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Are Dollar General's Expansion Plans Good News for Retail REITs?


Dec 08, 2020 by Matthew DiLallo
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Dollar General (NYSE: DG) plans on hitting the growth accelerator in 2021. The discount retailer unveiled plans to open 1,050 new stores while renovating another 1,750 locations and relocating 100 other stores. That's an increase from its game plan to open 1,000 new stores, remodel 1,670 sites, and relocate 110 stores by Jan. 29, 2021. The revised plan would enable the retailer to increase and enhance its current footprint of nearly 17,000 locations.

While Dollar General plans to fund much of that growth internally, it also relies on external real estate partners to help drive its expansion. One of its key partners is retail REITs, or real estate investment trusts, that focus on owning freestanding triple net lease properties. Here's a closer look at some REITs that might benefit from the company's rapidly expanding footprint.

An agreeable shopping spree

Agree Realty (NYSE: ADC) currently counts Dollar General as its second-largest tenant, at 4.6% of its annual base rent (ABR). The discount retailer is right in its sweet spot, as it's a national brand highly resistant to both e-commerce and recessions, and it has an investment-grade credit rating. Those factors have allowed the company to continue growing its footprint when many other retailers are shrinking.

Agree Realty itself has ambitious growth plans. It currently expects to buy between $1.25 billion and $1.35 billion of new properties this year, a significant increase from its initial acquisition range of $600 million to $700 million. With a top-notch financial profile, the REIT has the flexibility to continue its shopping spree in 2021. Thus, it could buy high-quality properties Dollar General puts on the market to help finance its accelerating expansion plans.

A top acquisition target

Realty Income (NYSE: O) also counts Dollar General as one of its top tenants. The discount retailer currently clocks in as its third-largest tenant, at 4.4% of its ABR. That's due to its defensive characteristic, as it's an essential retailer that focuses on low-price point items.

Realty Income has also been doing a lot of shopping this year. The REIT currently expects to buy about $2 billion of properties in 2020. While that's a bit below its initial $2.25 billion to $2.75 billion target range because of the pandemic, the REIT has one of the best balance sheets in the sector, giving it the flexibility to go on a buying binge in 2021. Because of that, it also seems a likely beneficiary from Dollar General's accelerated expansion plan.

The new kid on the block likes this key characteristic

NETSTREIT (NYSE: NTST) is a relatively new REIT -- it just went public this August. The company also counts Dollar General as a top tenant. The discount retailer is currently its eighth-largest tenant, at 4.6% of its ABR. One of the big draws of the retailer for NETSTREIT is its investment-grade credit rating, which implies a financially strong company with the funds to meet its financial obligations.

The REIT's recent public offering gave it a cash war chest to go shopping. It ended the third quarter with $137 million in cash and $250 million of available credit to go with an ultra-low leverage ratio for a REIT. All this gives it the flexibility to continue buying new properties in the coming year, which could include growing its exposure to Dollar General.

The Millionacres bottom line: Complementing growth plans

Dollar General's decision to accelerate its expansion program in 2021 should yield higher sales for the retailer. It should also help boost REITs like Agree Realty, Realty Income, and NETSTREIT that own properties leased to the discount retailer, since it should increase their investment opportunity set. As a result, they should be able to continue growing their portfolios, cash flows, and dividends in the coming year.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.