You'd think that Kohlberg, Kravis Roberts & Co. L.P.'s proposed $7.3-billion acquisition of Dollar General Corp. — the second largest leveraged buyout in retail since 2004 — would have a potentially huge impact on strip center REITs, especially since such deals often result in large-scale store closings.
But, even though the deep discounter operates 8,260 stores, no major retail REIT has very much exposure. Dollar General does not appear in JP Morgan's 2006 Tenancy Handbook — which documents every retailer that accounts for 1 percent or more of any REIT's annualized base rents.
John Gabriel, a retail analyst with Morningstar, says Dollar General's portfolio consists largely of stores of 6,000 to 8,000 square feet in small strip centers in rural markets. “We're talking about locations tucked away in neighborhoods with low rents,” Gabriel says. “We're not talking about urban, high-traffic areas.”
After opening more than 700 stores in both 2004 and 2005 and 600 in 2006, the company announced late last year that it was slowing its pace to 300 openings in 2007 and 400 in 2008. Meanwhile, it announced 400 closings — a number Gabriel thinks could double.
What does the Dollar General deal say about the prospects for more retail takeouts — deals that might hit the mainstream retail real estate market? Clearly, private equity investors see value in the sector. The price works out to 27 times Dollar General's estimated 2008 earnings and 10.9 times its last twelve months EBITDA. That's higher than multiples paid for Petco, Michael's, Burlington Coat Factory and other recent deals.