These are the 10 best commercial properties among 300-400 daily listings between $1M-$30M in all 50 US states listed by CBRE, Marcus Millichap, SVN, etc. The properties are selected based on various criteria: price, cap rate, and more (please read "How properties are selected" article.)
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Short sale in Las Vegas, NV: Portfolio of 2 buildings totaling 36,369 SF: one retail, one office on 3.86 acres lot. $3.9M.
Shopping center in Reseda, CA: 19,822 SF shopping center on 1.41 acres corner lot in a densely populated area in Southern CA. 100% NNN leased. Profoma NOI $433K/yr. $5.75M. 8.4% cap.
Apartments in Los Angeles, CA: 6-unit apartments on a corner lot near USC campus. Being used as student housing. NOI $78K/yr. $1.05M. 7.5% cap.
Rite Aid in Woonsocket, RI: 11,850 SF drug store on 1 ac lot. New 20 yrs absolute NNN lease. NOI $185K/yr with 10% rent bump every 10 yrs. $2.197M. 8.45% cap.
Strip Center in De Pere, WI: 5862 SF class A retail center on an outparcel to a shopping center anchored by Festival Foods Grocery in Green Bay suburbs. 100% NNN leased by 4 national tenants: Starbucks coffee, FedEx Kinkos, US Cellular and EZ Payday Loans. NOI $166K/yr. $2.084M. 8% cap.
Family Dollar in Orlando, FL: 9180 SF single-tenant building with all masonry construction on 1 acre corner lot in fast growing area. New 10 yrs corp NN lease by Family Dollar. NOI $178K/yr. plus 6K billboard income. $2.236M. 8.25% cap.
Goddard Childcare center in Olathe, KS: 6768 SF childcare center built in 2000 in fast growing affluent (AHI $108K/yr) Kansas city suburbs. NOI not avail. $1.35M.
Shopping Center in Topeka, KS: 40,240 SF shopping center on 4.3 acres lot just off I-470. Anchored by Petsmart and Party America. NOI $433K/yr. $4.814M. 9% cap.
Sam’s Club building in Flagstaff, AZ: 140,000 SF single-tenant retail center built in 1994 on 12.7 acres lot near I-40. 100% NNN leased till 2023. Base rent of $940K plus percentage rent. $14.75M. 7% cap.
Auto Mall in Palm Harbor, FL: 24,724 SF auto mall center built in 1990 on 2.31 acres corner lot in Tampa metro. 100% leased by 10 auto tenants with low rents. NOI $191K/yr. $2.387M. 8% cap.
Walgreen's in Fresno, CA: 14,820 SF new drug store on 1.59 acres corner near hwy 99. 25 yrs NNN lease. NOI $345K/yr.$4.93M. 7% cap.
Jack In the Box in Austin, TX: 2682 SF fast food restaurant built in 1999 on .92 acre in fast growing (52% since 2000) and strong income area. 18 yrs absolute NNN corp lease with 7 yrs remaining. NOI $135K/yr. with 8% rent bump every 5 yrs. Price reduced from $1.865M to $1.758M. 7.7% cap.
Strip Center in Orland Park, IL: 8927 SF upscale retail center on ¾ ac lot in growing upper middle-class Chicago metro with AHI $91K/yr. 73% NNN leased. Proforma NOI $134K/yr. $1.378M. 9.75% proforma cap.
Apartments in Fort Worth, TX: 140-unit apartments on 6.63 acres lot.. 75% occupied. Proforma NOI $404K/yr. $3.1M. 13% cap. Just over $22k/unit!
Apartments in Nashua, NH: attractive 22-unit apartments in Boston suburbs. NOI $98K/yr. Price reduced to $1.15M. 8.5% cap.
There are 3 major drugstore chains in the US: Walgreens, CVS, and Rite Aid. Below are some key statistics about the 3 major drugstore chains as of July 2010:
Walgreensranks #1 with market cap of $29.33 Billion, $66.25 Billion in revenue, and S&P rating of A+. According to Walgreens, 75% US population lives within 3 miles from its stores. On Oct 1, 2009, Walgreens opened its 7000-th store in Brooklyn, New York. In April 2010, it acquired 258 Duane Reade drug stores in New York Metropolitan area.
CVSranks #2 with market cap of $42.09 Billion, $99.1 Billion in revenue (CVS revenue alone is less than Walgreens if revenue from its Caremark group is taken out), and S&P rating of BBB+. CVS opened its 7000-th store in Little Canada, Minnesota on October 5, 2009 and currently operates 7025 drug stores.
Rite Aid ranks #3 with market cap of $869 Million, $25.53 Billion in revenue, 4780 drug stores and S&P rating of B-.
Investors purchase properties occupied by these drugstore chains for the following reasons:
The drugstore business is very recession-insensitive. People need medicine when they are sick, regardless of the state of the economy. Both rich and poor people in the US have access to medicine. Some even argue that low-income people use more medicine due to free or low-cost drugs offered by government-assisted programs. So the tenants should do well during tough time and have money to pay rent to landlords.
The drugstore business has a good prospect in the US:
·People are living longer and need more medicine to sustain longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer’s symptoms. Older people tend to use more medicine than younger ones as they often have more medical problems. As the 78 million baby boomers are getting closer to retiring age starting from 2008, the drugstore chains anticipate the demand for medicine to increase in next 20 years.
