Walgreens, Cvs, and Rite Aid - What Re Investors Should Know in 2011

Walgreens, Cvs or Rite-Aid: Which Tenant Is Best in 2011?

There are 3 major drugstore chains in the Us: Walgreens, Cvs, and Rite Aid. Below are some key statistics about the 3 major drugstore chains as of July 2010:

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1. Walgreens
2. ranks #1 with store cap of .33 Billion, .25 Billion in revenue, and S&P rating of A+. According to Walgreens, 75% Us habitancy lives within 3 miles from its stores. On Oct 1, 2009, Walgreens opened its 7000-th store in Brooklyn, New York. In April 2010, it acquired 258 Duane Reade drug stores in New York Metropolitan area.
3. Cvs
4. ranks #2 with store cap of .09 Billion, .1 Billion in income (Cvs income alone is less than Walgreens if income from its Caremark group is taken out), and S&P rating of Bbb+. Cvs opened its 7000-th store in microscopic Canada, Minnesota on October 5, 2009 and currently operates 7025 drug stores..
5. Rite Aid
6. ranks #3 with store cap of 9 Million, .53 Billion in revenue, 4780 drug stores and S&P rating of B-.

Walgreens, Cvs, and Rite Aid - What Re Investors Should Know in 2011

Investors buy properties busy by these drugstore chains for the following reasons:

1. The drugstore enterprise is very recession-insensitive. habitancy need treatment when they are sick, regardless of the state of the economy. Both rich and poor habitancy in the Us have passage to medicine. Some even argue that low-income habitancy use more treatment due to free or low-cost drugs offered by government-assisted programs. So the tenants should do well while tough time and have money to pay rent to landlords.
2. The drugstore enterprise has a good expectation in the Us:
   • People are living longer and need more treatment to preserve longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer's symptoms. Older habitancy tend to use more treatment than younger ones as they often have more curative problems. As the 78 million baby boomers are getting closer to retiring age beginning from 2008, the drugstore chains anticipate the inquire for treatment to increase in next 20 years.
   • The drug store continues to advance as the Us habitancy will continue to grow. More and more Americans suffer from various diseases. The amount of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million habitancy per Fortune magazine. They spent .4 Billion in 2009 for allergy drugs. As their waist lines balloon (75% of Americans are forecasted to be whether overweight or obese by 2020), more Americans are diagnosed with diabetes, high cholesterol at younger and younger ages. In addition, doctors also suggest treating various diseases sooner than later due to great insight about the diseases. For example, doctors now prescription antiretroviral drugs for patients soon after infected with Hiv virus instead of waiting for the infection to come to be Aids. More doctors consolidate insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors increase the size of the drug market.
   • Advance in genetic engineering has introduced various new genetic Dna testing kits which allow the genetic determination of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest increase segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug stores in the near future. Upon Fda approval, these new products will potentially bring in supplementary income for drug stores.
   • The passage of health Care Reform Bill on March 23, 2010 provides guarnatee coverage to an estimated 33 million more American. This is a major gift to the drugstore industry.
   • There are new drugs to treat previously untreatable illnesses, and new diseases, e.g. Viagra for men's unhappiness, Zoloft for depression, Avastin for colon cancer, Herceptin for breast cancer, Nicotine patches for smokers to kick the habit, Tamiflu for a possible bird flu pandemic, vaccine for swine (H1N1) flu pandemic, Tekturna/Rasilez for hypertension and various new drugs for Aids and attention Deficit Disorder (Add). The new medicines are very expensive, e.g. A year's furnish of Avastin costs about ,000. Eli Lilly has sold about .8 billion of Zyprexa in 2007 for schizophrenia and yet most habitancy have never heard of this medicine.
   • There are existing drugs now stylish to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damage in habitancy with diabetes. It is now stylish by Fda to treat Fibromyalgia which affects 5.8 million Americans per WebMd.
   • Big advances in genetics, biology and stem cells investigate are imaginable to produce a new class of drugs to treat diabetes, Parkinson's and various rare genetic disorders. For example the new drug Ilaris from Novartis targets genetic causes of an inherited disorder that there are only 7000 known cases worldwide. However, Novartis hopes to slowly broaden its drugs to a blockbuster drug to more coarse disorders caused by similar genetics.
   • Technology and modern life introduce and want new products, e.g. pregnancy test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, perceive lenses, lenses cleaners, diet pills, vitamins, birth-control pills, Iuds, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly B in 2006 on Cholesterol medications alone per Ims Health, a Connecticut-based consulting enterprise that monitors pharmaceutical sales.) There are also more surgeries: C-sections, Kidney transplants, open-heart triple by-pass, and breast augmentations. More surgeries mean more medicines are needed such as Vicodin for pain supervision and Warfarin to forestall blood clots in surgeries.
   • Before the customers can get to the treatment aisles or pharmacy counters, they have to pass by chocolates, sodas, digital cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. Drug stores hope you use the one-hour photos services and replacement your liquid propane tanks there. The stores also carry seasonal items, e.g. Halloween costumes, and "As Seen on Tv" merchandise, e.g. Shamwow. As a result, customers buy more than their prescriptions and treatment in these drugstores. Rite Aid sells more 28,000 non-pharmacy items in its stores while Walgreens has 22,000 different items on store shelves. Cvs reported that non-pharmacy sales represented 30% of the company's total sales in January of 2007. The outline for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are in succeed convenience stores especially ones that are in residential or rural areas. And so Walgreens hopes that customers also pick up Wd-44, and screw drivers at its stores instead of at Home Depot; Thai Jasmine rice, and fish sauce to avoid a trip to Safeway or Kroger Supermarkets. while the recession, sales of these non-drug items are down as customers buy what they need and not what they want. Walgreens tries to cut the amount of items by 4000. It also introduces its own secret label which has higher profit margins.
   • There are more and more generic medications on the store as a amount of enormously popular brand-name blockbusters will lose their 20-year long patents, e.g. Lipitor (best selling drug in the world to lower cholesterol) in 2010, Viagra (you know what it's for) in 2012. Drugstores prefer to sell generic drugs to customers due to higher profit margins than the brand-name medications.
   • Some habitancy are addicted to pain killers, e.g. Hydrocodone and consume a large amount of medicine, e.g. 30-day dosage in a day to get high. According to testimony from the National establish on Drug Abuse, Us sell pharmacies dispensed nearly 180 million prescriptions in 2007 for opiates, e.g. Hydrocodone. A high ration of these prescriptions are probably not used for any legitimate curative purposes.
   • This author estimates that at least 10% of the dispensed prescription drugs are not used at all and sit idle in the treatment cabinets. They are eventually expired and thrown away.
3. These associates sign very long-term, Nnn leases, guaranteed by their corporate assets. This makes the speculation in the basal asset fairly low risk, especially for Walgreens with an A+ S&P rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent abruptly and timely. This author is not aware of any properties leased by one of these drugstore chains in which the tenants failed to pay rents. Even when the stores are done due to weak sales (Walgreens done 119 stores in 2007), these associates may sublease the properties to other associates and continue to pay rents on the specialist leases.
   • A typical Walgreens lease consists of 20-25 year original term plus 8-10 five-year options. while original term and options, there will be no rent increases in most of the leases. This is the main disadvantage of investing in Walgreens drugstores.
   • A typical Cvs lease consists of 20-25 year original term plus 4-5 five-year options. The rent is regularly flat while the original term and then there is a 2.5%-10% rent increase in the in each 5-year option.
   • A typical Rite Aid lease consists of 20-25 year original term plus 4-8 five-year options. The lease often has a rent increase every 5-10 years.

Investment Risks: Although the pharmacy enterprise in normal is recession-insensitive, there are risks involved in your investment:

