Net Lease Pharmacy Report March 2018

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1 NET LEASE PHARMACY INDUSTRY OVERVIEW CVS and Walgreens are the market leaders in the U.S. drugstore industry accounting for more than half of the market share in top metropolitan areas. Over the years, drugstores have evolved into allencompassing health service providers and as a result have strategically positioned themselves to diversify their portfolios by acquiring key competitors and forging partnerships to protect themselves from growing online threat. Industry demand is driven by an aging population, health issues, and advances in medical treatment. Drugstores rely heavily on their prescription business, which has grown over the years, however same store comparables for front of store sales have decreased. Total 2017 retail sales for prescription drugs filled at pharmacies surpassed $397B* and are speculated to have been upwards of $426B. *Data based on QuintilesIMS National Prescription Audit (NPA) database. Includes new prescriptions and refills of both brand/generic. Source: Kaiser Foundation Definitions Pharmacy Benefits Managers (PBM): Third party companies that provide healthcare management and administration services to insurance companies, Medicare Part D plans, state government employee plans and corporations. e.g. CVS Caremark, Express Scripts. PBMs leverage economies of scale by negotiating drug prices with drug makers and pharmacies on behalf of larger groups of customers. Senior Senior

2 MERGERS & ACQUISITIONS IN THE INDUSTRY The industry is emerging with new acquisitions and new market players. In December 2017, CVS Health announced it agreed to buy Aetna for approximately $69 billion in cash and stock in a move to transform the pharmacy company and capture more of what consumers spend on health care. Stockholders voted March 14th, 2018 to approve the pharmacy company s acquisition of the heath insurer. The merger is expected to close in the second half of 2018, subject to required regulatory approvals. Walgreens Boots Alliance rumored acquisition of drug distributor AmerisourceBergen. Walgreens currently owns a 26% stake in the company. An acquisition would improve profit ability through purchasing power with generic and brand drug manufacturers. Talks have ended without a deal. Cigna, insurer, is nearing a deal to acquire Express Scripts, a mail order/specialty pharmacy. Albertsons entered definitive merger agreement with Rite Aid (only includes remaining 2,569 stores) and PBM business. Combined, total store count of a merger would be 4,892 stores. EMERGING MARKET ENTRY The sector is bracing itself for the speculative entry of Amazon and the impact of its joint venture partners Berkshire Hathaway and JPMorgan. Amazon has taken quiet steps in gaining approval to become a wholesale distributor in 12 states. When and how Amazon makes an entry to the pharmacy or healthcare market will determine what affects it will have on brick and mortar drugstores. Smaller operators can still competitively enter the industry to provide services to geographical gaps. FORECAST/MARKET TRENDS The US drugstore sector is becoming increasingly crowded restricting opportunities for organic store openings. Larger mergers like CVS/Aetna combines one of the biggest drugstore chains with the third largest health insurer and is disrupting to the status quo of healthcare delivery. CVS will benefit by pushing some of Aetna s 22 million customers into CVS brick and mortar stores. Pharmacies are the profit drivers producing upwards of 70% of revenue despite only occupying 10% of the floor plan. Senior Senior

3 The long-term effects of these mergers will eventually make it harder for new insurers to enter the market thus reducing competition since they won t be able to negotiate lower drug prices like larger firms. This will provide drugstores a competitive edge as more generic drugs become available, which are typically cheaper but could come with higher profit margins than brand name drugs. Long-term, large key players have been ramping up the acquisition of smaller independent pharmacy chains due to rising competition from private companies and the speculative threat of Amazon. Acquisition activity will continue to increase as drugstores explore how acquisitions can increase foot traffic to the corner drugstore. Consumer trends show that prescriptions are still predominately filled at brick and mortar locations. Despite the conveniences of mail order, most of the 4 billion prescriptions are dispensed at a retail pharmacy location (new scripts and refills). Only 1 in 10 prescriptions is filled by mail. CVS and Walgreens are stable mature companies and have long been attractive investment properties. In 2017, a private investment group acquired 49 newly developed CVS Pharmacy properties across 16 states in a single transaction. Part of their appeal is the absolute NNN properties with passive income on leases set for an initial years and options taking the lease upwards of 75 years. Average Cap Rate Trend 5.92% 5.96% Strengths + Investment Grade Tenant Corner Locations Provide Access & Visibility Credit Tenant Lease Financing Corporate Guaranty Stable Company w/ Continued Growth Weaknesses Some NN Leases Fixed Rent Over Primary Term and 1 2 Option Periods. Average Cap Rate Trend 6.10% 6.08% Investment Grade Tenant Corporate Guaranty Credit Tenant Lease Financing High Visibility Corner Locations Primarily Absolute NNN Leases Iron Clad Leases Renewable Every 25 Years Rare Rental Increases High Initial Rental Rate Annual Cancellation Option After Initial Term Senior Senior

