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CAP RATE REPORT Q3 2016

CAP RATE REPORT Q3 2016RESEARCH

R E S E A RCH@CA L KA I N . COM CA L KA I N . COM2

Q3 2016 OVERVIEW

SECTORSQ2 2016 Q3 2016 AVG

CAP RATE (BPS)

LEASE YEARS (REM)

AVG CAP LOW HIGH

AVG LEASE YEARS

SAMPLE SIZE

AVG CAP LOW HIGH

AVG LEASE YEARS

SAMPLE SIZE

Automotive 6.17% 4.25% 8.37% 12.3 25 6.49% 4.00% 8.80% 10.7 25 32.1 (1.6)

Bank 5.35% 4.00% 8.00% 11.0 20 5.53% 3.94% 8.09% 7.9 16 17.6 (3.1)

Big-Box 6.08% 4.73% 7.40% 13.2 8 6.24% 4.13% 7.40% 9.7 8 16.5 (3.5)

Casual Dining 6.04% 3.70% 9.40% 14.0 43 5.97% 4.50% 8.70% 12.9 27 -6.5 (1.1)

C-Store 5.70% 4.25% 8.37% 12.2 11 5.11% 3.56% 7.57% 13.6 19 -59.2 1.4

Dollar Store 7.14% 5.60% 10.32% 11.5 49 7.03% 5.62% 10.00% 11.7 48 -11.5 0.2

Educational 7.40% 5.90% 9.22% 10.7 8 8.00% 5.50% 10.15% 14.0 4 59.5 3.3

Medical 6.89% 3.98% 10.00% 9.1 8 6.10% 5.75% 6.51% 13.0 3 -78.5 3.9

Pharmacy 5.80% 4.44% 9.32% 17.3 26 6.20% 4.67% 7.99% 13.9 37 39.4 (3.4)

QSR 5.81% 3.63% 10.10% 13.1 82 5.65% 3.73% 11.86% 13.2 88 -16.6 0.1

Other Retail1 7.20% 4.59% 12.00% 10.5 33 6.44% 4.02% 8.70% 11.6 34 -75.5 1.1

Average 6.32% 12 6.25% -7.5 (0.25)

Total Sample Size 313 309

1 Other retail includes retailers who don’t otherwise neatly fit into one of the above categories such as grocery stores, cellular stores, mattress stores, and fitness centers.

The third quarter of 2016 saw cap rates follow a similar pattern from the beginning of the year. There has been a gradual decrease of 7.5 bps drop from the last quarter and a 20 bps drop year-to-date. The low-interest rates and attractive cap rates have brought capital into commercial real estate, especially in net lease. Global economic and political uncertainties have attracted foreign capital into U.S. real estate, which is viewed as a safe haven.

The upcoming elections and a possible interest rate hike will be watched carefully in the commercial real estate sector. Any rapid increases in interest rates may shrink the cap rate spread. Anticipated increases in the interest rates are considered to be minor with a nominal impact.

CAP RATE REPORT Q3 2016RESEARCH

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• The C-store sector experienced cap rate compression of 59 bps that was largely due to a number of newly built 7-Eleven and Wawa sales with longer lease terms bringing the average lease years remaining to 13.6. 26% of the comps in the C-Store sector are in Florida and 21% are in California where cap rates are trading at lower returns than the rest of the nation.

• Automotive showed a slight increase of 32 bps; however, that was primarily due to older stores trading at a higher cap rate.

• Other retail includes grocery stores, cellular stores, mattress stores, and fitness centers, which dis-played a slight decrease in average cap rate. This was due in part to brand new stores opening in Florida and California.

• The average cap rate for dollar stores, bank, big-box, QSR, and casual dining remained relatively consistent this quarter with movement of less than 20 bps.

• The educational sector had a 59 bps increase in cap rate but fewer deals closed and most had less than 10 years remaining on the lease.

• The pharmacy sector average cap rate increased by 39 bps and lease years remaining dropped by 3.42.

KEY TAKEAWAYS

CAP RATE REPORT Q3 2016RESEARCH

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Average cap rates in the dollar store sector dropped by 12 bps. Family Dollar showed an increase of 20 bps, which was the result of many shorter NN lease sales. Dollar General’s average cap rate however, decreased by 40 bps since the last quarter. They make up more than twice the number of sales compared to Family Dollar and most of their stores were brand new build-to-suit deals with a 15-year absolute-triple-net lease. Dollar General has plans to open 900 stores this year and 1,000 more in 2017.

