CVS Credit Upgrade Points to Net Lease Pharmacy Success
Moody’s recently upgraded CVS’s credit rating to Baa1 (from Baa2). CVS is now rated equally to Walgreens by Moody’s and is slightly higher by S&P – BBB+ to BBB. Though CVS and Walgreens are clearly the shining tenants of the pharmacy sector, Rite Aid was also upgraded to B3 by Moody’s. All of this points to vibrant health of the net lease pharmacy sector.
On the whole for 2013, net lease pharmacies have averaged a considerably lower cap rate compared to the overall net lease retail market – 6.75% to 7.05%. This is not surprising as Walgreens and CVS are two of the most coveted net lease assets. Investors are attracted both by the investment grade credit ratings featured by these tenants and their historic stability.
Pharmacies represent one of the more secure net lease retail sectors to invest in. The aging baby boomer population necessitates increasing amounts of prescription drugs and the need for close physical proximity to the stores that dispense them. For this reason, pharmacies can rely on somewhat inelastic demand for their core products. Unlike other net lease sectors such as big boxes or banks – which are being affected by online vendors - there doesn’t appear to be any need for bold reductions in pharmacy store site numbers.
Part of the value in net lease investments is their long term viability. Long leases, stable credit and prime locations create an asset which will produce income for many years and likely avoid the worst impacts of any future real estate bubbles. It is therefore very important to net lease investors that their asset perform well into the future – many net lease investments are procured for long term familial financial security. Pharmacies fulfill these requirements further than most other sectors. Looking forward, the demand for net lease pharmacies is set to increase.
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