4 CVS / PHARMACY CVS operates approximately 9,600 stores in the US with approximately 7,980 single-tenant stores and more than 1,100 Minute Clinics across 33 states. In fiscal 2017, the company opened 175 stores, closed 81 and relocated 30. Since its first store opening in 1955, the company has strategically expanded its footprint and customer reach with aggressive acquisitions. Two of its largest acquisitions were in 1997 taking over 2,500 stores from Revco and as recently as 2015 acquiring 1,600+ Target pharmacies and clinics. CVS serves over 5M customers daily, 5M patients served by Omnicare annually, 165k Corma patients receiving services annually from its speciality infusion arm, more than 94M PMB members, 68,000+ retail network pharmacies and 75 major health system affiliations. CVS diversified business model provides it with multiple revenue streams. Average retail store sales in 2017 was $8,164,000 per store, a 2.5% decrease over prior year figures, averaging sales of $791/SF. Decreased revenue is based on more customers using the drive-thru to pick up prescriptions and same store sales by more generic drugs, lowering prices of prescriptions. CVS in the past few years has focused on rebranding its beauty sections to entice consumers into stores. Total revenue growth was up 4.1% with total revenues of $18,765.0 MM. Ecommerce sales represent an insignificant share <1% of total revenue. Top three revenue generators by product category: prescription drugs 75%, general merchandise 10.8% and over the counter & personal care 10%. 107 Investment Assets Currently on Market Nationally Median Asking Cap Rate 5.96% Median Asking Price $4,424,743 $369.13/SF Cap Rates Increased 4 Basis Points in 2017 vs. Year Prior Considers 20/25 Year Lease Term with 10 Renewal Options Every 5 Years for New Locations Senior Senior

5 WALGREENS BOOTS ALLIANCE Walgreens, Retail Pharmacy USA segment, operates approximately 8,175 stores in the US with 400 walk-in health clinics in store. During Q1 2018, store counts increased by 101 stores. In 2017, Walgreens received approval to purchased 2,186 Rite Aid stores and 3 distribution centers. These properties will be transferred in phases to Walgreens with its goal to be completed by spring Total integration is anticipated in three years. Walgreens plans to close nearly 600 stores in the portfolio due to store overlap. Walgreens has a reputed history since its first store opening in Traditionally conservative, most of the company s growth has been organic up until the 2000 s. Walgreens became more aggressive in its growth strategy and continues to lead the industry by store count. Average retail store sales in 2017 was $7,563,000 per store, a 4.2% increase over prior year figures, averaging sales of $756/SF. Total revenue growth was up 2.6% with total revenues of $120,453.0 MM. Ecommerce sales represented 1.7% of total revenue. Top three revenue generators by product category: prescription drugs 67%, general merchandise 24% and non-prescription drugs 9%. An expansion of its mail services helped increase revenue through its formation of a specialty pharmacy and mail service company, AllianceRx Walgreens Prime. Pharmacy drugstore sales increased 5.6% in Q vs the previous year quarter primarily due to higher volume. Cheaper generic prices weighed on pharmacy sales, however Walgreens pharmacy sales have been offset with partnerships with pharmacy benefit managers such as Prime Therapeutics in 2016 (to compete with CVS) and Medicare Part D growth. Walgreens operations are largely dependent on its pharmacy business. 218 Investment Assets Currently on Market Nationally Median Asking Cap Rate 5.96% Median Asking Price $5,825,000 $397.43/SF Cap Rates Decreased 2 Basis Points in 2017 vs. Year Prior Walgreens Owns 14% of its Drugstores in the U.S., Remaining are Leased. Initial Lease Terms are Typically 15/25 Years for New Locations with Renewal Options at 5 Year Intervals. Senior Senior

6 Net Lease Pharmacy Report CVS ACQUISITIONS TIMELINE WALGREENS ACQUISITIONS TIMELINE Senior Senior

7 Avg CAP Rate 5.49% (12 mo avg w/ 10+ yr Lease Term) 5.84% (12 mo avg w/ 10+ yr Lease Term) Avg $ Sale $5,782,590 $6,715,482 NOI $317,464 $392,184 $/Square Ft $450 - $600 $300 - $400 Building SF 11,000-15,000 w/ drive-thru 14,500 Lot Size Acres 1.8 Lease Term 25 Years 25 Years Escalations Varies None Credit Rating S&P BBB+ S&P BBB Moody's Baa1 Moody's Baa2 MEDIAN ASKING CAP RATE AND PRICE BY REGION 5.25% CAP $8,021,039 $ PSF $406,382 NOI 6.25% CAP $4,543,770 $ PSF $305,931 NOI 5.75% CAP $6,604,167 $ PSF $389,500 NOI 5.96% CAP $5,436,000 $ PSF $307,963 NOI 6.00% CAP $4,859,909 $ PSF $303,010 NOI Data Based on Current Asking Median Figures: 107 CVS Listings and 218 Walgreens Listings. Senior Senior