·The drug market continues to expand as the US population will continue to grow. More and more Americans suffer from various diseases. The number of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million people per Fortune magazine. They spent $5.4 Billion in 2009 for allergy drugs. As their waist lines balloon, more Americans are diagnosed with diabetes, high cholesterol at younger and younger ages. In addition, doctors also recommend treating various diseases sooner than later due to better understanding about the diseases. For example, doctors now prescribe antiretroviral drugs for patients soon after infected with HIV virus instead of waiting for the infection to become AIDS. More doctors combine insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors increase the size of the drug market.
·Advance in genetic engineering has introduced various new genetic DNA testing kits which allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest growth segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug stores in the near future. Upon FDA approval, these new products will potentially bring in additional revenue for drug stores.
·The passage of Health Care Reform Bill on March 23, 2010 provides insurance coverage to an estimated 33 million more American. This is a great present to the drugstore industry.
·There are new drugs to treat previously untreatable illnesses, and new diseases, e.g. Viagra for men’s unhappiness, Zoloft for depression, Avastin for colon cancer, Herceptin for breast cancer, Nicotine patches for smokers to kick the habit, Tamiflu for a potential bird flu pandemic, vaccine for swine (H1N1) flu pandemic, Tekturna/Rasilez for hypertension and various new drugs for AIDS and Attention Deficit Disorder (ADD). The new medicines are very expensive, e.g. a year’s supply of Avastin costs about $55,000. Eli Lilly has sold about $4.8 billion of Zyprexa in 2007 for schizophrenia and yet most people have never heard of this medicine.
·There are existing drugs now approved to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damage in people with diabetes. It is now approved by FDA to treat Fibromyalgia which affects 5.8 million Americans per WebMD.
·Big advances in genetics, biology and stem cells research are expected to produce a new class of drugs to treat diabetes, Parkinson’s and various rare genetic disorders. For example the new drug Ilaris from Novartis targets genetic causes of an inherited disorder that there are only 7000 known cases worldwide. However, Novartis hopes to gradually broaden its drugs to a blockbuster drug to more common disorders caused by similar genetics.
·Technology and modern life introduce and require new products, e.g. pregnancy test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, contact lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly $26B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting company that monitors pharmaceutical sales.) There are also more surgeries: C-sections, Kidney transplants, open-heart triple by-pass, and breast augmentations. More surgeries mean more medicines are needed such as Vicodin for pain management and Warfarin to prevent blood clots in surgeries.
·Before the customers can get to the medicine aisles or pharmacy counters, they have to pass by chocolates, sodas, digital cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. Drug stores hope you use the one-hour photos services and exchange your liquid propane tanks there. The stores also carry seasonal items, e.g. Halloween costumes, and “As Seen on TV” merchandise, e.g. Shamwow. As a result, customers buy more than their prescriptions and medicine in these drugstores. Rite Aid sells more 28,000 non-pharmacy items in its stores while Walgreens has 22,000 different items on store shelves. CVS reported that non-pharmacy sales represented 30% of the company’s total sales in January of 2007. The figure for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are in effect convenience stores especially ones that are in residential or rural areas. During the recession, sales of these items are down as customers buy what they need and not what they want. Walgreens tries to reduce the number of items by 4000. It also introduces its own private label which has higher profit margins.
·There are more and more generic medications on the market as a number of enormously popular brand-name blockbusters will lose their 20-year long patents, e.g. Lipitor (best selling drug in the world to lower cholesterol) in 2010, Viagra (you know what it’s for) in 2012. Drugstores prefer to sell generic drugs to customers due to higher profit margins than the brand-name medications.
·Some people are addicted to pain killers, e.g. Hydrocodone and consume a large amount of them, e.g. 30-day dosage in a day to get high. According to testimony from the National Institute on Drug Abuse, US retail pharmacies dispensed nearly 180 million prescriptions in 2007 for opiates, e.g. Hydrocodone. A high percentage of these prescriptions are probably not used for any legitimate medical purposes.
·This author estimates that at least 10% of the dispensed prescription drugs are not used at all and sit idle in the medicine cabinets. They are eventually expired and thrown away.
These companies sign very long-term NNN leases, guaranteed by their corporate assets. This makes the investment in the underlying property fairly low risk, especially for Walgreens with an A+ S&P rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent promptly and timely. This author is not aware of any properties leased by one of these drugstore chains in which the tenants failed to pay rents. Even when the stores are closed due to weak sales (Walgreens closed 119 stores in 2007), these companies may sublease the properties to other companies, e.g. Advance Auto Parts and continue to pay rents on the master leases.
·A typical Walgreens lease consists of 20-25 year primary term plus 8-10 five-year options. During primary term and options, there will be no rent increases in most of the leases. This is the main disadvantage of investing in Walgreens drugstores.
·A typical CVS lease consists of 20-25 year primary term plus 4-5 five-year options. The rent is normally flat during the primary term and then there is a 2.5%-10% rent increase in the in each 5-year option.
·A typical Rite Aid lease consists of 20-25 year primary term plus 4-8 five-year options. The lease often has a rent increase every 5-10 years.
Investment Risks
Although the pharmacy business in general is recession-insensitive, there are risks involved in your investment:
1)The main downside about investing in pharmacies is there is little or no rent bump for a long time, e.g. 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not appeal to younger investors.
