Drug Store Sector Update

Contributing Author: Sean O’Shea

Certainly for the last decade or longer, the drugstore sector has been viewed by many single tenant investors, as a bond-like investment, in the sense that they had investment grade ratings (this has changed over the last decade, in part, due to the additional debt that has been incurred for various mergers in the sector); and predictable, stable income streams that were afforded due to absolute NNN lease structure of most drugstore tenants’ leases.

There has been some concern, over the years, regarding whether these assets afford an inflation hedge, since in the case of Walgreens-Boot Alliance, that the rental income was stabilized or ‘flat’ for almost 75 years. The CVS Health and Rite Aid lease structure can vary; but do afford some scheduled increases.

The medical, pharmaceutical and health services industry has been undergoing fairly dramatic changes in the last ten years regarding coverages and insurance provision changes with the ongoing debates of the Affordable Care Act.

Even in the face of some uncertainty, these drugstore assets have historically served as a ‘go-to’ investment in the maturing Net Lease Sector, due to perceived consistent performance.

In earlier articles we have explored How do NNN Assets Address Your concerns? We believe, that a thoughtful review of issues, that affect investor decisions, as they consider their best deployment of their resources, which distinguishes some critical impact issues, has never been more important:

Location criteria, Tax free states/non-tax free states; of course; other Regional considerations;
Comparative Tenant Credit of WAG; CVS Health and Rite Aid, as the ‘Majors’ in this sector; non-credit smaller regional opportunities;
Lease Structures, not merely, NN vs. NNN; (to differentiate the impact of respective lease structures and contingent risks); Lease term; scheduled escalations; renewal provisions; liabilities in casualty and insurance;
The ability to secure acceptable and competitive financing, if leverage is appropriate, to match investor objectives;
“Real estate intrinsics”, as always, traffic counts, local competitors; demographics, regional economies and growth prospects.

We have included a CVS short list to reflect that there is a wide variance in offerings even within one drug store chain. See attached.