8 DRUGSTORE REAL ESTATE SNAPSHOT Select Real Estate Sales Comps YTD Sale Date City State SF Sale Price* PSF Cap Rate Notes Under Contract Birmingham AL 12,900 $12,105,000 $ % Pending. NNN, 25.6 Yr Lease Term - Built 2014 Jan-18 Huntington Beach CA 13,880 $6,685,934 $ Exchange / Portfolio Sale Allocated Funds Feb-18 Tujunga CA 14,745 $10,400,000 $ % Escrow Castro Valley CA 30,343 $11,000,000 $ % NNN 25yr lease, 16.6 remaining. Ten (5 Yr) options at FMV. Corporate Guarantee, No Landlord Responsibilites. $578,217 NOI. Jan-18 Rocky Hill CT 9,649 $5,474,740 $ Jan-18 Coconut Creek FL 11,876 $5,125,000 $ Jan-18 Douglasville GA 13,013 $5,002,231 $ % 1031 Exchange Jan-18 Chicago IL 13,865 $6,948,500 $ % Broadway St / Edgewater Neighborhood Mar-18 Chicago IL 23,100 $6,586,000 $ % N Lincoln Ave / W Irving Park Rd Under Contract River Forest IL 10,880 $6,360,615 $ % Pending Under Contract Westfield IN 12,900 $8,196,190 $ % NN Lease, New Construction w/ Drive Thru & 24 Hr Service. 25 Yr Lease Gty. $430,300 Effective Gross Income. Landlord responsible for R&M of Roof, Foundation,Structure, Plumbing, Utility Lines & Parking Capex. Under Contract Coshocton OH 9,756 $2,850,000 $ % Pending Feb-18 Lawton OK 13,506 $6,493,000 $ % 1031 Exchange Jan-18 Madison TN 11,988 $2,925,000 $ % Under Contract Elgin TX 12,900 $5,372,000 $ % NNN Corporate Guarantee Lease, 22 Yrs Remaining, No Increases in Base Term. Remaining 8 Options at FMV. $273,996 NOI. Under Contract El Paso TX 11,945 $3,777,777 $ % 1031 Exchange, Ground Lease. Corporate Guarantee, Lease Exp 12/2042 Esclations 10% in Yr 11 and 9 (5 Yr) Options Under Contract Norfolk VA 12,534 $5,955,000 $ % Absolute NNN, 22 Years Remaining on Initial Term with 10 (5 Yr) Options. $297,742 Annual Rent with Corporate Guarantee. Built First 2 Extension shall be fixed rent in initial term, remaining term at FMV. AVERAGE 14,105 $6,544,529 $ % MEDIAN 12,900 $6,360,615 $ % Senior Senior

9 DRUGSTORE REAL ESTATE SNAPSHOT Select Real Estate Sales Comps YTD Sale Date City State SF Sale Price* PSF Cap Rate Notes Feb-18 Mobile AL 14,474 $5,873,015 $ % Jan-18 Glendale AZ 13,833 $4,342,000 $ % Mar-18 Glendale AZ 15,136 $3,800,000 $ % Absolute NNN, 3 Yr Remaining on 20 yr Lease. 8 (5Yr) Options Annual Rent $269,504 Under Contract Riverside CA 12,804 $9,910,000 $ % Pending Jan-18 Avon CO 15,655 $8,211,840 $ % 1031 Exchange Under Contract Fruita CO 14,490 $6,070,000 $ % 15 Years Remaining on 25 Yr Lease, Corporate Guarantee, Absolute NNN Built 2018, $355,000 NOI Jan-18 Valrico FL 15,930 $3,000,000 $ Jan-18 Jacksonville FL 13,905 $1,428,570 $ % Under Contract New Smyrna Beach FL 13,454 $3,425,000 $ % NN Lease, Reported Sales $344 psf for 7 Years Trailing, 600' to Ocean Annual Base Rent: $192,000 Lease Expiration 2/28/23 Feb-18 Homewood IL 13,905 $2,925,000 $ % Under Contract Gretna LA 14,490 $6,185,700 $ % NN Lease, 4 Yr+ Remaining on Lease, 8 (5 Yr) Options, $433,030 NOI Corporate Guarantee, Landlord Responsible for Roof & Structure Jan-18 Waldorf MD 14,490 $6,350,000 $ % 1031 Exchange Jan-18 Saint Louis MO 18,200 $3,200,000 $ % Feb-18 Omaha NE 14,820 $5,916,239 $ % Feb-18 Ewing NJ 14,680 $10,645,333 $ % Jan-18 Staten Island NY 14,490 $10,400,000 $ % 1031 Exchange / Debt Assumption Feb-18 Columbus OH 14,820 $6,905,537 $ Jan-18 Houston TX 14,820 $4,925,000 $ % Under Contract Stephenville TX 14,729 $4,416,000 $ % Absolute NNN, 12.5 Yrs Remaining with 10 (5 Yr) Option. Under Contract Rocky Mount VA 14,462 $8,616,000 $ % Absolute NNN, 18 Yrs Remaining ($9.6M in Rent Payments) Under Contract Racine WI 14,820 $5,800,000 $ % NNN Lease Guarantee through 10/ Yrs Remaining on Guarantee Term 10 (5 Yr) Options. AVERAGE 14,686 $5,825,964 $ % MEDIAN 14,490 $5,873,015 $ % * Under C ontract L is tings R eflect L is ting P rice, T rans action P ending for Actual S old P rice. Senior Senior