1. The main downside about investing in pharmacies is there is microscopic or no rent bump for a long time, e.g. 20-50 years, especially for Walgreens. So the rent is effectively reduced after inflation is factored in. This is one of the main reasons these properties do not request for retrial to younger investors.
2. The 3 drugstore chains now have a new formidable competitor, Wal-mart. Wal-mart sells prescription drugs in more than 4000 Wal-mart, Sam's Club and Neighborhood store stores in 49 states. The sell giant is known for launching in 2006 a highly-publicized generic prescription drug schedule which now sells 350 generic medications for a 30-day supply. The actual amount of medications is less as the medications with different strengths are counted as different medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart probably makes very microscopic profits on these medications if any. However, the marketing campaign--created by Bill Simon, the President and Ceo of Wal-mart Us, generates a lot of publicity for Wal-mart. Wal-mart hopes to draw customers to its stores with other prescriptions where it has higher profit margins. In an unscientific survey with just one brand-name prescription of Lyrica, this author finds the lowest price at Costco, the highest price at Walgreens and Wal-mart at the middle. Other drug chains try to counter Wal-mart in different ways. Target now offers the same 350 generic medications for for a 30-day supply. Walgreens has a prescription drugs club with membership fee which offers 1400 generic medications for as microscopic as /week. Cvs says it will match any offers from its competitors.
3. Chief enterprise Correspondent Rick Newman from Us World & News report imaginable that Rite Aid might not survive in 2009. While Rite Aid is still nearby in 2010, dire predictions continue. The study by Audit Integrity gave Rite Aid about a 10.5 percent chance of filing for bankruptcy in 2010.
4. Drugs are also sold in thousands of supermarkets, Target stores, and Costco warehouses. However, there are no drive-through windows at these stores or Walmart to comfortably drop off the prescriptions and pick up medicines. Customers will not be able to pick up their prescriptions while lunch hour or after 7Pm at Target stores or supermarkets. They need to have membership to buy medicines at Costco. Others may not fill their prescriptions at Walmart because they don't want to mingle with typical Walmart customers who are in lower income brackets. And some babyboomers don't want their prescriptions filled at Target or Walmart because there are no comfortable chairs for them to sit down to wait for their medicines.
5. Many leases in areas with hurricanes and tornados are Nnn leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.
6. The tenant may move to a new location down the road or over the street when the lease expires. This risk is high when the asset is settled in small town where there is low barricade for entry, i.e. Lots of vacant & developable land.
7. The tenant may ask for rent concession to enhance its lowest line. The possibility is higher if the tenant is Rite Aid and if the store has low sales income and/or higher than store rent.
8. More Americans are walking away from their prescriptions, especially the most costly brand-name medicines. This may have negative impact on the sales income and profits of drug stores and consequently may cause drug store closures. According to Wolters Kluwer Pharma Solution, a health-care data company, nearly 1 in 10 new prescriptions for brand-name drugs were abandoned by habitancy with industrial health plans in 2010. This is up 88% compared to 4 years ago just before the stepping back began. This trend is driven in part by higher and higher co-pays for brand name drugs as employers are shifting more guarnatee costs to their employees.

Among 3 drugstore chains, Walgreens and Cvs pharmacies in normal have the best locations-at major intersections while Rite Aid has less than excellent locations. Walgreens tends to hire only the top graduates from pharmacy schools while Rite Aid settles with lowest graduates to save costs. When possible all drugstore chains try to fill the prescriptions with generic medications which have higher profit margins

Walgreens: the enterprise was founded in 1901 by Charles Walgreen, Sr. In Chicago. While the enterprise has existed for more than 100 years, most stores are only 5-10 years old. This is the best managed enterprise among the three drugstore chains and also among the most admired social associates in the Us. The enterprise has been run by executives with proven track records and hires the top graduates from universities. Due to its superior financial strength--S&P A+ rating-- and excellent irreplaceable locations, properties with leases from Walgreens get the highest price per square foot and/or the lowest cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increase for 20 to 60 years. The cap rate is often in the low 6% to 7.5% range in 2009. Investors who buy Walgreens tend to be more mature, i.e. Closer to seclusion age. They are looking for a safe speculation where it's more leading to get the rent check than to get appreciation. They often compare the returns on their Walgreens speculation with the lower returns from Us treasury bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and thus you see many new Walgreens stores for sale. It will slow down this expansion in 2010 and focus on renovation of existing stores instead

Cvs: Cvs Corporation was founded in 1963 in Lowell, Ma by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name Cvs stands for "Consumer Value Stores". As of 2009, Cvs has about 6300 stores in the Us, mostly straight through acquisitions. In 2004, Cvs bought 1,200 Eckerd Drugstores mostly in Texas and Florida. In 2006, Cvs bought 700 Savon and Osco drugstores mostly in Southern California. And in 2008 Cvs acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for .9B dollars. The acquisition of Long Drugs appears to be a good one as it Cvs does not have any stores in Northern Ca and Arizona. Besides, the price also included real estate. It is also bought Caremark, the largest pharmaceutical services enterprise and changed the corporation name to Cvs Caremark. When Cvs bought 1,200 Eckerd stores, it formed a single-entity Llc (Limited Liability Company) to own each Eckerd store. Each Llc signs the lease with the asset owner. In the event of a default, the owner can only legally go after the assets of the Llc and not from any other Cvs-owned assets. Although the owner loses the guaranty security from Cvs corporate assets, this author is not aware of any incident where Cvs closes a store and does not pay rent.

