Net Lease Drug Store Report
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www.bouldergroup.com THE NET LEASE DRUG STORE REPORT Q3 2013 DRUG STORE PROPERTIES MEDIAN ASKING CAP RATES Q4 2012 Q3 2013 Basis Point Tenant (Previous) (Current) Change Walgreens 6.40% 5.75% -65 CVS 6.60% 6.07% -53 Rite Aid 9.00% 8.00% -100 DRUG STORE PROPERTIES ON THE MARKET Q4 2012 Q3 2013 Percentage Tenant (Previous) (Current) Change Walgreens 86 156 81.4% CVS 30 44 46.7% Rite Aid 38 30 -21.1% DRUG STORE PROPERTIES MEDIAN ASKING PRICE Median Asking Median Price Tenant Price Per Foot Walgreens $6,547,689 $452 CVS $4,519,992 $395 Rite Aid $3,487,955 $312 MARKET OVERVIEW 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. Above numbers include properties with all lease lengths.
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The Boulder Group Publishes Net Lease Drug Store Research Report
Transcript of Net Lease Drug Store Report
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THE NET LEASEDRUG STORE REPORT
Q3 2013
DRUG STORE PROPERTIESMEDIAN ASKING CAP RATES
Q4 2012 Q3 2013 Basis Point Tenant (Previous) (Current) Change
Walgreens 6.40% 5.75% -65
CVS 6.60% 6.07% -53
Rite Aid 9.00% 8.00% -100
DRUG STORE PROPERTIESON THE MARKET
Q4 2012 Q3 2013 PercentageTenant (Previous) (Current) Change
Walgreens 86 156 81.4%
CVS 30 44 46.7%
Rite Aid 38 30 -21.1%
DRUG STORE PROPERTIES MEDIAN ASKING PRICE
Median Asking Median PriceTenant Price Per Foot
Walgreens $6,547,689 $452
CVS $4,519,992 $395
Rite Aid $3,487,955 $312
MARKET OVERVIEWCap 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.
Above numbers include properties with all lease lengths.
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THE NET LEASEDRUG 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%
MEDIAN ASKING CAP RATE BY PROPERTY TYPE
Property Type Walgreens CVS Rite Aid
Ground Lease 5.00% 5.00% 6.50%
Fee Simple 5.75% 6.07% 8.00%
MEDIAN NATIONAL ASKING VS. CLOSED CAP RATE SPREAD
Tenant Closed Asking Spread (bps)Walgreens 6.20% 6.13% 7
CVS 6.20% 6.00% 20
Rite Aid 8.36% 8.10% 26
DRUG STORE VS. RETAIL NET LEASEMARKET CAP RATE
Q4 2012 Q3 2013 Tenant (Previous) (Current)
Drug Store 6.93% 6.00%
Retail Net Lease Market 7.25% 7.02%
Drug Store Premium (bps) 32 102
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THE NET LEASEDRUG STORE REPORT
Q3 2013
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 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%
COMPANY AND LEASE OVERVIEW
FOR MORE INFORMATIONAUTHORJohn Feeney | Research [email protected]
CONTRIBUTORSRandy Blankstein | [email protected]
Jimmy Goodman | [email protected]
Zach Wright | Research [email protected]
(Company estimates)
© 2013. The Boulder Group. Information herein has been obtained from databases owned and maintained by The Boulder Group as well as third party sources. We have not verified the information and we make no guarantee, warranty or representation about it. This information is provided for general illustrative purposes and not for any specific recommendation or purpose nor under any circumstances shall any of the above information be deemed legal advice or counsel. Reliance on this information is at the risk of the reader and The Boulder Group expressly disclaims any liability arising from the use of such information. This information is designed exclusively for use by The Boulder Group clients and cannot be reproduced, retransmitted or distributed without the express written consent of The Boulder Group.
