net lease drug store research report

1. www.bouldergroup.com
THE NET LEASE
DRUG STORE REPORT
Q1 2014
DRUG STORE PROPERTIES
MEDIAN ASKING CAP RATES
Q3 2013 Q1 2014 Basis Point
Sector (Previous) (Current) Change
Walgreens 5.75% 5.60% -15
CVS 6.07% 5.90% -17
Rite Aid 8.00% 7.75% -25
DRUG STORE PROPERTIES
ON THE MARKET
Q3 2013 Q1 2014 Percentage
Sector (Previous) (Current) Change
Walgreens 156 131 -16.0%
CVS 44 45 +2.3%
Rite Aid 30 33 +10.0%
DRUG STORE PROPERTIES
MEDIAN ASKING PRICE
Median Asking Median Price
Sector Price Per Foot
Walgreens $6,798,000 $467
CVS $4,323,000 $358
Rite Aid $2,887,000 $258
MARKET OVERVIEW
Cap rates for Walgreens and CVS properties reached their historic low
in the net lease drug store sector in the first quarter of 2014. From the
third quarter of 2013 to the first quarter of 2014, Walgreens, CVS and
Rite Aid single tenant properties experienced cap rate compression
of 15, 17 and 25 basis points respectively. Part of the compression
can be attributed to the significant decline of 9% in the supply of drug
store properties currently being marketed. The supply constraints
combined with limited expansion plans from drug store companies
has created increased competition amongst buyers further adding to
the cap rate decline.
Investor demand in the drug store sector remains active as evidenced
by the 85 basis point premium to the entire net lease retail market.
However, when compared to the third quarter of 2013, the premium
narrowed as investors have pursued alternative net lease property
types to increase yield. With cap rates in the net lease retail sector
at all-time lows, owners of drug store assets have added properties
to the market at aggressive prices in attempt to take advantage of
higher valuations. As a result, overall cap rates declined as asking
prices for certain properties were not reflective of market pricing. The
bid ask spread in the first quarter of 2014 increased by 19 basis
points when compared to the third quarter of 2013.
Private investors continue to dominate the drug store sector as the
largest purchaser of drug store assets. According to Real Capital
Analytics, 75% of the drug store transactions occurring in the first
quarter of 2014 were completed by private buyers. With strong
demand in this sector, especially for recently constructed Walgreens
and CVS properties, some real estate funds and private investors
have shifted their attention to Rite Aid. Properties tenanted by Rite
Aid, still offer the benefits of the pharmacy retailers with an increased
yield in comparison to Walgreens and CVS. As Rite Aid stock price
has reached its highest point in 14 years, investors’ view the future
of Rite Aid favorably as the company’s core business continues to
improve.
Transaction volume for 2014 should remain active in the drug store
sector as investor interest remains high. Drivers of the interest
include investor’s familiarity with the tenants, financing availability,
residual strength of the real estate and the positive outlook of the
fundamentals of the pharmacy business.
Above numbers include properties of all lease lengths and types.

2. www.bouldergroup.com
THE NET LEASE
DRUG STORE REPORT
Q1 2014
MEDIAN ASKING CAP RATE BY LEASE TERM REMAINING
Term Remaining Walgreens CVS Rite Aid
20+ 5.50% 5.50% N/A
15-19 5.65% 5.90% 7.00%
10-14 5.90% 6.08% 7.30%
6-9 6.63% 7.42% 8.50%
5 & Under 7.34% 7.75% 8.75%
MEDIAN ASKING CAP RATE BY PROPERTY TYPE
Property Type Walgreens CVS Rite Aid
Ground Lease 5.10% 5.00% 6.25%
Fee Simple 5.60% 5.90% 7.75%
Leasehold 6.75% 6.88% 9.08%
MEDIAN NATIONAL ASKING VS.
CLOSED CAP RATE SPREAD
Tenant Asking Closed Spread (bps)
Walgreens 6.93% 7.23% 30
CVS 6.63% 6.85% 22
Rite Aid 8.00% 8.78% 78
DRUG STORE VS. RETAIL NET LEASE
MARKET CAP RATE
Q3 2013 Q1 2014
Tenant (Previous) (Current)
Drug Store 6.00% 5.90%
Retail Net Lease Market 7.02% 6.75%
Drug Store Premium (bps) 102 85

3. www.bouldergroup.com
THE NET LEASE
DRUG STORE REPORT
Q1 2014
Walgreens CVS Rite Aid
Credit Rating BBB (Stable) BBB+ (Stable) B (Stable)
Market Cap $61 billion $85 billion $6 billion
Revenue $74 billion $126 billion $25 billion
2014 Stores Planned 150 150 N/A
Number of Stores 8,681 7,660 4,595
Typical Lease Term 20 or 25 year primary term with
fifty years of options
25 year primary term with six
5-year options
20 year primary term with six
5-year options
Typical Rent Increases None None in primary
10% increases in option periods
10% increases every 10 years
COMPANY AND LEASE OVERVIEW
FOR MORE INFORMATION
AUTHOR
John Feeney | Research Director
john@bouldergroup.com
CONTRIBUTORS
Randy Blankstein | President
rblank@bouldergroup.com
Jimmy Goodman | Partner
jimmy@bouldergroup.com
Zach Wright | Research Analyst
zach@bouldergroup.com
(Company estimates)
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