However, many CVS stores are built by contractors hired by the company, according to the Boulder Group research director Jeff Rothbart, then sold to institutional investors who finance them with zero-cash flow loans.
Meanwhile, Eckerd stores already make up 42% of the available net-lease drug stores on the market, according to the Boulder Group, compared to 36% for Walgreen. Investors are willing to pay a premium for the Walgreen locations, though, with capitalization rates averaging 7%, a full point below Eckerd's.
"This trend is partially due to the fact that Eckerd is not a credit rated tenant by Standard & Poors," says Rothbart in his Net Lease Drug Store Market Report. "While Eckerd was owned by JCPenney, JCPenney did not guarantee any Eckerd leases. Therefore, investors tended to shy away from purchasing those properties."
That will change, Rothbart predicts. He notes CVS stores have sold at a mean capitalization rate of 7%, and expects Eckerd stores to trade closer to that figure.
The average Walgreen's sells for nearly $4.6 million, compared to $4.1 million for an Eckerd store and $2.8 million for a CVS location. Earnings at the average Walgreen's run $8.3 million a year, according to the Boulder Group's research, compared to less than $5 million for Eckerd and $6.4 million at CVS.
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