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The Continued Strength of the Retail Pharmacy Sector

GlobeSt.com

Think about your neighborhood retail pharmacy. Perhaps it’s a stand-alone Walgreens on a busy street corner, or a CVS on a pad site, shadow-anchored by a big-box retailer. If you’re anything like the average consumer, this pharmacy offers a handy location for prescriptions, health and beauty products, and groceries.

If investors are anything like the average net lease property owner, they might find a retail pharmacy is a solid investment. Even better news is this investment will likely to continue providing a reasonable rate of return.

Then and Now

During much of the early to mid-20th century, people filled prescriptions at the local pharmacy. These independently owned operations also offered over-the-counter remedies, a small line of packaged goods, magazines, candy, and some locations had old-fashioned soda counters.

Today’s retail pharmacy isn’t your grandfathers’ neighborhood drug store.

Over the past several decades, these establishments morphed from independent ownership to operations that are, for the most part, in the hands of national chains. This, in turn, has meant more front-of-store offerings.

PricewaterhouseCoopers noted, “Consumers have been quick to adopt retail pharmacies as their neighborhood sources of flu shots, strep tests, and ear checks, along with milk, mascara, and even maki rolls.” As health hubs, someone with a sore throat can get diagnosed at a CVS Health MinuteClinics, fill an antibiotic prescription at the pharmacy counter, and buy cans of chicken soup and a humidifier, without having to go elsewhere.

Additionally, the industry is becoming more vertically integrated. Walgreens Boots Alliance is partnering with Humana on a variety of initiatives, including a senior health care clinics pilot program. CVS Health’s $69 billion acquisition of Aetna, is, according to the Wall Street Journal, geared toward pairing “Aetna’s medical expertise with CVS’ ubiquitous physical store presence . . . to curtail runaway health-care costs.”

The Physical Nature

Calkain has previously discussed the benefits of retail pharmacy ownership;  long-term lease structures, combined with high credit ratings leading to favorable rates of return. These trends mean continued good news for net lease investors.

In our most recent Pharmacy Sector Report, we point out that not all pharmacies are created equal. For example:

  • Cap rates vary by tenant. Rite Aid properties carry lower credit ratings than do CVS and Walgreens. They also carry higher cap rates (7.76%) versus that of CVS properties (6.06%).
  • Cap rates vary by lease types. Double-net lease Rite Aid properties trade, on average, at an 8.56% cap; triple-net-lease Rite Aid’s cap rates average 7.13%.
  • Cap rates vary by region. Retail pharmacies in California and the West Coast have cap rates of 5.53% and 5.70%, respectively. These metrics are higher in the south (8.05%) and southeast (7.60%).

A Positive Outlook

In addition to consumer convenience, the retail pharmacy sector is currently being driven by the aging of the American population. A McKesson report notes that, in 2017, more than 42 million were enrolled in Medicare Part D plans, and seniors ages 50-64 filed an average of 27.6 prescriptions per person.

The continued expansion of this population cohort, combined with the development and release of new drugs, will continue to boost demand for retail pharmacies’ products and services. As such, while industry shifts continue, net lease retail pharmacies remain an investment bright spot, even as returns can vary by location, lease structure, and brand.

Read the article on GlobeSt.com

Amanda WillisThe Continued Strength of the Retail Pharmacy Sector

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