Beginning as a humble tractor-part mail order business, Tractor Supply Company, has morphed itself into one of the premier retail chains in the United States. Specializing in home improvement, agriculture, livestock, and pet care amongst other things, Tractor Supply Company currently operates over 1,700 locations in 49 states. Tractor Supply Company is a publicly traded company (NASDAQ: TSCO) based out of Brentwood, TN.
Net Lease Overview
In the competitive sector of retail, Tractor Supply Company has managed to develop a cult like following, and carve out a space for itself in a very specific sector, catering to farmers and home improvement needs. Over the years, they have achieved steady growth in number of stores and operating income, showing promise for its performance in the net lease marketplace.
Typically, Tractor Supply stores are located in more rural and agricultural heavy markets. The stores, usually 19,000 SF, are often developed as single-tenant, built-to-suit projects on larger tracts of land to accommodate outdoor display and selling areas for large equipment. In addition to stand alone locations, Tractor Supply has been filling junior box vacancies in shopping centers that can carve out specific subdivided parcels or parking areas to accommodate the necessary square footage and retail exposure required.
Beyond the strategic real estate, the lease form is very landlord friendly. New construction leases tend to be 15 years with additional option terms. There are typically structured rent increases throughout the lease, which carries a corporate guarantee. These qualities help to position Tractor Supply Company as a top net lease investment offering.
When we compare Tractor Supply Company to a direct competitor such as Harbor Freight Tools, we can see Tractor Supply has lower cap rates for both all lease terms and leases with 10+ years remaining. One interesting observation is that Harbor Freight’s cap increased for deals that had 10+ years remaining, and this could be attributed to the majority of deals having 10+ years remaining and the shorter term deals took place in premium states such as California, driving down the cap compared to other locations.
Tractor Supply Company has historically traded close to the STNL average, but a nearly 500 point basis spread over the US 10 Yr Treasury Rate. This spread, coupled with Tractor Supply’s strong credit allows for very favorable financing options.