Delaware Statutory Trust: Cove Pharmacy Net Lease 65 DST

Recently, Cove Capital Investment's Managing Member and Co-Founder Dwight Kay sat down to discuss one of Cove's popular Delaware Statutory Trust offerings, the Cove Pharmacy Net Lease 65 DST in Encinitas, California.

Here are some highlights and time stamps from the recording:


00:05 : - Introducing Cove Pharmacy Net Lease 65 Delaware Statutory Trust in Encinitas, CA Back to Top

All right. Thank you everybody for joining us today. This is Dwight Kay with Cove Capital Investments. I am a managing member at Cove Capital Investments, and today we're going to be going over one of our current Delaware statutory trust offerings, the Cove Pharmacy Net Lease 65 DST in Encinitas, California. So it's down in San Diego, California. And today's offering is a Regulation D Rule 506(c) offering. And let's jump right in. So again, the Cove Pharmacy Net lease 65 DST, it's available for 1031 exchange as well as direct cash investment. It's an all-cash free DST, very different from many of the DSTs in the marketplace that have leverage on them, which leverage, as we've discussed many times before, can be potentially a good thing in terms of enhancing potential returns, cash flow appreciation. However, it could also be a bad thing if things don't work out as planned and a lender could foreclose on the building and wiping out the equity for DST investors.

01:07 : - A description of Walgreens, the tenant of Cove Pharmacy Net Lease 65 Delaware Statutory Trust. Back to Top

So this offering that we're going over today is an all-cash debt-free DST that has no risk of lender foreclosure for our investors. So this is a Walgreens long-term net lease. It's a 15 year lease with Walgreens as the tenant, and it's an absolute triple net lease. So the tenant, Walgreens is responsible for the maintenance, the taxes, and the insurance on the property, not the landlord or the DST investors. Okay. So 15 year net lease and it has a 721 exchange exit potential, a tax deferred exchange into the operating partnership of a real estate investment trust. So that's the potential for the exit strategy. So let's jump in.

First we'll start with risks and disclosures. Bear with me. All DSD properties shown our regulation D Rule 506(c) offerings. All offerings are subject to availability. There can be a no any DST properties and offerings shown will be available for purchase. DST 1031 properties are only available to accredited investors, generally described as having a net worth of over a million dollars exclusive of primary residents and are possessing an annual income of over $200,000 or $300,000 with a spouse and expecting the same or greater for the current year. As well as accredited entities which are generally described as an entity owned entirely by accredited investors and/or owning investments in excess of $5 million. Please check with a qualified CPA attorney to determine if you are a credit investor prior to considering an investment or a 1031 exchange.

This material is not to be considered tax or legal advice. Please speak with your own CPA of attorney for all tax and legal advice prior to considering an investment. Internal Revenue code Section 1031, Section 1033 and Section 721 are complex tax codes. Therefore, we encourage you to consult your tax or legal professional for details regarding your particular situation. All real estate and DST properties contain risk. Please read the private police of memorandum prior to considering an investment. Please do not invest in real estate or DST properties if you cannot afford to lose your entire principal amount invested. Potential cash flows, potential returns and potential appreciation are never guaranteed and could be lower than anticipated and or could be negative. This material contains information that has been obtained from sources believed to be reliable. However, Cove Capital Investments the next capital and their representatives do not guarantee the accuracy and validity of the information herein.

Investors should perform their own investigations before considering any investment. Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee returns and does not protect against loss. Securities is offered through FNEX Capital, LLC member FINRA, SIPC. All right. So today's topic is the Cove Walgreens in Encinitas, California. Delaware statutory trust offering, again available for 1031 exchange investors as well as direct cash investors considering wanting to diversify outside of the stock market or looking for a way to participate in a real estate offering without having to get involved with management. Again, this property, it has a new 15 year absolute net lease. We liked it for that reason. It was a direct sale lease back with Walgreens. It's an all-cash debt-free DSC offering, so there's no risk of lender foreclosure, which in our experience we've participated as the founders of Cove Capital Investments.

My partner and I, Chay Layman, we've participated in over, I think it's 30 billion of DST offerings through our sister company over the years. And in our experience, the debt-free nature of this offering and the offerings that Cove Capital puts out as a DST sponsor company. If you can participate in a DST that is debt-free, we do encourage it for those investors that don't need to take on that equal or greater debt because it just drastically reduces your risk potential not having the risk of a lender foreclosure.

