Performance of Retail DSTs during COVID

Secu­ri­ties offered through MSC-BD, LLC

COVID has changed busi­ness oper­a­tions in many ways. We have cov­ered the effects on Delaware Statu­to­ry Struct (DST) offer­ings includ­ing mul­ti fam­i­ly, stu­dent hous­ing and oth­er asset class­es over the past few months. The head­lines on the news may point to the effects on retail and how many retail loca­tions are either closed or at best strug­gling.

When you men­tion the asset class “retail” what comes to mind, for most peo­ple, may be the stores that are seen in the malls, strip cen­ters and stand-alone loca­tion strug­gle to com­pete against Ama­zon. There is no ques­tion that Ama­zon (and oth­er deliv­ery options) have chal­lenged the exis­tence of the every­day retail estab­lish­ments. The strat­e­gy for the “Retail DST” offer­ings would be to aggre­gate those busi­ness­es that are con­sid­ered nec­es­sary oper­a­tions and sat­is­fy every­day needs of con­sumers across all eco­nom­ic sec­tors. In addi­tion, the geo­graph­ic loca­tion of the DST offer­ings may be across sev­er­al states along with a vari­ety of loose­ly asso­ci­at­ed types of busi­ness­es.  The assem­bly or aggre­gate busi­ness may be CVS, Wal­greens, drug stores, Dol­lar Gen­er­al, gro­cery stores, and sup­ply stores that are need­ed to sus­tain on going busi­ness­es. 

These busi­ness­es are not 100% Ama­zon proof (con­cept that there may be a busi­ness or ser­vice Ama­zon can­not imme­di­ate­ly pro­vide) but are in areas where the demo­graph­ics prove the loca­tions pro­vide con­sis­tent year over year increase in same store sales. In addi­tion, the loca­tion of the stores, from a real estate prospec­tive, pro­vide a sta­ble loca­tion in the event the busi­ness would move out and anoth­er ten­ant would release the space.  In some cas­es, the DST offer­ings are ref­er­enced as “Trip Net” of NNN oppor­tu­ni­ties.

Just to be clear, let’s look at the ques­tion, What Is a Triple Net Lease (NNN)? Accord­ing to Investo­pe­dia, “A triple net lease (triple-Net or NNN) is a lease agree­ment on a prop­er­ty where­by the ten­ant or lessee promis­es to pay all the expens­es of the prop­er­ty includ­ing real estate tax­es, build­ing insur­ance, and main­te­nance. These pay­ments are in addi­tion to the fees for rent and util­i­ties, and all pay­ments are typ­i­cal­ly the respon­si­bil­i­ty of the land­lord in the absence of a triple, dou­ble, or sin­gle net lease”.  This means the owner/investor is not respon­si­ble for those items.

The Spon­sors of the “Retail DST” or “NNN DST” will assem­ble a select col­lec­tion of nec­es­sary ser­vice stores in a vari­ety of loca­tion and pack­age togeth­er to offer an above aver­age return with a risk pro­file typ­i­cal­ly spread across a wide geo­graph­ic loca­tion. These DSTs may pro­vide a high­er yield over a pub­licly trad­ed REIT. In addi­tion, the DSTs may have longer terms leas­es with almost 100% invest­ment grade ten­ants. A pub­licly trad­ed REIT may have only 25%- 50% invest­ment grade ten­ants and rely on dis­cre­tionary retail ten­ants to round out their port­fo­lio. 

DST Spon­sors may focus on the neces­si­ty retail space includ­ing the health care space.  This strat­e­gy may also cre­ate a high­er yield as well as more secure div­i­dend yield. Remem­ber not all invest­ments are guar­an­teed. This DST strat­e­gy will become more attrac­tive when it the time presents itself for an exit out of the DST or sale.  At the end of the DST term the port­fo­lio may be very attrac­tive for acqui­si­tion by an insti­tu­tion­al REIT and add addi­tion­al sta­bil­i­ty to the REIT’s port­fo­lio adding to their invest­ment grade con­cen­tra­tion.  For the REIT, that acquires the DST cred­it grade assets, this acqui­si­tion may increase the yield it may pay their investors. The oth­er attrac­tive­ness of the DST struc­tured NNN may be the lad­dered leas­es with dif­fer­ent expi­ra­tion terms and the tim­ing of the Debt Matu­ri­ties (use of lever­age as in most real estate acqui­si­tions). The use of Broad Diver­si­fi­ca­tion also adds to the attrac­tive­ness for the DST exit strat­e­gy.

The COVID effect- Before and dur­ing COVID the DSTs pro­vid­ing essen­tial retail sec­tor of the mar­ket per­formed very well.  All retail oper­a­tions insti­tut­ed the pre­scribed safe­ty mea­sures with clean­ing, social dis­tanc­ing, sig­nage and oth­er safe­ty mea­sures to ensure the pub­lic access to the stores. Because of the nation­al cred­it stand­ing of many of the asset con­tained in the NNN port­fo­lio incomes were sta­ble thus per­mit­ting an unin­ter­rupt­ed cash flow to the investors.  How­ev­er, the effects of COVID on the pub­lic per­cep­tion as well as the avoid­ance of instore vis­its by shop­pers, many facil­i­ties need­ed to insti­tute curb­side pick­up and poten­tial­ly deliv­ery ser­vices. 

Last week we field­ed a call from a poten­tial investor regard­ing debt ser­vice ratio and the effects on invest­ment.  If you were apply­ing for a loan for a rental prop­er­ty, the lender may look for a cer­tain debt ser­vice ratio.  For every $1.00 of debt the lender may require $1.50 in rent col­lect­ed.  In this exam­ple, the debt ser­vice ratio is 1.5.  In some of the Retail DST offer­ings the debt ser­vice ratio is 2.5 or 2.9 mean­ing for every $1 of debt there is $2.90 col­lect­ed in rent. This enable Spon­sors the abil­i­ty to pro­vide a con­sis­tent cash flow to the investors.  The chal­lenge may be secur­ing a posi­tion in a NNN DST.  The avail­ably is small in com­par­i­son to the mul­ti­fam­i­ly DST options. DST News, https://dstnews.org/ pro­vides an overview (for accred­it­ed investors) to pre­view a sam­pling of the types of DSTs offered   Cur­rent­ly in the sam­pling, Retail com­pris­es about 8–9% of DST and Mul­ti Fam­i­ly over 50%.

Based on feed­back, the investors uti­liz­ing a DST (cou­pled with a 1031 Exchange) are look­ing for four major items: cap­i­tal preser­va­tion, sta­ble income, tax defer­ral, and an exit strat­e­gy.  The NNN DST is one asset class that may pro­vide the investor all these items.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future.

For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@dst.investments.