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.

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