Rite-Aid: Rite Aid was founded by Alex Grass (he just passed away on Aug 27, 2009 at the age of 82) and opened its first store in 1962 as "Thrif D allowance Center" in Scranton, Pennsylvania. It officially incorporated as Rite Aid Corporation and went social in 1968. By the time Alex Grass stepped down as the company's chairman and chief administrative officer in 1995, Rite Aid was the nation's largest drugstore chain in terms of total stores and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid's income in the late 1990s. Rite Aid is now the weakest financially among the 3 drugstore chains. In 2007, Rite-Aid acquired about 1,850 Brooks and Eckerd drugstores, mostly along the East coast to catch up with Walgreens and Cvs. In the process, it added a huge long term debt (currently owes over .69 Billion) and is the most leveraged drugstore chain based on its store value. The integration of Brooks and Eckerd did not seem to go well. income from some of these stores went down as much as 20% after they convert the sign to Rite Aid. In 2009, Rite-Aid had over 4900 stores and over Billion in revenues. The figures went down in 2010 to 4780 stores and .53 billion in revenue. On January 21, 2009 Moody's Investor Services downgraded Rite Aid from "Caa1" to "Caa2", eight notches below speculation grade. Both ratings are "junk" which indicate very high prestige risk. Rite Aid contacted a amount of its landlords in 2009 trying to get rent concession to enhance the lowest line. In June 2009, Rite Aid successfully completed refinancing .9 Billion of its debts. However, it continues to struggle in 2010 as same store sales decreased 2.5% in June, 1.7% in May, 1% in April,.1% in March, 3.2% in February, and 2.1% in January..

Things to reconsider when invested in a pharmacy

If you are interested in investing in a asset leased by drugstore chains, here are a few things you should consider:

1. If you want a low risk investment, go with Walgreens. In carport or growing areas, the degree of security is the same whether the asset is in California where you get a 6% cap or Texas where you may get a 7.5% cap. So, there is no indispensable benefit to invest in properties in California as the asset value is based primarily on the cap rate. In 2010, the offered cap rate for Walgreens seems to come down from 7.5%-8.4% in 2009 to 6.5%-7.5% for new stores.
2. If you are willing to take more risk, then go with Rite-Aid. Some properties outside of California may offer up to 10% cap rate in 2010. However, among the 3 drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it articulate bankruptcy, Rite Aid has the choice to pick and select which locations to keep open and which locations to conclude the lease. To minimize the risk that the store is shuttered, select a location with strong sales and low rent to income ratio.
3. Financing should be an leading consideration. While the cap rate is lower for Walgreens than Rite Aid, you will be able to get the best rates and terms for Walgreens. A 7.25% cap Walgreens with 5.25% interest rate on the loan will originate more cash flow than a 10% cap Rite Aid with 9% interest rate (if you could find a lender for Rite Aid).
4. If you are not a conservative investor or risk taker, you may want to reconsider a Cvs pharmacy. It has Bbb+ S&P prestige rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer great rent bumps. On the other hand, some Cvs leases, especially for properties in hurricane areas, e.g. Florida are not truly Nnn leases where landlords are responsible for the roof and structure. So make sure you adjust the cap rate down accordingly. Some of the Cvs locations have onsite Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it's not clear having a clinic inside Cvs is a plus or minus to the lowest line of the store.
5. All 3 drugstore chains have similar requirements. They all want extremely visible, standalone, rectangular asset nearby 10,000 - 14,500 Sf on a 1.5 - 2 acre lot, preferably at a angle with about 75 - 80 parking spaces in a growing and high traffic location. They all want the asset to have a drive-through. Hence, you should avoid purchasing an inline property, i.e. Not standalone and asset with no drive-through windows. There is a chance that these drugstores may not want to renew the lease unless the asset is settled in a densely-populated area with no vacant land nearby. In addition, if you gain a asset that does not meet the new requirements, for example a drive-through, you may have a question getting financing as lenders are aware of these requirements.
6. If the pharmacy is opened 24 hours a day, it is in a great location. Drugstore chains do not open the store 24 hours day unless the location draws customers.
7. Many properties may have a ration lease, i.e. The landlord can get supplementary rent when the store's every year income exceeds a certain figure, e.g. M. However, the income used to compute ration rent often excludes a page-long list of items, e.g. Wine and sodas, tobacco products, items sold after 10 Pm, drugs paid by governmental programs. The excluded sales income could account for as much as 70% of store's gross revenue. As a result, this author has seen only 2 stores in which the landlord is able to gain supplementary ration rent. The store with a ration rent is required to report its monthly sales to the landlord. As an investors, you want to invest in a store with strong gross sales, e.g. Over 0 per square foot a year. In addition, you also want to check the rent to income ratio. If the outline is in the 2-4% range, the store is likely to be very profitable so the chance the store is shut down is low.
8. It does not matter how good the tenants are, avoid investing in declining and/or low-income areas or small towns with less than 30,000 residents within 5 miles ring. In a small town, it may be the only drug store in town and captures most of the store share. However, if a competitor opens a new location in the area, income may be severely affected. These properties are easy to buy now and hard to sell later. In 2009 where the prestige store is tight, you may have problems looking a lender to finance these properties.
9. Many properties have an existing loan that the buyer must assume. If you have a 1031 exchange, think twice about buying this property. You should clearly understand loan assumption requirements of the lenders before bright forward. Should you fail to assume the existing loan (assuming an existing loan is a lot more difficult than getting a new loan), you may run out of time for a 1031 replacement and may be liable to pay capital gain.
10. With few exceptions, drugstore chains do not own the stores they occupy for any reasons. Here are just a consolidate of them:
    • They know the pharmacy enterprise but don't know real estate. Stock investors also don't want Walgreens to come to be a real estate speculation company.
    • Owning the real estate will want them to carry lots of long term debts which is not a great idea for a publicly-traded company.
11. About 10% of the drugstore properties for sale and typically Cvs pharmacies want very small amount of equity to acquire, e.g. 10% of the buy price. However, you are required to assume an existing fully-amortized loan with zero cash flow. That is, all of the rent paid by the tenant must be used to pay down the loan. The cap rate may be in the 7% range, and the interest rate on the loan could be bright in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, the investor has no certain cash flow. This requires you to come up with outside cash to pay income tax on the rental profits (the difference between the rent and mortgage interest). The longer you own the property, the more outside cash you will need to pay income taxes as the mortgage interest will get less and less toward the end. So who would buy this kind of property?
    • The investors who have broad losses from other properties. By acquiring this zero cash flow property, they may offset the income from the drugstore tenant against the losses from other speculation properties. For example, a asset has 5,000 of rental profits a year, and the investor also has losses of 0,000 from other speculation properties. As a result, the combined dutible profits are only ,000.
    • The uninformed investors who fail to reconsider that they have to raise supplementary cash to pay income taxes.

