November Capital / July 26, 2024
Analyzing a new construction NNN lease CVS that recently sold outside of Orlando Florida.
NNN CVS Sold in Melbourne, Florida on July 22, 2024.
Address: 5447 Onate Ln, Melbourne, FL 32940
Google Maps: 5447 Onate Ln, Melbourne, FL 32940
Written by: Jeffrey Weil, President and Founder of November Capital
According to Costar, an individual investor acquired a new construction CVS in Melbourne, Florida on July 22, 2024. The investor paid $11,825,000 at a 5.40% cap rate. This asset brings passive income for the buyer for at least 20 years.
Credit:
Among net lease investors CVS is considered to be strong credit. CVS corporation is still investment grade rated by S&P at BBB. Currently Walgreens credit has fallen out of favor among investors however CVS remains somewhat in demand. The attitude towards drugstores among the real estate community is mixed. Walgreens has announced bulk store closures as of Spring 2024 while also rolling out newer small format stores called “Cooper Stores.”
Lease Structure:
This lease is a brand new 20 year lease with a flat base term. Rent commencement starts May of 2024 and expires in May of 2044. The 20 year lease presents a highly secure income stream for the buyer, but the flat rent presents challenges considering annual inflation rate is high. The investor will be stuck with a low 5% yield on this investment through 2044. Not exactly ideal. The lease is Absolute NNN which presents no landlord management responsibilities to the buyer. They pretty much won’t have to lift a finger on this asset throughout the duration of the primary term. Leak in the roof? CVS responsible. Parking lot needs repair? CVS responsible. Taxes go up? CVS responsible. Essentially – this is an armchair investment. Passive income for at least 20 years as long as CVS remains solvent. The odds that CVS pays rent through 2044 on this asset are extremely high. Ideally for this investor – CVS will exercise each of the six 5-year options at 10% increases.
CVS is paying an annual flat rent of $639,585 on 14,871 square feet of space on 1.81 acres of land. $43 PSF isn’t terrible for new construction. However according to CoStar, market rent per square foot in this market for retail is around $18. So CVS is paying over 2X market rent here. There is way more nuance to comparing new construction rents to rents in older buildings however for purposes of this analysis – I would say the rent being paid for a brand new construction CVS is appropriate at $43 per foot.
Location:
Situated just southeast of Orlando, Florida. This asset is well positioned for a long time in a flourishing state and MSA. Many Americans are moving to Florida from Democrat states. The business friendly and tax free Florida environment has led to tremendous population growth in Orlando and Florida as a whole.
The CVS is extremely well located. Big traffic counts off of interstate 95 which sees 88,000 vehicles per day pass through. The traffic off of Viera Boulevard and Lake Andrew Drive is good not great. 17,300 VPD on Viera and 17,800 VPD on Lake Andrew Drive. Again – very solid traffic counts – not the best ever, not the worst ever.
CVS is adjacent to Chick Fil A and Wawa and down the road from a Publix anchored center featuring a McDonald’s and Starbucks. The blue chip national retailers have all identified that this is a viable trade area to do business. It’s a well established trade are and the 1.8 acres of dirt will carry and hold strong value for the next 20 years. If – in a worst case scenario – CVS leaves in 2044, I would guess this is pretty easily backfilled – the rental rate at which, who knows.
One drawback is that I would much rather see this parcel at the main and main signalized hard corner. This site is a bit east off the main intersection. When buying a NNN deal – it’s important to remember you are not just buying a 20 year CVS – you are buying the dirt and building. If CVS leaves – you want the dirt to have strong intrinsic value. You want the dirt to protect you as much as the credit behind the lease.
Demographics
The 1 mile population radius of 5,744 is respectable. The 3 mile (45K) and 5 mile (81K) population is very solid. The average household income within 3 miles of the site is $118,000 which is strong. Between the traffic, population and household income numbers an investor should be comfortable with the dirt here.
Deal story:
In my mind – the deal story here is the fact that CVS is building a new construction site. New construction drug stores are a rarity nowadays. CVS must be awfully confident with this trade area. This deal makes sense for a 1031 investor or high net worth individual looking for a credit backed income stream with good residual real estate value. Given where interest rates are – a deal like this is most appropriate for someone in a 1031. A buyer is not going to obtain financing to purchase something like this. Your debt rate would be higher than your cap rate here which is about 5.25%.
Building SF: 14,871 SF
Land Area: 1.81 Acres
Year Built: 2024
Tenant: CVS
Guaranty: Corporate
Lease Type: Absolute NNN
Landlord responsibilities: None
Lease Term: 20 Years
Increase: Flat base term; 10% at options
Options: Six 5-year
Rent Commencement: May 2024
Lease Expiration: May 2044
Note: SRS brokered this deal – November Capital is simply writing an analysis on the publicly available information.