05:25 : Walgreens as the tenant has shown significant commitment to the location. Back to Top

Bullet 0.3 here is a recent lease extension showing the strong tenant commitment to the location. So Walgreens has been at this location for a number of years and we purchased the property from them and with that purchase, they extended their lease for an additional 15 years. So we like that tenant commitment to the location. It's got a corporate guarantee from Walgreens, which Walgreens, we've participated in Walgreens offerings and we own a number of Walgreens pharmacies throughout the country.

Obviously, past performance doesn't guarantee future results, but being that they're an S&P rated BBB investment grade credit tenant as well as that, they're an essential business, an essential retailer. We've seen them perform time and time again for ourselves as investors as well as our clients involved in these DST 1031 properties. As the underlying tenant in DSTs, we've seen them perform through the great financial crisis, through the COVID-19 pandemic. Being an essential business, they remained open and paying rent, which a lot of companies weren't able to do. That has an investment grade tenant. So we're very comfortable with that Walgreens corporate lease guarantee. And then on top of that, like we talked about earlier, being debt-free is very important.

06:22 : - The lease on Cove Pharmacy Net Lease 65 Delaware Statutory Trust is a triple net lease. Back to Top

So zero landlord obligations, again, it's an absolute triple net lease. So all the maintenance, taxes and insurance and responsibility of our tenant. Walgreens, about 11,370 square foot built retail pharmacy and it's located in beautiful Encinitas, California. So we're going to dig into Encinitas shortly, but many of you in California or visiting California know it's a very, very special place and we consider this a trophy asset for our portfolio. Due to that intrinsic value of the dirt and where it's located in San Diego County near the beach near the Pacific Ocean, there's just not a lot of real estate like this in the country. So many Walgreens that you see available on other DSTs or maybe in just buying a Walgreens on your own, you'll see that they're in very obscure secondary and tertiary markets that have not a lot of population, not a lot of population growth projected, not a lot of businesses.

07:34 : - Why the location of Cove Pharmacy Net Lease 65 Delaware Statutory Trust is so important for this investment. Back to Top

So there's still a staple of that community. And Walgreens oftentimes will sign a long-term net lease in a market that is not as robust as Encinitas or San Diego, California. And it doesn't mean those are bad. But for us, we really want to go back to the pillars of real estate, location, location, location. Because we're investors at Cove Capital, and I'll get into our portfolio and background shortly. But as a long-term investor, we really digging into the location, that's why we like this asset. That's why we bought it on top of being an investment grade rated tenant as well as the 15 year release extension by Walgreen. So location, location, location. Located in Encinitas, California, we're doing a cost segregation study for enhanced tax efficiency and write off potential for investors that are interested in that.

Myself personally as an investor, I am interested in that for my portfolio. So that could be something that investors can take advantage of you. We do encourage you to talk to your CPA, an attorney prior to considering an investment about your 1031 exchange or about the cost segregation study and how that may potentially or may not benefit you personally. Again, it's a top performing location with strong reported store sales. That's very important to us. It's located in a major retail trade area. And national tenants in the surrounding area includes Sprouts, farmer's market, Kohl's, Pete's Coffee, LA Fitness, and several others. So here's some of the photos of the building. Again, Cove Pharmacy Net Lease 65 DST located at 1320 Encinitas Boulevard in Encinitas, California. And it's a absolute triple net lease with Walgreens, 15 year lease, 11,000 square feet and very importantly, zero debt. It's an all-cash debt-free DST with no risk of a lender foreclosure.

09:25 : - This offering is a debt-free Delaware Statutory Trust, and why is that important? Back to Top

Couple of the highlights here, again, investment grade tenant, very important. When looking at a property to purchase, you want to look at what is the potential surety of that income stream under the leases. So if you had a small mom and pop pharmacy as compared to Walgreens with an investment grade credit tenant, investment grade rating from Standard & Poor's, you'd see a higher risk of that small mom-and-pop pharmacy, maybe with one pharmacist that signs the lease. That would be a higher risk profile than this property where the tenant, Walgreens Boots Alliance, they're publicly traded on the NASDAQ. They have over 13,000 locations worldwide, over 11 countries, and they're an investment grade rated tenant. So we really like that about our tenant here.