2)The 3 drugstore chains now have a new formidable competitor, Wal-mart. Wal-mart sells prescription drugs in more than 4000 Wal-mart, Sam’s Club and Neighborhood Market stores in 49 states. The retail giant is known for launching in 2006 a highly-publicized $4 generic prescription drug program which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart probably makes very little profits on these medications if any. However, the marketing campaign generates a lot of publicity for Wal-mart. Wal-mart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Wal-mart at the middle. Other drug chains try to counter Wal-mart in different ways. Target now offers the same 350 generic medications for $4 for a 30-day supply. Walgreens has a Prescription drugs club with membership fee which offers 1400 generic medications for as little as $1/week. CVS says it will match any offers from its competitors.
3)Chief Business Correspondent Rick Newman from US World & News Report predicted that Rite Aid might not survive in 2009. While Rite Aid is still around in 2010, dire predictions continue. The study by Audit Integrity gave Rite Aid about a 10.5 percent chance of filing for bankruptcy in 2010.
4)Drugs are also sold in thousands of supermarkets, Target stores, and Costco warehouses. However, there are no drive-thru windows at these stores or Walmart to conveniently drop off the prescriptions and pick up medicines. Customers will not be able to pick up their prescriptions during lunch hour or after 7PM at Target stores or supermarkets. They need to have membership to buy medicines at Costco. Others may not fill their prescriptions at Walmart because they don’t want to mingle with typical Walmart customers who are in lower income brackets.
5)Many leases in areas with hurricanes and tornados are NNN leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.
6)The tenant may move to a new location down the road or across the street when the lease expires. This risk is high when the property is located in small town where there is low barrier for entry, i.e. lots of vacant & developable land.
7)The tenant may ask for rent concession to improve its bottom line. The possibility is higher if the tenant is Rite Aid and if the store has low sales revenue and/or higher than market rent.
Among 3 drugstore chains, Walgreens and CVS pharmacies in general have the best locations—at major intersections while Rite Aid has less than premium locations. Walgreens tends to hire only the top graduates from pharmacy schools while Rite Aid settles with bottom graduates to save costs. When possible all drugstore chains try to fill the prescriptions with generic medications which have higher profit margins.
1)Walgreens: the company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has existed for more than 100 years, most stores are only 5-10 years old. This is the best managed company among the three drugstore chains and also among the most admired public companies in the US. The company has been run by executives with proven track records and hires the top graduates from universities. Due to its superior financial strength--S&P A+ rating-- and premium irreplaceable locations, properties with leases from Walgreens get the highest price per square foot and/or the lowest cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increase for 20 to 60 years. The cap rate is often in the low 6% to 7.5% range in 2009. Investors who buy Walgreens tend to be more mature, i.e. closer to retirement age. They are looking for a safe investment where it’s more important to get the rent check than to get appreciation. They often compare the returns on their Walgreens investment with the lower returns from US treasury bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and thus you see many new Walgreens stores for sale. It will slow down this expansion in 2010 and focus on renovation of existing stores instead.
2)CVS Pharmacy: CVS Corporation was founded in 1963 in Lowell, MA by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name CVS stands for “Consumer Value Stores”. As of 2009, CVS has about 6300 stores in the US, mostly through acquisitions. In 2004, CVS bought 1,200 Eckerd Drugstores mostly in Texas and Florida. In 2006, CVS bought 700 Savon and Osco drugstores mostly in Southern California. And in 2008 CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $2.9B dollars. The acquisition of Long Drugs appears to be a good one as it CVS does not have any stores in NorthernCA and Arizona. Besides, the price also included real estate. It is also bought Caremark, the largest pharmaceutical services company and changed the corporation name to CVS Caremark. When CVS bought 1,200 Eckerd stores, it formed a single-entity LLC (Limited Liability Company) to own each Eckerd store. Each LLC signs the lease with the property owner. In the event of a default, the owner can only legally go after the assets of the LLC and not from any other CVS-owned assets. Although the owner loses the guaranty security from CVS corporate assets, this author is not aware of any incident where CVS closes a store and does not pay rent.
3)Rite-Aid: Rite Aid was founded by Alex Grass (he just passed away on Aug 27, 2009 at the age of 82) and opened its first store in 1962 as “ThrifDDiscountCenter” in Scranton, Pennsylvania. It officially incorporated as Rite Aid Corporation and went public in 1968. By the time Alex Grass stepped down as the company's chairman and chief executive officer in 1995, Rite Aid was the nation's largest drugstore chain in terms of total stores and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid's earnings in the late 1990s. Rite Aid is now the weakest financially among the 3 drugstore chains. In 2007, Rite-Aid acquired about 1,850 Brooks and Eckerd drugstores, mostly along the East coast to catch up with Walgreens and CVS. In the process, it added a huge long term debt (currently owes over $5.69 Billion) and is the most leveraged drugstore chain based on its market value. The integration of Brooks and Eckerd did not seem to go well. Revenue from some of these stores went down as much as 20% after they change the sign to Rite Aid. In 2009, Rite-Aid had over 4900 stores and over $26 Billion in revenues. The figures went down in 2010 to 4780 stores and $25.53 billion in revenue. On January 21, 2009 Moody’s Investor Services downgraded Rite Aid from “Caa1” to “Caa2”, eight notches below investment grade. Both ratings are “junk” which indicate very high credit risk. Rite Aid contacted a number of its landlords in 2009 trying to get rent concession to improve the bottom line. In June 2009, Rite Aid successfully completed refinancing $1.9 Billion of its debts. However, it continues to struggle in 2010 as same store sales decreased 2.5% in June, 1.7% in May, 1% in April, .1% in March, 3.2% in February, and 2.1% in January.
