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Drugstores Offer Prescription for Low-Risk Investors

When Marilyn Kane seeks out commercial properties for her clients to acquire, drugstores are high on her list. The founder of New York-based fund manager Iridium Capital, Kane works with investors who lack the capital or skills to operate income-producing properties. By pooling their financial resources, her clients can acquire low-risk real estate that requires minimal management.

Drugstores fit the bill. Usually leased to high-credit tenants on terms that can stretch from 15 to 25 years, these largely homogenous properties provide steady returns, low risk and a ready exit strategy when it comes time to sell. Leases typically are written on a triple-net basis, so the tenant manages the property and pays for maintenance, insurance and taxes.

“The new buyer will have a secure tenant whose corporation is guaranteeing the rent,” says Kane. “As a landlord seeking a tenant, these investment-grade companies are good bets.”

Safe bets, that is. Unfortunately for growth-oriented investors, the predictable value stream from a drugstore lease leaves little room to boost income over time because lease agreements nearly always dictate when, and by how much, the rent will increase.

That’s OK with Nicholas Schorsch, chairman and CEO of Jenkintown, Pa.-based American Realty Capital. The company’s non-traded real estate investment trust (REIT) recently purchased 35 CVS/pharmacy stores in two portfolio acquisitions collectively worth $100 million, according to New York-based Real Capital Analytics.

“Drugstores have morphed into more than the classic pharmacy we grew up with,” says Schorsch. “We like that the use of the building is becoming more and more of a general store.”

Pharmacy sales are an obvious customer draw, but the sector generates additional sales from convenience shopping and services, such as printing digital photos.

“You can buy pretty much anything you can buy in a grocery store, and medication and a variety of sundry items,” Schorsch says. “If you look in the beach communities and resort towns, you can even buy clothing and beach chairs in some drugstores.”

The appeal of drugstores for investors boils down to the three Qs: quality income, quality location and quality of the business model, says Schorsch. Roughly 14% of American Realty Capital’s portfolio is invested in drugstores including CVS/pharmacy stores, Walgreens and Rite-Aid stores.

With the majority of drugstores already sold to investors, the supply available for acquisitions is smaller than it was a few years ago, Brady says. That has investors vying to buy assets and bidding up prices.

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