It's a debt-free unleveraged transaction, so it's an all-cash debt-free DST. You've got potential benefits being a debt-free DST, no risk of a balloon mortgage that most commercial loans have. Typically, commercial loans have five, seven or 10 year terms. And after that, that's a hard maturity. You either have to refinance or sell the asset or the lender will foreclose on you. So balloon maturities, hey, it's no big deal when interest rates are in your favor, when financing is easy to come by and you can take advantage of refinancing into a lower rate environment. But what if you're in a credit crunch? What if it's 2008, 2009? What if it's March, 2020 and lenders due to the coronavirus are not lending anymore? What if interest rates are 2, 3, 400 basis points higher when that balloon maturity comes to fruition than they were when you bought the property?

So that balloon maturity is something that a lot of investors are wanting to remove themselves of that risk because who knows what's going to happen in 5, 7, 10 years. So being that we're debt-free, we have no balloon maturity, I think the autistic, is that there's about four and a half trillion dollars of commercial real estate debt coming due over the next two to three years. So with rates rising with the economy being what it is, people are pretty concerned about that. Well, not our investors because our portfolio at Cove Capital, the majority of our offerings are debt-free. I think it's about 99% or right around there of our offerings. 600, 700 million of properties that we've purchased around the country, they're debt-free. So we don't have that balloon mortgage maturity risk. We don't have any lender prepayment penalties.

One of the things with commercial real estate when you put debt on it is when you go to sell that property, the lender, whether it be a bank or a life company, you're looking at a prepayment penalty. And if it's CMBS, you're looking at defeasance. You've got to defease that loan, which can be very expensive. At Cove Capital, we've taken a number of offerings full cycle, meaning our clients say 1031 exchange in or purchased a cash investment in the DST. We owned and operated that. We collected rent from the tenants, distributed that out to the investors, and after a number of years we were able to take that asset and sell it to another third party buyer. So we call that full cycle where investors have a liquidity event, the property gets sold, and our investors are able to do a 1031 exchange and more DSTs, which many of them end up doing with us. They can 1031 exchange into another property that they would own and manage on their own or they could do a cash-out where they pay any taxes that they may own on that sale.

So in that full cycle, we've been able to take a number of properties full cycle where the market was on our side, where we got very aggressive bids by buyers in the market and we were able to provide that liquidity event full cycle to our investors at healthy returns. Obviously, past performances never guarantee a future results, but when you have a loan on a property, you might be in the money on the property, but then you go and calculate your lender prepayment penalties or the cost that defeats the loan and it arose your returns and it makes it not viable to go ahead and sell the assets. So people really like that with the debt-free strategy is that there's no lender prepayment penalties and there's no go dark clauses, which allow a lender to sweep cash flow and no risk of a lender foreclosure.

So the go dark clauses is, for example, if you have a loan on a property, I've seen this on other net lease offerings with another sponsor's DST, whereby the tenant, they were downgraded by the rating agencies. So they were investment grade, the tenant was downgraded, and in the loan docs, the lender had a provision that if the tenant drops below investment grade and Poor's, the lender has a right to sweep all the cash flow and as additional collateral under the loan. So even though the tenant was timely on their rent, was paying their rent every month, the DST investors stopped getting cash flow because the lender had a go dark provision and swept the cash flow.

So that's a risk and that's something that we're trying to solve for our investors and really protect our investors. If Walgreens were to drop below investment grade, I don't think they're going to, but if they were, we would still be able to distribute cash flow, pay rent on this Encinitas Walgreens because we have no lender, we have no go dark clauses or cash flow sweeping clauses due to investment grade tenant ratings fluctuating. So we really like that about the property and again, no risk of lender foreclosure.

And then lastly here, strong tenant commitment to the location, the Cove Pharmacy Net Lease 65 DST, 11,000 square feet essential retail. It's a new corporately backed 15 year absolute triple net lease and it has 5% increases every five years. So we like that as a potential hedge on inflation to grow our net operating income, our NOI, our income stream on the property. Very rare. Many Walgreens in the country are flat leases where there's no rental increases built into the lease. So doesn't mean that's bad. We own a number of pharmacies, Walgreens, and CVS with flat leases. In this case, we were able to put together a situation where it does have those rent bumps every five years.

Next it's an essential business. So it's one of the nation's largest health related firms. At Walgreens is considered an essential business that remained open and paying rent throughout the entire COVID-19 pandemic. Many, many household names, Fortune 500 companies that weren't essential businesses, they asked for rent relief from the landlords during COVID-19 because they couldn't operate their business. So many large companies didn't pay their rent throughout the COVID-19 pandemic, we owned many Walgreens in our portfolio. Every single one of them, the rent check arrived from Walgreens all through the pandemic. Again, past performance doesn't guarantee the future. And there could be another pandemic where they couldn't pay their rent. However, we liked that about them being an essential business.