Things to consider when invested in a pharmacy
If you are interested in investing in a property leased by drugstore chains, here are a few things you should consider:
If you want a low risk investment, go with Walgreens. In stable or growing areas, the degree of safety is the same whether the property is in California where you get a 6% cap or Texas where you may get a 7.5% cap. So, there is no significant advantage to invest in properties in California as the property value is based primarily on the cap rate. In 2010, the offered cap rate for Walgreens seems to come down from 7.5%-8.4% in 2009 to 6.5%-7.5% for new stores.
If you are willing to take more risk, then go with Rite-Aid. Some properties outside of California may offer up to 10.% cap rate in 2010. However, among the 3 drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it declare bankruptcy, Rite Aid has the option to pick and choose which locations to keep open and which locations to terminate the lease. To minimize the risk that the store is shuttered, choose a location with strong sales and low rent to revenue ratio.
Financing should be an important consideration. While the cap rate is lower for Walgreens than Rite Aid, you will be able to get the best rates and terms for Walgreens. A 7.25% cap Walgreens with 5.25% interest rate on the loan will generate more cash flow than a 10% cap Rite Aid with 9% interest rate (if you could find a lender for Rite Aid).
If you are not a conservative investor or risk taker, you may want to consider a CVS pharmacy. It has BBB+ S&P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer better rent bumps. On the other hand, some CVS leases, especially for properties in hurricane areas, e.g. Florida are not truly NNN leases where landlords are responsible for the roof and structure. So make sure you adjust the cap rate down accordingly. Some of the CVS locations have onsite Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it’s not clear having a clinic inside CVS is a plus or minus to the bottom line of the store.
All 3 drugstore chains have similar requirements. They all want highly visible, standalone, rectangular property around 10,000 - 14,500 SF on a 1.5 - 2 acre lot, preferably at a corner with about 75 - 80 parking spaces in a growing and high traffic location. They all require the property to have a drive-thru. Hence, you should avoid purchasing an inline property, i.e. not standalone and property with no drive-thru windows. There is a chance that these drugstores may not want to renew the lease unless the property is located in a densely-populated area with no vacant land nearby. In addition, if you acquire a property that does not meet the new requirements, for example a drive-thru, you may have a problem getting financing as lenders are aware of these requirements.
If the pharmacy is opened 24 hours a day, it is in a better location. Drugstore chains do not open the store 24 hours day unless the location draws customers.
Many properties may have a percentage lease, i.e. the landlord can get additional rent when the store’s annual revenue exceeds a certain figure, e.g. $5M. However, the revenue used to compute percentage rent often excludes a page-long list of items, e.g. wine and sodas, tobacco products, items sold after 10 PM, drugs paid by governmental programs. The excluded sales revenue could account for as much as 70% of store’s gross revenue. As a result, this author has seen only 2 stores in which the landlord is able to collect additional percentage rent. The store with a percentage rent is required to report its monthly sales to the landlord. As an investors, you want to invest in a store with strong gross sales, e.g. over $500 per square foot a year. In addition, you also want to check the rent to revenue ratio. If the figure is in the 2-4% range, the store is likely to be very profitable so the chance the store is shut down is low.
It does not matter how good the tenants are, avoid investing in declining, e.g. Detroit and/or low-income areas or small towns with less than 30,000 residents within 5 miles ring. In a small town, it may be the only drug store in town and captures most of the market share. However, if a competitor opens a new location in the area, revenue may be severely affected. In addition, the tenant can always moves to a new location down the road when the lease expires since there is low barrier to entry in a small town. These properties are easy to buy now and hard to sell later. In 2009 where the credit market is tight, you may have problems finding a lender to finance these properties.
Many properties have an existing loan that the buyer must assume. If you have a 1031 exchange, think twice about buying this property. You should clearly understand loan assumption requirements of the lenders before moving forward. Should you fail to assume the existing loan (assuming an existing loan is a lot more difficult than getting a new loan), you may run out of time for a 1031 exchange and may be liable to pay capital gain.
With few exceptions, drugstore chains do not own the stores they occupy for several reasons. Here are just a couple of them:
-They know the pharmacy business but don’t know real estate. Stock investors also don’t want Walgreens to become a real estate investment company.
-Owning the real estate will require them to carry lots of long term debts which is not a brilliant idea for a publicly-traded company.
About 10% of the drugstore properties for sale and typically CVS pharmacies require very small amount of equity to acquire, e.g. 10% of the purchase price. However, you are required to assume an existing fully-amortized loan with zero cash flow. That is, all of the rent paid by the tenant must be used to pay down the loan. The cap rate may be in the 7-9% range, and the interest rate on the loan could be attractive in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, you have no positive cash flow. This requires you to come up with outside cash to pay income tax on the rental profits (the difference between the rent and mortgage interest). The longer you own the property, the more outside cash you will need to pay income taxes as the mortgage interest will get less and less toward the end. So who would buy this kind of property?
