net lease drug store research report

1. THE NET LEASE
DRUG STORE REPORT
Q3 2013
DRUG STORE PROPERTIES
MEDIAN ASKING CAP RATES
MARKET OVERVIEW
Tenant
Walgreens
Q4 2012
(Previous)
6.40%
Q3 2013
(Current)
5.75%
Basis Point
Change
-65
CVS
6.60%
6.07%
-53
Rite Aid
9.00%
8.00%
-100
Above numbers include properties with all lease lengths.
DRUG STORE PROPERTIES
ON THE MARKET
Tenant
Walgreens
Q4 2012
(Previous)
86
Q3 2013
(Current)
156
Percentage
Change
81.4%
CVS
30
44
46.7%
Rite Aid
38
30
-21.1%
DRUG STORE PROPERTIES
MEDIAN ASKING PRICE
Tenant
Walgreens
Median Asking
Price
$6,547,689
Median Price
Per Foot
$452
CVS
$4,519,992
$395
Rite Aid
$3,487,955
$312
Cap rates in the net lease drug store sector compressed significantly from
the fourth quarter of 2012 to the third quarter of 2013. Properties tenanted
by Walgreens, CVS and Rite Aid experienced cap rate compression of 65,
53 and 100 basis points respectively during this time frame. Specifically,
cap rates for Walgreens and CVS properties built between 2011 and
2013 compressed by 25 basis points in the last three quarters. Part of
the compression is derived from the lack of net lease property supply
as owners are able to hold and refinance at lower interest rates from
the original acquisition date. Drug store properties continue to be at the
forefront of investor demand as evidenced by the 102 basis point premium
to the net lease retail market in the third quarter of 2013. Over $1 billion
of drug store transactions occurred in the third quarter of 2013, which
represents the largest volume of any quarter in the past three years.
Despite the significant decrease in cap rates throughout the drug store
sector, the supply of properties tenanted by Walgreens and CVS increased
by 76%. The overall increase in supply to the drug store sector is attributed
to sellers adding older or properties with short lease terms to the market in
attempt to take advantage of the low cap rate environment in this sector.
Inversely, the supply of Rite Aid properties declined by more than 20%
as owners have been more receptive to refinancing and Rite Aid has not
recently developed stores. Additionally, the financial position of Rite Aid
improved marginally (Standard & Poor’s “B-” to “B”), causing select Rite Aid
properties to sell, further decreasing the supply.
New construction Walgreens and CVS properties remain in the highest
demand amongst investors as they are one of the only net lease products
that offer leases with more than longer than 20 years. In the past 12-18
months, Walgreens changed their typical lease length and new construction
stores mainly have an initial 20 year lease term compared to 25 years.
Cap rates for new construction drug stores are near all-time lows, therefore
some investors have altered their acquisition criteria to include older drug
store assets to increase yield. In the third quarter of 2013, properties
constructed prior to 2007 accounted for 58% of all drug store transactions
which represented a 10% increase from the third quarter of 2012.
Transaction volume for the remainder of 2013 should remain active as
investors are drawn to this asset class. With cap rates for new construction
drug store near all-time lows, 1031 Exchange and private investors will
continue to be the most active investors in this sector as institutions
cannot achieve their return thresholds for long term drug stores in the
current market environment.
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2. THE NET LEASE
DRUG STORE REPORT
Q3 2013
MEDIAN ASKING CAP RATE BY BUILDING AGE
Year Built
Walgreens
CVS
Rite Aid
2011-2013
5.50%
5.75%
N/A
2005-2010
5.75%
6.00%
7.58%
2000-2004
6.20%
6.45%
8.00%
1995-1999
7.25%
7.64%
8.72%
Before 1994
7.70%
8.00%
9.90%
CVS
Rite Aid
MEDIAN ASKING CAP RATE BY PROPERTY TYPE
Property Type
Walgreens
Ground Lease
5.00%
5.00%
6.50%
Fee Simple
5.75%
6.07%
8.00%
MEDIAN NATIONAL ASKING VS.
CLOSED CAP RATE SPREAD
DRUG STORE VS. RETAIL NET LEASE
MARKET CAP RATE
Tenant
Walgreens
Closed
6.20%
Asking
6.13%
CVS
6.20%
6.00%
20
Rite Aid
8.36%
8.10%
26
Q4 2012
(Previous)
6.93%
Q3 2013
(Current)
6.00%
Retail Net Lease Market
7.25%
7.02%
Drug Store Premium (bps)
Spread (bps)
7
32
102
Tenant
Drug Store
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3. THE NET LEASE
DRUG STORE REPORT
Q3 2013
COMPANY AND LEASE OVERVIEW
Walgreens
CVS
Rite Aid
Credit Rating
BBB (Stable)
BBB+ (Stable)
B (Stable)
Market Cap
$56 billion
$76 billion
$4 billion
Revenue
$72 billion
$123 billion
$25 billion
2014 Stores Planned
(Company estimates)
150
150
N/A
Number of Stores
8,582
7,553
4,623
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
Increases every 10 years of 10%
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
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