DOLLAR STORESNATIONAL AVERAGE CAP RATES BY DOLLAR STORES

6.96%

7.16%

7.30%

6.90%

Q2 2016 Q3 2016 Q2 2016 Q3 2016

CAP RATE REPORT Q3 2016RESEARCH

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The pharmacy sector as a whole showed an increase of 39 bps since the last quarter. Both CVS, which made up 44% of the pharmacy sample set, and Walgreens, which made up 41%, showed an average cap rate increase by 46 bps and 58 bps respectively. Rite Aid, on the other hand, accounted for just 13% of the total pharmacy sector decreased by 68 bps since half of the stores traded were in California, which usually trades at a lower cap rate than other areas in the country.

Overall we saw an increase in the total number of sales in the pharmacy sector. We believe this was largely attributable to institutional owners reallocating their portfolios and strategically selling some of their holdings.

PHARMACIESNATIONAL AVERAGE CAP RATES BY PHARMACIES

6.03%5.60%

6.45%7.00%

5.68% 5.62%

Q1 2016 Q2 2016 Q1 2016 Q2 2016 Q1 2016 Q2 2016 Q2 2016 Q3 2016 Q2 2016 Q3 2016 Q2 2016 Q3 2016

5.60%6.06%

7.00%

6.32%

5.62%

6.20%

CAP RATE REPORT Q3 2016RESEARCH

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TENANTSQ2 2016 Q3 2016 CHANGE IN AVG CAP RATES

(BPS)CAP RATES CAP RATES7-Eleven 4.72% 4.43% -29.0

ALDI 6.01% 4.21% -180.0

Arby's 6.52% 6.59% 7.0

Burger King 6.24% 5.98% -26.0

CVS 5.60% 6.06% 46.0

Denny's 6.06% 5.73% -33.0

Dollar General 7.30% 6.90% -40.0

Goodwill 6.77% 6.49% -28.0

Hardee's 6.00% 5.83% -17.0

Jiffy Lube 6.56% 6.37% -19.0

KFC 6.00% 6.08% 8.0

McDonald's 4.10% 4.13% 3.0

Panera Bread 5.13% 5.01% -12.0

Walgreens 5.62% 6.20% 58.0

STNL TENANT CHANGE IN AVERAGE CAP RATESQUARTER OVER QUARTER

All calculations are based upon available comps for each specific quarter with 10+ lease term remaining. The total number of sale comps for respective tenants in each quarter also varies significantly.

• ALDI cap rates decreased due to a number of newly built ground lease sales in California.

• Burger King sample set includes many long-term leases for Q3 2016 that resulted in a decrease in cap rates.

• Q3 2016 sale comps for Denny’s includes a significant number of corporate stores while Q2 2016 had more franchisee stores.

CAP RATE REPORT Q3 2016RESEARCH

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STNL CAP RATES 10 YEAR TREASURY RATES

STNL CAP RATES VS 10 YEAR TREASURY RATES

Not surprisingly, STNL cap rates continue to mirror interest rate movements. Although not significant, it is worth noting that the spread from one year ago has widened by 55 bps within the past three quarters consistently increasing the spread. The surprising result is perhaps that the interest rates have continued to decline despite being at an all-time low for what is now “years.” Between uncertainty in the upcoming elections and a wide belief that there will be no major shifts in monetary policy before the end of the year, we expect cap rates to continue along at these historic low rates.

In the absence of some external shock, it’s difficult to imagine a scenario where interest rates, and therefore cap rates, will rise precipitously in the coming quarter, or even into the first half of next year.

6.36% 6.25%

2.22%

1.56%

RESEARCH

DISCLOSURES: As part of our market research, we collect sales price, cap rate, and lease years remaining for all publicly advertised and sold STNL properties. a) We are not able to capture 100% of the off-market transactions that occur; however the nature of off-market typically limits their value as true market comps. b) Sources include public records, sales announcements, Calkain sales, and appraiser obtained sales amongst others. c) Our collection process, while thorough, is not all encompassing and there may be biases in the data as it relates to geography, tenancy, or brokers involved in the transaction. d) Public records often lag behind when transactions actually close, months in some cases. Consequently the data supplied here for any given quarter is likely to miss a material amount of transactions that actually closed in it.

CALKAIN RESEARCHVinky Marolia | Research Analyst 12930 Worldgate Drive, Suite 150 Herndon, VA 20170 (571) 449-8146 calkain.com

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