16:43 : - A closer look at Encinitas as an investment market Back to Top

Top performing location. We talked about that already. It's in a dense commercial thoroughfare in this prime coastal region of San Diego County, some very nice neighboring retailers and shopping centers. And then it's a world southern California location. So Encinitas is a beach city in the North county area of San Diego County. It's located within Southern California, about 25 miles north of San Diego, and it's between Solana Beach and Carlsbad, and that's about 95 miles, an hour and a half or so south of Los Angeles. So as of the 2010 census, the city Encinitas had about 60,000 people and we just the property for a number of reasons.

So here's an aerial here. We've got our property, the Walgreens, as you see highlighted and read there, major thoroughfare there. You've got 25,000 average daily traffic count along Encinitas Boulevard. You've got all the national retailers. Again, these national retailers, these nearby tenants. They're not a part of this offering. All we own is that one specific property, the Walgreens there in Encinitas. So that's what you're looking at.

And we like the dense infill nature of this property. Very affluent communities all around here. You've got the Pacific Ocean, just a short couple of minute drive away and all these national retailers. So location, location, location. Here's a couple of different properties. And again, Walgreens has been at this location for many, many years. I don't know the exact or I don't remember the exact number of years, but they like the location so much that they just signed a brand new 15 year lease. So we like that commitment that they're showing for the location.

Again, 13,000 different retail stores throughout the world. You've got over 8,000 drug stores in the United States. Walgreens has over 31,000 pharmacists, 325,000 team members, and they are an investment grade company that's been around for 170 years, publicly traded on the NASDAQ. So we feel very comfortable with our tenant and their ability to honor the commitments of their lease. Again, no guarantees. Walgreens could go bankrupt, rent payments could stop. But what does that look like? Well, that means that we have an empty building in a very, very, what we call highly desirable location. And we don't have a loan, so we don't have monthly debt service that would still have to be paid, and that's the risk of buying into a DST offering that has a mortgage on it. If the tenant stops paying rent, the mortgage is still owed. Okay. And that's where you have the risk of a foreclosure where being debt-free, we don't have that risk. We don't think anything's going to happen to Walgreens, but the world's a crazy place it could. So we want to make that risk by being debt-free.

Again, Encinitas, you've got right there on the Pacific Ocean, about six miles along the Pacific Ocean in North County, San Diego. Really beautiful place. I highly recommend it for anybody that hasn't been there. I was just down there recently. And it's in San Diego County, which why San Diego County? Well, it's the second-largest county in California. Lots of economic demand, generators and drivers there. Really special.

That's the offering. If you're interested in the offering, reach out to us. Visit our website,, and we will get you a copy of the private place or memorandum, which will dig into the business plan that we have for the asset as well as the risk factors. And we encourage everybody to read the business plan, read the risk factors, read the PPM, ask us questions. We're more than happy to walk you through them.

So a little bit about Cove Capital. Again, we're very different and that's because we're debt-free. We believe this is a contrarian approach to most real estate investments. Most real estate companies, they don't even know what that means being debt-free because nobody does it. It's very, very rare that people or companies provide debt-free investments. And we think that this is highly prudent considering the recent pandemic, COVID-19, conditions of the US economy and current state of the geopolitical global affairs. So we're very risk averse and real estate is risky. There's no guarantees for rent and there's no guarantees that the property will go up in value. In fact, properties can go down in value, you can lose money in real estate. So that's why we want to be very, very prudent and be debt-free on this offering and many of our other offerings.

There's a quick overview of our portfolio, Cove Capital. These numbers are dated. These numbers have gone up since this slide was put out, but 1.9 million square feet of real estate sponsored and under management at Cove Capital. All over the country in many different states, we've got over 452 million in DST offerings that we've sponsored. I think that number's closer to six or 700 million now and 81 properties in the Cove portfolio nationwide. So we've got a full team of acquisitions professionals, asset management professionals, property management team, a full accounting team. We have our CFO, we have our operations team as well as at Cove, we have two in-house councils as well as paralegals to help us with this entire portfolio.

So we own a lot of properties all over the country, many thousands of investors. We're sending out rent checks to our investors every month, typically through ACH, but we can send physical cheques if the investor prefers it. And we're helping investors complete 1031 exchanges, 1033 exchanges, as well as cash investments into our various DSTs as well as we have real estate funds.