-The investors who have substantial losses from other properties or stocks market. By acquiring this zero cash flow property, they may offset the income from the drugstore tenant against the losses from other properties or stocks market. For example, a property has $105,000 of rental profits a year, and the investor also has rental losses of $100,000 from other properties. As a result, the combined profits are only $5,000.
-The uninformed investors who fail to consider that they have to raise additional cash to pay income taxes.
Out of the Box Thinking
If you put too much weigh on the S&P rating of the tenants, you may end up either taking a lot of risks or passing up good opportunities.
1.Good location should be the key in your decision on which drug store to invest in. It’s often said a lousy business should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is closed down later on (yes, Walgreens closed 119 stores in 2007) is still a bad investment even though Walgreens continues paying rent on time. So you don’t want to blindly invest in a drug store simply because it has a Walgreens sign on the building.
2.No company is crazy enough to close a profitable location. It does not take a rocket scientist to understand that a financially-weak company like Rite Aid will make every effort to keep a profitable location open. On the other hand, a financially-strong Walgreens will need justifications to keep an unprofitable location open. So how do you determine if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The answer is you cannot. However, you can make an educated guess based on store’s annual gross revenue is often reported to the landlord as required by the percentage clause in the lease. With the gross revenue, you can determine the rent to income ratio. The lower the ratio, the more likely the store is profitable. For example, if the annual base rent is $250,000 while the store’s gross revenue is $5M then the rent to income ratio is 5%. As a rule of thumb, it’s hard to make a profit if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to income ratio then you know it’s likely a very profitable location. In the event Rite Aid declares bankruptcy, it will keep this location open and continue paying rent. If you see a Rite Aid drug store with 3% rent to income ratio offering 11% cap, chances are it’s a low risk investment with good returns. The weakness of corporate guaranty from Rite Aid is probably not as critical and the risk of having Rite Aid as a tenant is not really that significant.
3.Drug stores with new 25 years leases tend to sell at lower cap, e.g. 7-7.5% cap on new stores versus 8.0-8.5% cap on established locations with 8-10 years remaining on the lease. This is because investors are afraid that the tenants may not renew the leases. Unfortunately, lenders also have the same fear! As a result many lenders will not finance drug stores with 2-3 years left on the leases. The fact that drugstores with new leases have a premium on the price means they have potential of 10% depreciation (buying new at 7.3% cap and selling at 8.3% cap when the leases have 10 year left). Some investors will not consider investing in drug stores with 5-10 years left on the lease. They might simply ignore the fact that the established stores may be at irreplaceable locations with very strong sales. Tenants simply have no other choices other than renewing the lease.
Disclosure: The investment strategy and information presented in this article should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. The author intends to provide information to the general public based on our recommendations of investment strategies and is not designed to be representative of your own financial needs. Please do not make any decisions about an investment strategy without consulting with a qualified professional.
To ensure compliance with requirements imposed by IRS Circular 230, we hereby inform you that the U.S. Federal tax advice contained in this article is not intended to be used nor has this article been written to be used, and it cannot be used, by any taxpayer for the purpose: (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. No tax advice is being given by this article for any specific transaction. If you desire advice about any particular transaction, then please consult a professional tax advisor.
David V. Tran is the Chief Investment Advisor at Transmercial, a commercial real estate brokerage, commercial loan broker, and property management company in San Jose, CA. His website is www.transmercial.com. He may be contacted at (408) 288-5500. Transmercial does business in all 50 states. David publishes on his blog a daily list of 10 best properties to invest in the US.
Carl’s Jr. in Georgetown, TX: 2937 SF newly constructed single-tenant Carl’s Jr. Restaurant on 1.14 acres outparcel to a shopping center anchored by Target, Kohl’s, Best Buy, TJ maxx, Michaels, Old Navy, Petsmart, Office Depot and Pier 1 Imports. Just off I-35 in fast growing & good income Austin suburbs. 20-years absolute NNN lease by an operator with 24 locations in CA & TX. 10% rent increases every 5-years. NOI $140K/yr. $1.806M. 7.75% Cap.
Shopping Center in Georgetown, TX:15,300 SF multi-tenant shopping center built in 2006 at hard corner location along busy retail corridor in fast growing Austin suburbs. 100% NNN leased. NOI $251K/yr. $2.650M. 9.5% Cap.
O’Reilly Auto Parts in Fort Worth, TX: 8064 SF brand-new single-tenant retail building on 1.50 acres of land along active thoroughfare. Long NNN corp lease till 2025. 5% rent increases every 5-years. NOI $88K/yr. $1.182M. 7.5% Cap.
Storage/Offices in Modesto, CA: 33,850 SF storage facility and two large offices along main corridor in fast growing (14.59%) middle-class (AHI $72K/yr.) neighborhood. 81% leased. NOI $176K/yr. $2.150M. 8.20% Cap.
Medical Office in Burlington, NC: 3307 SF well-maintained single-tenant medical office located at main thoroughfare in growing Greensboro suburbs. 100% NNN leased by Urgent Care Center. NOI $91K/yr. $945K. 9.67% Cap.
Advance Auto Parts in Decatur, GA: 7000 SF retail building constructed in 1997 on over 1 acre lot in Atlanta metro. 100% NN leased by credit tenant till 2022. NOI $74K/yr. $822K. 9% Cap. Proven location for 12 yrs.
