Spotlight on CVS
CVS/pharmacy, or simply CVS, is the nation’s second largest pharmacy chain with over 8,000 retail pharmacy stores around the country. The company is the nation’s largest provider of integrated pharmacy health care, serving more than 75 million plan members. It is the retail pharmacy division of its parent corporation CVS Health (NYSE:CVS) which ranks 10th on the 2015 Fortune 500 list.
CVS generates over 68% of its revenue from the pharmacy business. For the fiscal year ending December 2015, net revenues totaled over $153 billion, a 9.9% increase from fiscal 2014. In 2014, CVS became the first national drugstore chain to stop selling cigarettes; a move that was projected to cost the company $1.5 billion in annual revenue but was squarely aimed at positioning the company to become an integrated healthcare provider. Still CVS has been driving growth in its stores particularly in core businesses like health and beauty and after exiting tobacco, with the average basket size having increased 2%. In higher margin core categories, such as health and beauty, it is up to 4%.
CVS continues to expand its retail presence, opening 161 new pharmacy stores and relocating 58 stores in 2015. They have also acquired 1,672 pharmacy locations within Target stores in
a $1.9 billion acquisition. They will operate as a “store-within-a-store” format and be rebranded as CVS/pharmacy.
Preferring to operate out of freestanding locations, CVS seeks sites of 1.5 to 2 acres at signalized intersections with high traffic counts and the ability to accommodate parking for 75 to 85 cars. The free-standing building prototype offers a building size of 12,000+ square feet and includes a pharmacy drive-thru.
The parent corporation of CVS/pharmacy is rated BBB+ by Standard & Poor’s, which is investment grade and the highest rated drugstore tenant in the marketplace. Leases with CVS are corporately guaranteed and offer long term lease structures generally with 20-year primary terms and a series of options with rent increases.
Given the tenant’s credit rating and continued market growth, investor demand remains strong for CVS leased properties. Average sale cap rates have declined by about 30 basis points from this same period last year with new construction pricing in the low 5 cap range. A CVS leased property is an easily financed investment which serves investors well when identifying it as a 1031 exchange replacement property.