Wednesday, September 15, 2010

CVS Corporate Bond vs. CVS Net Lease

Where to invest is a question on many people’s minds today. Many are seeking to mitigate risk and avoid the costly mistakes of the past while still owning a lucrative investment. As such, a growing debate has emerged about where best to place capital. Although some would dismiss real estate as too costly; closer inspection reveals a well of opportunity.

Let’s say you were looking to invest in either CVS bonds or real estate earlier this year (CVS rated BBB+ by Moody’s). A 10yr issuance that was done in March of 2009 has maturity date of 2019. It pays a coupon of 6.6% and is priced at $111.45; you would receive a yield to maturity of 5.04%, and an annual yield of 5.92%.

Now let’s look at an opportunity to purchase a brick and mortar store that CVS would lease from you. The lease runs through 2034, and property is for sale at $3.5Mil. Furthermore, there are .50/Sqft increases in rent every five years.

We’ll set the period of observation to 10 years and assume no increase in value (you can see the specifics here). Said differently, we’ll sell the property for what we paid for it, and the bond will just be redeemed for its face value. Also, to keep the playing field level we aren’t going to use any leverage, just cash.

In this example, the property would receive a 78% higher return over the bond. It achieves both a greater yield and cash flow for the same amount of money invested. Some of this is due to the tax benefits of depreciation expense, but even in a world without taxes the property still outperforms the bond. The risk profiles of the two investments are also virtually identical in that CVS is the guarantor of both streams of income. All things being equal if one had to make a mutually exclusive investment decision between the two choices the answer is obvious.


  1. This is an interesting analysis, and I wonder how this would compare to a tax free municipal or state bond. I think favorably, but I don't know their yield.

  2. Very interesting article since NNN properties share many features with bonds.

    One important difference between these two investments is the length of the investment. That is you're looking at a 24 year lease vs. a 10 year bond.

    Do corps do longer term bonds? If so wouldn't a 24 year bond be a better apples to apples comparison, and wouldn't a longer term lease get higher returns (without the risk of the property losing value if the tennant flees).

    Also, there is a serious risk to your capital if CAP rates are higher and you have to sell the property after 10 years (with 14 years left on the lease). There is also a potential reward if CAP rates go down. In the case of the bond, you will get your invested capital back contractually.

    One difficulty that I have with NNN properties is determining a viable exit strategy with confidence. Are there any analyses which do this well?

  3. You did not include commission costs in sale of NNN and you also need to NPV the difference in cash flows!!! Not a correct analysis, sorry.