Retail News Blog

On April 25, 2009 we posted an article entitled Cap Rates on the Rise for Walgreens. Five months later, it appears that capitalization rates have stabilized for this asset class. The following is a discussion of the tenant, investment demand and evidence for prevailing Walgreens cap rates.

The Tenant

Walgreens is a national, retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. The company was founded in 1901, and as of August 2009, operated 6,996 drug stores located in 49 states and Puerto Rico. The company is publicly traded on the NASDAQ National Market, the New York Stock Exchange, and the Chicago Stock Exchange under the symbol WAG, and is included in the Standard and Poor’s 500 Index and the NASDAQ 100 Index. Moody’s rates Walgreens long-term debt A2 and short-term debt Prime-1. Standard & Poor’s rates Walgreens long-term debt A+ and short-term debt A-1. The outlook from both agencies is stable.

Investment Demand

There is currently strong investor demand for Walgreens properties, as market participants are attracted to the absolute net lease structure, long-term lease, moderate cash-on-cash returns and strong creditworthiness of the tenant. There was a lull in Walgreens sales during the first couple quarters of 2009 due to asking prices that were still targeting peak of the market values. Over, the past several months a majority of sellers have re-priced, which has increased sales volume substantially. Walgreens investments are attractive to a specific pool of investors to balance risk within their portfolios.

It is worth noting that the inventory of Walgreens listings is quickly evaporating, which is primarily due to recent increased sales volume and the fact that this tenant has substantially reduced expansion efforts.

Capitalization Rates

The subject property of a resent appraisal we completed was a Walgreens in Lane County, OR. The following table summarizes regional cap rates trends.

The 2008 sale transactions are no longer relevant because market cap rates shifted upward substantially since these sales occurred. The 2009 transactions indicate a cap rate range from 7.3% to 8.2%, and an average of 7.7%. Comp 1 (7.3%) is a sale that occurred in early 2009 (negotiated in 2008), and is likely a low indicator for current market cap rates. Comp 2 (8.2%) had marketability issues associated with prospective buyers having to assume existing financing that limits annual cash-on-cash to less than 1%. This issue put substantial upward pressure on the cap rate; therefore, this comp overstates prevailing cap rates. Comp 3 (7.5%) is the best indicator from this dataset given that the sale reflects current market conditions and this is a straightforward transaction.

The following table summarizes four additional cap rate examples of recent Walgreens sales in the Western region.

The additional cap rate comps show a range from 7.3% to 7.8% and average 7.5%. Based on interviews with two brokers that specialize in selling net leased investments, the most prevalent market cap rate for Walgreens is currently 7.5%, which is supported by the preceding data.