Retail Center in Phoenix, TX: 7534 SF well-maintained retail building constructed in 2005 shadow-anchored by Auto Zone. 100% NNN leased. NI $169K/yr. $1.870M. 9.08% Cap.
Retail Building in San Antonio, TX: 38,000 SF attractive single-tenant retail building constructed in 2002 in fast growing (98% since 2000) middle class (AHI $71K/yr) area. Long NNN leased by Spectrum Athletic Club. 10% rent increase in 2012. NOI $637K/yr. $7.5M. 9% Cap.
Shopping Center in Lawrenceville, GA: 14,430 SF beautiful shopping center on 1.83 acres of land along main thoroughfare in fast growing middle-class Atlanta metro. NOI $116K/yr. $1.450M. 8% Cap.
Shopping Center in Louisville, CO: 26,588 SF retail center as part of a shopping center anchored by Safeway in a affluent Denver metro with AHI over $100K/yr. 84% NNN leased by 13 tenants. Current NOI $288K/yr. $3.2M. 9% cap. Upside potential when 100% leased.
Professional Center in Cameron Park, CA: 20,000 SF two-story office building as part of 5-building office park constructed in 2007 adjacent to Marshall Hospital close to Hwy-50 in high income Sacramento metro. 95% NNN leased. NOI $331K/yr. $4.425M. 7.5% Cap.
Hooters restaurant in Council Bluffs, IA: 4880 SF restaurant built in 2008 on 1.5 ac pad to Horseshoe Casino, Mid America Convention Center & Bass Prop Shops. New 15 yrs absolute NNN lease by an experienced operator. NOI $216K/yr with 10% rent bump every 5 yrs. $2.469M. 8.75% cap.
Shopping Center in Omaha, NE:40,419 SF attractive shopping center on over 5 acres of land across from new Hy-Vee grocery anchored center at high income (AHI $111K/yr) area. 95% NNN leased. NOI $538K/yr. $6.150M. 8.75% Cap. Buyer to assume non-recourse loan at 6.19% interest rate.
Shopping Center in Omaha, NE: 23,954 SF Class-A shopping center constructed in 2004 in fast growing high income area. 96% NNN leased. NOI $323K/yr. $3.8M. 8.5% Cap. Buyer to assume loan at 5.75% interest rate.
Retail Building in San Antonio, TX: 21,930 SF two-tenant retail building anchored by Dollar General along busy corridor near Hwy 90/37/281. 100% NNN leased. NOI $267K/yr. $3M. 8.5% Cap.
Multi-tenant Retail Building in Lemoore, CA: 8184 SF shopping center shadow-anchored by Save Mart/Kmart with strong tenant mix at signalized corner location in growing town just south of Fresno. 100% leased by 4 tenants. NOI $129K/yr. $1.5M. 8.6% Cap.
Shopping Center in Rialto, CA: 34,385 SF shopping center consisting of four separate parcels anchored by Walgreen’s Pharmacy at signalized hard corner location across from Home Depot/Food 4 Less. 96% leased by strong national/credit tenants. NOI $816K/yr. $11.659M. 7% Cap. Buyer to assume loan at 5.65% interest rate.
Starbucks Coffee in Houston, TX:1750 SF single-tenant retail building constructed in 2008 outparcel to Kroger/Dollar Tree shopping center with excellent visibility along dominant traffic corridors. 100% NNN leased by credit tenant. 10% rent increases every 5-years. NOI $57K/yr. $750K. 7.7% Cap.
Self Storage in Greensboro, NC: 52,600 SF Class-A storage facility built in 2000 on 4.80 acres of land with security cameras. 89% leased. NOI $245K/yr. $3.060M. 8% Cap.
NOI: Net Oper Income—income after tax, insurance and maintenance expenses paid.
AHI: Avg. Household Income
NNN: Triple net lease in which tenants pay taxes, insurance and maintenance expenses
Fresenius Medical in El Centro, CA: 13,000 SF 1yr old single-tenant dialysis center on 1.7 acres lot in a growing city. 15 yrs NNN lease with guaranty by Fresenius Medical Holdings Company, a leading national provider of dialysis service. Tenant has spent over $2.6M in improvements. NOI $331K/yr with strong 3% annual rent bump. Price reduced from $4.7M to 44.42M. 7.5% cap.
Short-sale Apartments in Fresno, CA: 56-unit apartments in a growing and higher income area. Proforma NOI $190K/yr. $1.975M. 9.65% Proforma cap. Subject to lender’s approval as existing loan balance with Chase is $2.164M.
Best Buy in Fort Worth, TX: 45,521 SF single-tenant retail center built in 1999 on 4.2 acres lot as part of a 600,000 SF shopping center anchored by Lowe’s and Kohl’s Department store just off I-20 exit in upper middle class area (AHI $85K/yr). Surrounded by Sam' s Club, Target, Costco, Lowes, Kohl's, Petsmart, Office Depot, TJ Maxx and the Hulen regional mall which includes Macy's, Dillard's, and Sears. 100% absolute NNN lease by Best Buy Co, Inc. (NYSE: BBY) with 9+ yrs remaining. NOI $467K/yr with rent increase in 2014. $5.875M. 8% cap.
