “next to none.”

“As an owner, the retailer also has all the information on sales of a particular store, and they typically don’t share it,” says Cody Brown, whose family has bought or sold nine dollar stores with Hurd over the past five years.

“But Daniel brings a lot of value to the table,” Brown says. “He’s become an expert on the product type, and he’s always very responsive and a good negotiator. He keeps us apprised of the big picture even when we’re not in the market.”

For his part, Hurd describes his relationships with Brown and other investors as proverbial “win-win” situations.

“I wake up every morning thankful that I am doing what I enjoy and something that’s fulfilling for me and others,” he says. “I’m excited about where the business is going to go over the next few years.”