Out of the Box thinking If you put too much weigh on the S&P rating of the tenants, you may end up whether taking a lot of risks or passing up good opportunities.

1. Good location should be the key in your decision on which drug store to invest in. It's often said a lousy enterprise should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is done down later on (yes, Walgreens done 119 stores in 2007) is still a bad speculation even though Walgreens continues paying rent on time. So you don't want to blindly invest in a drug store plainly because it hasa Walgreens sign on the building.
2. No enterprise is crazy adequate to close a profitable location. It does not take a rocket scientist to understand that a financially-weak enterprise like Rite Aid will make every exertion to keep a profitable location open. On the other hand, a financially-strong Walgreens will need justifications to keep an unprofitable location open. So how do you conclude if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The write back is you cannot. However, you can make an educated guess based on store's every year gross income is often reported to the landlord as required by the ration clause in the lease. With the gross revenue, you can conclude the rent to income ratio. The lower the ratio, the more likely the store is profitable. For example, if the every year base rent is 0,000 while the store's gross income is M then the rent to income ratio is 5%. As a rule of thumb, it's hard to make a profit if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to income ratio then you know it's likely a very profitable location. In the event Rite Aid declares bankruptcy, it will keep this location open and continue paying rent. If you see a Rite Aid drug store with 3% rent to income ratio offering 11% cap, chances are it's a low risk speculation with good returns. The infirmity of corporate guaranty from Rite Aid is probably not as indispensable and the risk of having Rite Aid as a tenant is not verily that significant.
3. Drug stores with new 25 years leases tend to sell at lower cap, e.g. 7-7.5% cap on new stores versus 8.0-8.5% cap on established locations with 8-10 years remaining on the lease. This is because investors are afraid that the tenants may not renew the leases. Unfortunately, lenders also have the same fear! As a succeed many lenders will not finance drug stores with 2-3 years left on the leases. The fact that drugstores with new leases have a excellent on the price means they have possible of 10% depreciation (buying new at 7.3% cap and selling at 8.3% cap when the leases have 10 year left). Some investors will not reconsider investing in drug stores with 5-10 years left on the lease. They might plainly ignore the fact that the established stores may be at irreplaceable locations with very strong sales. Tenants plainly have no other choices other than renewing the lease.

Walgreens, Cvs, and Rite Aid - What Re Investors Should Know in 2011

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