Shopping center in Lakewood, CO: 10,200 SF strip mall built in 2006 on 1.93 acres lot at a high traffic intersection in Denver metro. 100% NNN lease by 4 national/regional tenants: FedEx Office, Pizza Hut, Quizno' s and Brothers BBQ. NOI $224K/yr. $2.99M. 7.5% cap.
First National Bank in Westminster, CO: 5600 SF First national Bank on 1.32 acres outparcel to a Safeway anchored shopping center in a upper middle class (AHI $88K/yr) Denver metro. 20 yrs NNN ground lease (you own the land while tenant owns the building) with 9.5 yrs remaining. NOI $114K/yr with 15% rent bump every 5 yrs. $1.473M. 7.25% cap.
Apartments in Phoenix, AZ: 173-unit 8-building apartments on 4 acres lot just South of Phoenix Spectrum Mall. 94% occupied. NOI $671K/yr. $5.5M. 12.2% cap.
Shopping Center in Webster, TX: 30,280 SF shopping center in middle class Houston metro. 94% NNN lease. Excellent visibility. NOI $312K. $3.466M. 9% cap.
Goddard School in Tyron, GA: 8000 SF state-of-the-art childcare center built in 2007 on over 1 acre lot in fast growing and wealthy (AHI $107K/yr) Atlanta suburbs. 100% NNN leased till 2026. NOI $185K/yr. with 2% annual rent bump. $1.949M. 9.5% cap.
Applebee’s in Delano, MN: 3895 SF family restaurant on .87 acres outparcel to a shopping center in growing middle class Minneapolis suburb. Long term NNN lease. NOI $102K/yr with 2% annual rent increase. $1.21M. 8.5% cap.
Fry’s Electronics in Fountain Valley, CA: 77,028 SF single tenant retail center on 7.1 acres lot just off I-405 in high income (AHI $96K/yr) Orange county. New 10 yrs extension NNN lease. NOI $860K/yr with 7.5% rent bump every 2.5 yrs. $12.75M. 6.75% cap.
Borders Books & Music in Sacramento, CA: 27,500 SF single-tenant retail center on 2.9 acres lot in the premier shopping corridor for Sacramento's upscale retailers and restaurants. 100% NNN lease with 9 yrs remaining. NOI $357K/yr. $3.499M. 10.2% cap.
Wendys in Altoona, IA: 3159 SF fast food restaurant built in 2004 on .97 ac apd to Target and Lowes anchored shopping center in Des Moines metro. New 20 yrs absolute NNN lease. NOI $125K/yr with 10% rent bump every 5 yrs. Store with strong sales of $1.7M. $1.618M. 7.75% cap.
Shopping Center in Houston, TX: 11,407 SF multi-tenant shopping center in strong income and population area. 100% NNN leased by 5 tenants. NOI $124K/yr. $1.373M. 9.10% cap.
Shopping Center in Houston, TX: 12,560 SF multi-tenant shopping center in strong income and population area. 100% NNN leased by 7 tenants. NOI $172K/yr. $1.895M. 9.11% cap.
Shopping Center in Frisco, TX: 22,028 SF shopping center built in 1997 on 2.69 acres lot in fast growing upper middle class (AHI $107K/yr) Dallas metro. 91% NNN leased. NOI $375K/yr. $4.5M. 8.34% cap.
Sweet Tomatoes restaurant in Jacksonville, FL: 7604 SF franchised restaurant on 1.6 acres across from Regency Square Mall. 20 yrs absolute NNN lease with 9 yrs remaining. NOI $174K/yr. $1.936M. 9% cap.
Goddard Childcare Center in Murrieta, CA: 8135 SF 3-yrs old childcare center on 1.62 acres lot in a fast growing (110% since 2000) and high income (AHI $97K/yr). 100% NNN leased by a national childcare provider till 2022. NOI $158K/yr with 3% avg. annual rent bump. $1.666M. 9.5% cap.
Advance Auto in Rocky Mount, NC: 7000 SF auto parts center built in 2005 on .8 acres lot. 100% NNN lease with 9 yrs remaining. NOI $107K/yr. with rent increase in 2015. $1.4M. 7.7% cap.
NOI: Net Oper Income—income after tax, insurance and maintenance expenses paid.
AHI: Avg. Household Income
NNN: Triple net lease in which tenants pay taxes, insurance and maintenance expenses
Aartments in Los Angeles, CA: 20-unit apartments in a middle class (AHI $82K/yr) and densely-populated area with over 1M residents within 5 miles ring South of Beverly Hills. 100% occupied. NOI $125K/yr. $1.65M. 7.58% cap.
Ryan’s Grill Buffet Restaurant in Martinsburg, WV: 10,991 SF Ryan’s Grill restaurant on 1.81 acres lot in a fast growing city. Long term absolute NNN corp lease. NOI $235K/yr with annual rent bump. $2.35M. 10% cap.
Buffalo Wild Wings in Austin, TX: 6248 SF franchised restaurant on 1.23 acres lot just off I-35 in a stable city. New 15 yrs absolute NNN lease by the largest BBW franchisee. NOI $226K/yr. $2.834M. 8% cap.
Burger King in Bellflower, CA: 3600 SF restaurant with play ground on .84 acres lot in a middle class area. New 20 yrs absolute NNN lease by an operator with 21 locations. NOI $119K/yr. with 10% rent bump every 5 yrs. $1.9M. 6.25% cap.
