For years, real estate has been an important component of my investment thought process. In 2002, we computed that Home Depot's value was exceeded by the value of its well-placed and hard to replace real estate. That value provided a "margin of safety" despite the challenges of competing with Lowe's and the vagaries of retailing.
The dynamics of the internet has changed that anchor value of real estate. My first real exposure to this shift was in the car retailing area. In analyzing AutoNation and Carmax, I discovered that car retailers were discovering that car purchasing was driven by online analysis. Gone were the days of driving from car lot to car lot. Instead, purchasers could simply sit at home and narrow down purchase options. When the search was concluded, a purchaser could drive to a less prominent and much less expensive lot and "kick the tires" there. A huge cost saving to auto retailing expenses. Carvana has highlighted this shift.
The Covid crisis has highlighted many of the same trends in other industries. As we have reviewed the healthcare sector, the low stock prices of pharmacy powerhouses CVS and Walgreens has been astonishing. But closer inspection reveals a retailing approach based on expensive real estate located at critical road junctions. In the past, retail discovery has been partially a drive-by convenience. However, if the new drive-by is a Google search, do these real estate locations continue to hold compelling value? If not, these companies may find it difficult to earn their cost of capital and be distorting their business plans by their long-term lease commitments.
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