Here's some of the tenants that we have. This list is growing. We own a number of FedEx, FedEx Freights, FedEx grounds throughout the country. Chipotle, Frito-Lay distribution facilities, CSL Plasma, CVS, Walgreens, DaVita, Fresenius, Family Dollar, Bojangles, Dollar General, AutoZone, Tractor Supply Company, Advanced Auto Parts, We just bought a Dutch Brothers. So we owned a number of different corporate tenants and basically we are the landlord to some of the largest companies in the world. Some of these companies are the largest companies in the world. We own the buildings, our investors, if they invest with us, we're also personally invested. My partner and I, the co-founders of Cove in pretty much every single one of the offerings that we've done, and I think we're on offering 75 now, is what we've done in terms of offering numbers. So these tenants, we are the landlord. Okay. Starbucks pays us rent every month. FedEx pays us rent every month. Chipotle pays us rent every month, and then we pass that through to our investors based on their investment amount in the offering.

24:04 :- A deeper look at the benefits of debt-free Delaware Statutory Trust investments. Back to Top

So why debt-free real estate investments? We've gone over some of these, but I'm going to still jump in here. So no refinancing risks. That's number one. Number two, flexibility to hold through any potential market downturns, credit crunches, recessions and or depressions. We're firm believers in real estate and it's potential value. The problem is if you have to sell at the wrong time or if you get foreclosed on, that's definitely the wrong time. Anytime that you get foreclosed on is the wrong time. So being debt-free, you don't have that risk.

No cross collateralized loan risk found in certain leverage real estate investments. So DSTs out there that are portfolios of properties in one DST and they can be potentially good. But the one caveat is that they're cross collateral. You've got one loan that's attached to every single one of the 3, 4, 5, 10, 15, et cetera properties in that DST. So you have cross collateralized loan risk. So maybe 10 of the 12 properties do incredibly well, but then two of them, and they might be big part of the underlying net operating income from the portfolio, something happens there, whether it be a tenant bankruptcy or the tenant's credit rating with below investment grade or whatever it is. And because it's all cross collateralized, it affects the entire portfolio.

So if you're debt-free, you don't have that risk, you don't have any cash flow sweep risk is found in most DSTs with debt. Oftentimes all-cash debt-free real estate and DST investments can have a higher projected cash flow than leverage DST investments. And that's due to there being no monthly debt service that needs to be paid to a lender. And that's especially true in today's higher rate interest rate environment. As rates have gone up, you don't have that positive arbitrage that people used to enjoy where they would buy at a 5% cap rate and finance at a three and a half percent loan and basically have that positive arbitrage.

Now it's you might buy it a five or six cap rate, but then you're borrowing at a six and a half or seven interest rate. So it's upside down. So number five is especially key in today's market. Number six, it allows investors to protect themselves from a financial catastrophe of a complete loss of their principle due to a lender foreclosure. So again, if the rent stops being paid, the debt service loan payments to the lender, they don't stop. They need to keep coming. So there have been situations where investors bought into DSTs. I heard of one years ago, I think it was a portfolio of steakhouses, triple net lease steakhouses, big national brand, and the tenant went bankrupt and there was eight or nine of these things in this one DST and the DST itself, the structure's not bad, but they had a loan on the property. When the tenant filed bankruptcy, the lender foreclosed on all the properties and the investors were wiped out.

So for investors that don't want to have the risk of a lender foreclosure and losing their principle to that lender, being debt-free makes a lot of sense for that type of investor. And again, financing your debt, it's not necessarily bad, but investors have to understand the risk prior to participating in that type of investment. So at Cove, we really like the debt-free strategy to protect our investors from that financial catastrophe of a complete loss of their principle due to a lender foreclosure. Why? Because we have no lender on this offering and on our other debt-free offerings. There's no lender, so they can't foreclose on us. We're debt-free. Number seven, no balloon mortgage maturity, which I talked about earlier, and no lender prepayment penalties, defeasance costs and/or yield maintenance. Again, it's important to remember past performances, not guarantee future results.

Thanks everybody for joining us. If you want to see more information on our Encinitas Walgreens DST, please do reach out to us. If you're an accredit investor and you qualify for the investment, we will send you the private place memorandum where you can read again the business plan and the risk factors of the investment. Also, we have a number of other debt-free DST offerings that are Reg D 506(c) offerings available at Cove Capital with other tenants besides this, which we'll get into on another date. But appreciate everybody joining us and visit our website, Feel free to sign up to register. We will provide you with more information on our other offerings at Cove Capital or give us a call 877-899-1315. So again, thanks so much everybody. We really appreciate your time and have a great rest of your day.