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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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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%

Spread (bps) 7

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)

32

102

Tenant Drug Store

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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

Š 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.

www.bouldergroup.com

Q3 2013 net lease drug store report  

The Boulder Group’s Research Department has released a new research report providing comprehensive numbers and analysis of the activity in t...

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