THE NET LEASE DRUG STORE REPORT Q1 2014 DRUG STORE PROPERTIES MEDIAN ASKING CAP RATES
MARKET OVERVIEW
Sector Walgreens
Q3 2013 (Previous) 5.75%
Q1 2014 (Current) 5.60%
Basis Point Change -15
CVS
6.07%
5.90%
-17
Rite Aid
8.00%
7.75%
-25
Above numbers include properties of all lease lengths and types.
DRUG STORE PROPERTIES ON THE MARKET
Sector Walgreens
Q3 2013 (Previous) 156
Q1 2014 (Current) 131
Percentage Change -16.0%
CVS
44
45
+2.3%
Rite Aid
30
33
+10.0%
DRUG STORE PROPERTIES MEDIAN ASKING PRICE Sector Walgreens
Median Asking Price $6,798,000
Median Price Per Foot $467
CVS
$4,323,000
$358
Rite Aid
$2,887,000
$258
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.
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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%
CVS
Rite Aid
MEDIAN ASKING CAP RATE BY PROPERTY TYPE Property Type
Walgreens
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
DRUG STORE VS. RETAIL NET LEASE MARKET CAP RATE
Spread (bps) 30
Tenant Drug Store
Tenant Walgreens
Asking 6.93%
Closed 7.23%
CVS
6.63%
6.85%
22
Retail Net Lease Market
Rite Aid
8.00%
8.78%
78
Drug Store Premium (bps)
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Q3 2013 (Previous) 6.00%
Q1 2014 (Current) 5.90%
7.02%
6.75%
102
85
THE NET LEASE DRUG STORE REPORT Q1 2014
COMPANY AND LEASE OVERVIEW 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 (Company estimates)
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
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
Š 2014. 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.
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