THE NET LEASE DRUG STORE REPORT Q3 2017 DRUG STORE PROPERTIES MEDIAN ASKING CAP RATES
MARKET OVERVIEW
Q3 2016 (Previous)
Q3 2017 (Current)
Basis Point Change
Walgreens
5.80%
6.00%
+20
CVS
5.70%
5.65%
-5
Rite Aid
7.00%
7.25%
+25
Tenant
DRUG STORE PROPERTIES ON THE MARKET
Cap rates for the single tenant drug store sector increased 14 basis points in the third quarter of 2017 to 6.10% versus the prior year. Cap rates for CVS properties declined by 5 basis points to a 5.65% cap rate while Rite Aid and Walgreens properties experienced significant increases of 25 and 20 basis points to 7.25% and 6.00% respectively. The increase in cap rates experienced by Walgreens and Rite Aid properties can be best attributed to drug store landlords adding a supply of lower quality assets to the market.
Tenant
Q3 2016 (Previous)
Q3 2017 (Current)
Percentage Change
Walgreens
135
192
42.2%
CVS
85
120
41.1%
Rite Aid
42
65
54.8%
DRUG STORE PROPERTIES MEDIAN ASKING PRICE Tenant
Median Asking Price
Median Price Per Foot
Walgreens
$5,459,667
$374
CVS
$4,395,248
$345
Rite Aid
$4,060,779
$303
Transaction volume in the drug store sector slowed over the past 18 months due to investor trepidation of the failed Walgreens and Rite Aid merger. Walgreens originally proposed a complete acquisition of Rite Aid; however those plans were halted due to regulatory concerns. The final iteration of the Walgreens and Rite Aid transaction calls for the acquisition of 1,932 Rite Aid stores, three distribution centers and existing inventory for $4.38 billion by Walgreens. The acquisition has begun, however isn’t expected to be fully completed until the spring of 2018. The unknown consequences of this acquisition caused investors to carefully monitor the cues from Walgreens to understand how store overlap and other real estate decisions will be solved in the future. Walgreens recently announced it will close 600 stores in 2018 – 2019. The supply of drug store assets significantly increased in the third quarter of 2016 when compared to the prior year by more than 40%. Rite Aid properties experienced the greatest increase of approximately 55%. Rite Aid owners held on to Rite Aid assets in 2016 while there was still a possibility that Walgreens would acquire all Rite Aid stores. As the complete merger is no longer viable, these owners have brought a significant amount of supply to the market. The Federal Trade Commission has provided Walgreens and Rite Aid with clearance for the partial Rite Aid acquisition and there is some insight as to which Rite Aid stores will be acquired by Walgreens. Transaction velocity for the remainder of 2017 in the net lease drug store sector should remain at a similar pace to 2016 as landlords and investors wait to see the ramifications of the Walgreens acquisition of more than 1,900 Rite Aid locations. However, drug store assets with strong sales performance in top tier markets and no Walgreens/ Rite Aid overlap will garner demand from investors. Private and 1031 investors will continue to be the primary buyer of drug store assets. Investors will be carefully monitoring the news as it has been recently reported that CVS has made a bid to acquire health insurer Aetna and Amazon recently received wholesale pharmacy licenses in 12 states.
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