While the net lease drugstore sector has been relatively internet-resilient and deemed an essential service during the COVID-19 pandemic, Amazon’s recent launch of Amazon Pharmacy could pose a significant threat to bricks-and-mortar drugstores. For now, however, net lease investors are waiting to see how successful Amazon’s venture proves to be before reflecting it in their underwriting.
The e-commerce giant opened its online and mobile prescription medication ordering and fulfillment service in November, allowing consumers to order medication or prescription refills, which will be delivered to their doorsteps in a couple of days.
Drugstores have already been facing growing competition from non-healthcare powerhouses like Amazon and other online retailers. Amazon, for example, acquired online pharmacy PillPack in 2018 for roughly $750 million. That acquisition was a strong indicator that the e-commerce giant had it sights set high on the retail pharmacy business. Now, with Amazon’s new online store, customers can complete an entire pharmacy transaction on their desktop or mobile device through the Amazon app.
Using a secure pharmacy profile, customers can add their insurance information, manage prescriptions and choose payment options before checking out. Prime members will receive unlimited, free two-day delivery on orders from Amazon Pharmacy included with their membership.
Prime members can also access savings on medications when paying without insurance, and there are more than 50,000 participating pharmacies across the U.S. that offer discount pricing, according to Amazon’s press release.
What does this mean for net lease investors?
Amazon entering the sector will make an impact, but the timing and scope of impact is what investors are trying to prepare for, says Tyler Molleson, an Associate Director at Stan Johnson Company, which specializes in net lease investments.
“How long will it be until Amazon is fully able to provide prescriptions to all states? How will this cut into the traditional drugstore market share for tenants such as CVS Pharmacy and Walgreens?” Molleson asks. “Once more clarity on these questions is found, we will be more prepared to determine the overall impact on the sector.”
Investors who own drugstores are currently keeping a watchful eye on Amazon, but are in “no way running to fire-sale their assets,” Molleson notes.
Drugstores continue to be an essential business, and after what COVID-19 has shown this year, having essential tenants should be a cornerstone for everyone’s portfolio, he notes. “These tenants carry investment-grade credit ratings and continue to be a popular choice for 1031 exchange investors across the country.”
Where are current cap rates?
CVS and Walgreens continue to be the dominant names in the drugstore sector. CVS assets are currently trading at between a 5.5 percent and 6.0 percent cap rates, while Walgreens stores are trading a bit higher, between 5.9 and 6.4 percent, according to Molleson. (This is when comparing properties with an average term of 15 years remaining and absolute net leases that have sold in the trailing 18-months period).
“Any major effect on cap rates will only come once Amazon proves they are truly disrupting the retail prescription drug market,” Molleson says.
“If Amazon is able to take significant market share away from CVS/Walgreens, these tenants’ bottom lines would be affected, which could end up lowering their credit rating. If this domino effect happens, the cap rates for drugstore tenants would likely go up.”