Net Lease Drug Store Report | The Boulder Group
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www.bouldergroup.com THE NET LEASE DRUG STORE REPORT Q3 2015 Q3 2014 Q3 2015 Basis Point Sector (Previous) (Current) Change Walgreens 5.60% 5.50% -10 CVS 5.75% 5.45% -30 Rite Aid 7.40% 6.63% -77 DRUG STORE PROPERTIES ON THE MARKET Q3 2014 Q3 2015 Percentage Sector (Previous) (Current) Change Walgreens 169 203 +20.1% CVS 74 95 +28.4% Rite Aid 36 43 +19.4% DRUG STORE PROPERTIES MEDIAN ASKING PRICE Median Asking Median Price Sector Price Per Foot Walgreens $6,700,000 $460 CVS $5,340,460 $438 Rite Aid $3,995,000 $357 MARKET OVERVIEW Cap rates for single tenant CVS, Rite Aid and Walgreens properties reached a new historic low in the net lease drug store sector in the third quarter of 2015. Cap rates continued to decline as investors flock to the net lease space’s cornerstone asset, drug stores. With historically low cap rates, the drug store property supply has increased drastically by over 20% as owners attempt to take advantage of unprecedented high values. While overall cap rate levels experienced compression, short term leased Rite Aid properties with 5-9 years of lease term remaining had the greatest cap rate compression of 85 basis points in the third quarter of 2015. New construction CVS properties experienced the second greatest compression of 50 basis points to a 5% cap rate, the same level for new construction Walgreens assets. These levels can be attributed to the historically low interest rate environment coupled with high demand amongst 1031 exchange buyers for long term leased properties in a market constrained by limited expansion plans for drug stores tenants. With cap rates for Walgreens and CVS at all-time low levels, the ratio of long term leased drug store properties (20 years or more) to the total supply has decreased when compared to the third quarter of 2014 and total overall supply of long term leased drug stores declined by 27% in the same time period. As Rite Aid’s financial strength improves, investors have gained interest in the extra yield associated with Rite Aid properties. The additional yield is attributed to Rite Aid not being an investment grade rated company similar to Walgreens or CVS. However, with improving company fundamentals, cap rates for Rite Aid properties decreased by 77 basis points since the third quarter of 2014. Transaction velocity for 2016 in the net lease drug store sector should remain at a similar pace to 2015 as drug stores continue to be at the forefront of investor demand. As cap rates for new construction properties with long term leases continue to compress, expect 1031 exchange buyers and private investors to remain the primary buyer. It has become increasingly difficult for institutional investors to acquire long term leased drug stores due to the low cap rates associated with these properties. Additionally, investors searching for higher yields for drug store properties will seek short term leased assets with strong store sales. DRUG STORE PROPERTIES MEDIAN ASKING CAP RATES Above numbers include properties with all lease lengths.
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The Boulder Group’s Research Department has released a new research report providing comprehensive numbers and analysis of the activity in the National Net Lease Drug Store Market.
Transcript of Net Lease Drug Store Report | The Boulder Group
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THE NET LEASEDRUG STORE REPORT
Q3 2015
Q3 2014 Q3 2015 Basis Point
Sector (Previous) (Current) Change
Walgreens 5.60% 5.50% -10
CVS 5.75% 5.45% -30
Rite Aid 7.40% 6.63% -77
DRUG STORE PROPERTIESON THE MARKET
Q3 2014 Q3 2015 PercentageSector (Previous) (Current) Change
Walgreens 169 203 +20.1%
CVS 74 95 +28.4%
Rite Aid 36 43 +19.4%
DRUG STORE PROPERTIES MEDIAN ASKING PRICE
Median Asking Median PriceSector Price Per Foot
Walgreens $6,700,000 $460
CVS $5,340,460 $438
Rite Aid $3,995,000 $357
MARKET OVERVIEW
Cap rates for single tenant CVS, Rite Aid and Walgreens properties reached a new historic low in the net lease drug store sector in the third quarter of 2015. Cap rates continued to decline as investors flock to the net lease space’s cornerstone asset, drug stores. With historically low cap rates, the drug store property supply has increased drastically by over 20% as owners attempt to take advantage of unprecedented high values. While overall cap rate levels experienced compression, short term leased Rite Aid properties with 5-9 years of lease term remaining had the greatest cap rate compression of 85 basis points in the third quarter of 2015. New construction CVS properties experienced the second greatest compression of 50 basis points to a 5% cap rate, the same level for new construction Walgreens assets. These levels can be attributed to the historically low interest rate environment coupled with high demand amongst 1031 exchange buyers for long term leased properties in a market constrained by limited expansion plans for drug stores tenants.
With cap rates for Walgreens and CVS at all-time low levels, the ratio of long term leased drug store properties (20 years or more) to the total supply has decreased when compared to the third quarter of 2014 and total overall supply of long term leased drug stores declined by 27% in the same time period.
As Rite Aid’s financial strength improves, investors have gained interest in the extra yield associated with Rite Aid properties. The additional yield is attributed to Rite Aid not being an investment grade rated company similar to Walgreens or CVS. However, with improving company fundamentals, cap rates for Rite Aid properties decreased by 77 basis points since the third quarter of 2014.
Transaction velocity for 2016 in the net lease drug store sector should remain at a similar pace to 2015 as drug stores continue to be at the forefront of investor demand. As cap rates for new construction properties with long term leases continue to compress, expect 1031 exchange buyers and private investors to remain the primary buyer. It has become increasingly difficult for institutional investors to acquire long term leased drug stores due to the low cap rates associated with these properties. Additionally, investors searching for higher yields for drug store properties will seek short term leased assets with strong store sales.
