Home Depot NNN For Sale
Home Depot is the largest home improvement retailer in the United States, and it supplies tools, construction materials, and other related products and services. It operates stores across the United States and its territories as well as in all 10 provinces of Canada and the 31 Mexican states. In total, it has 2,300 stores throughout North America.
Founded and headquartered in Georgia in 1978, Home Depot has been in business for nearly 50 years. Standard & Poor’s has confirmed Home Depot’s A credit rating, meaning that the store is an attractive investment-grade tenant. Its industry is relatively stable, and its big-box store format makes it a frequent long-term renter.
Tenant Overview
Home Depot is a one-stop shop for any do-it-yourself enthusiast. The typical store today offers 105,000 square feet of indoor retail space. Plus, it’s connected to an e-commerce business offering over 1 million products for DIY customers and professional contractors alike. Home Depot also offers the industry’s largest installation business for customers who aren’t so fond of the DIY model.
The store operates out of large, warehouse-style buildings that it normally builds itself on ground-leased land. It prefers its locations to be along highly trafficked commercial corridors near shopping centers or strip malls. Home Depot normally prefers suburban locations that allow for the large footprint that its stores require.
| Home Depot NNN Lease Overview | |
| Average sale price | $10,000,000 - $25,000,000 |
| Average NOI (net operating income) | $750,000 monthly |
| Average square feet | 105,000 |
| Average lot size | 12 acres |
| Typical lease term | 15 years |
| Escalators | 5% every 5 years |
| Typical location | Suburban locations along highly trafficked retail corridors |
| Ticker symbol | NYSE: HD |
Home Depot Lease Structure
Home Depot typically signs 15-year ground leases, during which the rent prices are set to rise 5% every five years. Ground leases are similar to NNN leases in that landlords are generally not responsible for maintenance or other property costs.
There’s an added bonus in that Home Depot’s ground-leased properties provide additional investment security. That’s because the company’s real estate team also makes a significant investment in the property by paying for the design, construction, and equipment for new stores. After that large investment, they’re more likely to stay longer.
The average cap rate, or capitalization rate, for a Home Depot lease is 5.25%. Cap rates are a way to a real estate investment’s profitability and return potential. Generally, cap rates of 5% to 10% are considered good, so Home Depot’s cap rate is within that range. Cap rates on the lower end, like Home Depot’s, typically just mean that the investment is more stable.
Why Choose a Net Lease Over a Gross Lease When Investing in Commercial Real Estate?
When it comes to commercial real estate, there are a few different types of leases to consider, but you’ll find that there are many benefits to using a net lease. A net lease is usually considered the opposite of a gross lease.
First off, a gross lease indicates that a tenant will pay a predetermined amount to use a given space. That amount doesn’t change based on operating expenses, which are generally the responsibility of the landlord. On the other hand, a net lease allows the landlord to pass operating expenses on to their tenants.
There are three tiers of net leases: N, NN, and NNN. The listed categories are also referred to as single, double, and triple net leases. Each level passes more expenses over to the tenant, exposing the property owner to less and less risk as the levels increase.
Single net leases, or N leases, pass just property taxes onto the tenant in addition to the cost of rent. The landlord retains responsibility for insurance, maintenance, repairs, and utilities. N leases are less common for commercial real estate. Double net leases (NN leases) and triple net leases (NNN leases) are far more common.
What Types of Net Leases Does Home Depot Operate Under?
Home Depot generally uses ground leases with 15-year initial terms during which the rent bumps up 5% every five years. Ground leases are similar to NNN leases, because in both cases, the tenant pays for property taxes, insurance, and maintenance expenses.
The difference is that ground leases normally involve undeveloped commercial land that is leased to tenants. Those tenants then have the right to develop on the property, meaning that they own the buildings there. They still have to pay rent for the land, however, and if the lease expires, the buildings become the property of the landowner.
When working with an NNN lease, a tenant like Home Depot will generally pay a lower base rent. That’s because they’re responsible for all of the property’s operating costs. Still, NNN leases are an attractive option because they reduce the burden of property management by passing most of the responsibilities onto the tenant.
How to Evaluate a Home Depot Net Lease
When you’re considering a Home Depot NNN ground lease, it’s crucial to look at both property value and tenant strength. In particular, when you’re looking at single-tenant properties like the ones Home Depot prefers, your tenant concentration can be 100% or 0% – that is to say you’ll be generating your maximum cash flow or none at all.
For that reason, it’s important to ensure that your investment property meets the qualifications that Home Depot prefers in its locations, including proximity to major shopping centers and retail corridors, high visibility, and large parking lots. That will help ensure that the property stays occupied and that you continue to generate revenue.
This is especially important because of the unique nature of these properties. Because of their large size and warehouse structure, Home Depot locations can be extremely hard to fill should the superstore move out. So you want to make sure you’ve selected a location where the store will thrive and want to stay a long time.
What Makes Home Depot an Attractive NNN Tenant?
As a publicly held company, Home Depot is required to release quarterly financial specs. In November, Home Depot reported its earnings for the third quarter of fiscal 2022. It shared that third quarter sales increased 8.6% year over year, topping $38.9 billion. In addition, earnings per share (EPS) went up 8.2% year over year.
Home Depot went public on September 22, 1981, at a split-adjusted stock price of $0.03 per share. These days, its stock is valued at about $310 per share, close to 25% lower than its 2021 peak of around $415 per share. Still, the company has seen a meteoric rise since its IPO, signaling a long-term trend of prosperity.
Overall, Home Depot is an attractive investment-grade tenant for commercial real estate investment. Its long-term ground leases offer favorable conditions for landlords, and its cap rate lands in the perfect range for a respectable return on investment.