Kindercare center in Moreno, CA: 7096 SF childcare center built in 1986 on 1.09 acres lot in a growing area. 100% NNN leased by a national childcare provider with 2 yrs remaining. Tenant has been at this location since 1987. NOI $138K/yr. $1.325M. $1.325M. 10.45% cap.
Business and Auto Care Center in Sun City, CA: 46,718 SF 3-building 31-unit retail/business and auto center built in 1999 on 4.2 acres corner lot in a fast growing city. 95% leased. NOI $642K/yr. 8.51% cap.
NOI: Net Oper Income—income after tax, insurance and maintenance expenses paid.
AHI: Avg. Household Income
NNN: Triple net lease in which tenants pay taxes, insurance and maintenance expenses
Sherwin Williams in Houston, TX: 6000 SF recently constructed single-tenant retail building adjacent to new strip center with excellent visibility to E. Beltway-8.New 10-year NNN lease by credit tenant. NOI $118K/yr. $1.688M. 7% Cap.
Schuck’s (O’Reilly) Auto Supply in Grants Pass, OR:7980 SF free-standing retail building constructed in 1998 on .68 acre lot conveniently located between Fred Meyer and Wal-Mart. Long NNN lease with rent increases. NOI $147K/yr. $1.740M. 8.45% Cap.
Shopping Center in Fort Mills, SC:29,100 SF attractive hopping center on over 7 acres of land at signalized intersection with great visibility along Hwy-21 in fast growing (81%) and upper middle class (AHI $81K/yr) Charlotte metro. Next to proposed Walmart supercenter. 8.10% Cap. Price not disclosed.
Retail Building in Kyle, TX: 7260 SF Goodyear Tire & Rubber retail building constructed in 2006 located on IH-35 in fast growing Austin suburbs. 100% NNN leased by credit tenant. NOI $172K/yr. $1.763M. 9.79% Cap.
Strip Center in Carrolton, TX:5396 SF strip center at excellent corner location with great visibility in Dallas metro. 100% NNN leased by professional/local tenants. NOI $83K/yr. $864K. 9.61% Cap.
Shopping Center in Saint Peters, MO:54,605 SF well-maintained shopping center anchored by Dollar Tree in middle-class (AHI $70K/yr) St. Louis suburbs. Close to Mid Rivers Mall and I-70. 74% leased. NOI $258K/yr. $2.850M. 9.06% Cap.
Shopping Center in Lake Oswego, OR: 19,265 SF newly remodeled shopping center next to New Seasons Market shopping center in stable upper middle class (AHI $109K/yr) Portland metro. 92% NNN leased. NOI $271K/yr. $3.390M. 8% Cap.
NOI: Net Oper Income—income after tax, insurance and maintenance expenses paid.
AHI: Avg. Household Income
NNN: Triple net lease in which tenants pay taxes, insurance and maintenance expenses
Taco Bell in Folsom, CA: 2300 SF single-tenant retail building across from Raley’s Supermarket anchored center at signalized intersection. New 15-years NNN lease by strong franchisee currently operating 36 restaurants. 10% rent increases every 5-years. NOI $87K/yr. $1.2M. 7.25% Cap.
Burger King in Tacoma, WA: 3723 SF Burger King restaurant built in 2002 with giant two store indoor play area out-parcel to K-Mart, Big-Lots and Safeway. Long NNN lease. NOI $139K/yr. $1.986M. 7% Cap.
Retail Center in Sacramento, CA: 11,810 SF retail center constructed in 2006 on 1.32 acres of parcel shadow-anchored by 24 Hours Fitness, Kohl’s and Walgreen’s along main retail corridor. 93% leased. NOI $342K/yr. $4.280M. 8% Cap. Buyer to assume $3,073,225 loan at 6.27% interest rate.
Office Building in Tempe, AZ: 24,195 SF Class-B multi-tenant office complex at hard corner location with excellent visibility. 100% leased. NOI $348K/yr. $3.664M. 9.5% Cap.
Shopping Center in Omaha, NE: 64,373 SF attractive shopping center on 7.20 acres of land across from new Hy-Vee Grocery anchored-center in fast (110.87%) growing well-off (AHI $111K/yr within 3-mile radius) neighborhood. 95% NNN leased. NOI $871K/yr. $9.950M. 8.75% Cap.
Retail Center in Las Vegas, NV: 6000 SF recently constructed multi-tenant retail center on .96 acre lot with strong tenant mix. 100% NNN leased. NOI $109K/yr. $1.099M. 10% Cap.
Shopping Center in Desert Hot Springs, CA: 17,200 SF shopping center at high traffic signalized intersection in growing Los Angeles suburbs. 100% leased. $2.1M. 9% Cap.
Retail Building in San Jose, CA: 5000 SF well-maintained retail building next to Citibank along busy corridor. 100% leased by 3-tenants: Vietnamese Dry Cleaners, Coffee Shop, and Hair Salon. NOI $50K/yr. $1.250M. 4% Cap.
Shopping Center in Gurnee, IL: 19,864 SF eye-catching shopping center conveniently located across Six Flags, Great America theme park. 100% leased. NOI $313K/yr. $2.890M. 10.85% Cap.
I am the Chief Investment Advisor at Transmercial, formerly
eFunding, Inc., a Commercial Real Estate Investments company in San Jose, CA. I am in the top 5 commercial real estate expert author among over 500 on ezinearticles.com.