DRUG STORE PROPERTIESMEDIAN ASKING CAP RATES
Above numbers include properties with all lease lengths.
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THE NET LEASEDRUG STORE REPORT
Q3 2015
MEDIAN ASKING CAP RATE BY LEASE TERM REMAINING
Term Remaining Walgreens CVS Rite Aid
20+ 5.00% 5.00% 6.15%
15-19 5.50% 5.25% N/A
10-14 5.60% 5.83% 6.65%
6-9 6.75% 6.60% 7.15%
5 & Under 6.90% 7.00% 8.00%
MEDIAN ASKING CAP RATE BY PROPERTY TYPE
Property Type Walgreens CVS Rite Aid
Ground Lease 5.05% 4.85% N/A
Fee Simple 5.50% 5.25% 6.63%
Leasehold 6.88% 7.00% N/A
MEDIAN NATIONAL ASKING VS. CLOSED CAP RATE SPREAD
Tenant Closed Asking Spread (bps)
Walgreens 6.23% 6.00% 23
CVS 5.92% 5.73% 19
Rite Aid 6.93% 6.72% 21
DRUG STORE VS. RETAIL NET LEASEMARKET CAP RATE
Q3 2014 Q3 2015 Tenant (Previous) (Current)
Drug Store 5.75% 5.49%
Retail Net Lease Market 6.50% 6.25%
Drug Store Premium (bps) 75 76
Above numbers are only reflective of closed transactions.
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THE NET LEASEDRUG STORE REPORT
Q3 2015
SELECTED SINGLE TENANT SALES COMPARABLES
Sale Date Tenant City State Price
PricePer SF
CapRate
Lease TermRemaining
Sep-15 Walgreens Anchorage AK $11,600,000 $783 5.22% 19Oct-15 CVS Plano TX $10,202,589 $699 4.82% 21Aug-15 CVS Niskayuna NY $10,200,000 $750 5.32% 21Sep-15 CVS Ballston Spa NY $8,993,000 $680 5.00% 20Aug-15 CVS Oxford MS $8,690,000 $657 5.10% 23Aug-15 Walgreens Minneapolis MN $8,275,000 $591 5.45% 20Jul-15 Walgreens Columbus OH $7,713,700 $520 5.73% 20Sep-15 Walgreens Altoona PA $7,599,999 $532 5.50% 19Aug-15 Walgreens Levittown PA $7,233,644 $488 5.30% 15Aug-15 Walgreens Bellingham WA $7,089,000 $469 6.35% 6Aug-15 Walgreens Midfield AL $7,063,943 $523 5.30% 20Sep-15 Walgreens Southington CT $7,050,000 $484 5.86% 14Aug-15 Walgreens Shawnee KS $7,034,339 $465 5.35% 15Jul-15 Walgreens Idaho Falls ID $6,915,000 $477 5.35% 20Aug-15 Walgreens Oklahoma City OK $6,634,800 $453 5.75% 15Aug-15 Walgreens Nashville TN $6,562,000 $480 5.80% 14Aug-15 Walgreens Kansas City MO $6,229,875 $420 5.90% 14Sep-15 Walgreens Ypsilanti MI $6,000,000 $440 5.80% 17Sep-15 Walgreens Tallahassee FL $5,900,000 $432 5.50% 14Oct-15 Walgreens Midvale UT $5,895,000 $400 5.94% 15Aug-15 Walgreens Woodway TX $5,500,000 $371 5.55% 15Oct-15 Walgreens San Bernardino CA $5,400,000 $364 5.30% 15Aug-15 CVS (GL) Glenview IL $5,220,000 $395 4.50% 25Sep-15 CVS Clermont FL $5,175,000 $375 5.72% 9Sep-15 Rite Aid Boston MA $5,000,000 $366 5.48% 13Aug-15 CVS Vallejo CA $4,880,625 $296 4.30% 25Sep-15 Rite Aid Durham NC $4,548,000 $357 7.75% 4Sep-15 Walgreens Lewisburg TN $4,378,700 $297 6.10% 15Sep-15 Walgreens Natchitoches LA $4,350,000 $294 5.90% 15Aug-15 Walgreens Ramseur NC $3,800,000 $376 6.70% 10Aug-15 Walgreens Mesa AZ $3,680,000 $237 5.90% 10Aug-15 Rite Aid Thomasville GA $3,402,773 $305 6.90% 10Aug-15 CVS (GL) Bonita Springs FL $3,269,904 $334 6.75% 5Sep-15 Walgreens Terre Haute IN $2,875,000 $213 7.16% 5Sep-15 Rite Aid Seneca SC $2,550,000 $234 9.20% 5Sep-15 Rite Aid Wadsworth OH $2,496,240 $222 8.80% 3Sep-15 Rite Aid Millen GA $2,439,456 $216 7.35% 10
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THE NET LEASEDRUG STORE REPORT
Q3 2015
Walgreens CVS Rite Aid
Credit Rating BBB (Stable) BBB+ (Stable) B (Positive)
Market Cap $91 billion $112 billion $6 billion
Revenue $93 billion $145 billion $27 billion
2015 Stores Planned 150 150 N/A
Number of Stores 8,207 7,822 4,600
Typical Lease Term 20 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 of10%
COMPANY AND LEASE OVERVIEW
(Company estimates)
FOR MORE INFORMATION
AUTHORJohn Feeney | Vice [email protected]
Randy Blankstein | [email protected]
Jimmy Goodman | [email protected]
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Zach Wright | [email protected]
CONTRIBUTORSScott Harris | [email protected]
