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 market cap of .33 Billion, .25 Billion in revenue, and S&P rating of A+. According to Walgreens, 75% Us people 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 market in New York Metropolitan area.
3. Cvs
4. ranks #2 with market cap of .09 Billion, .1 Billion in earnings (Cvs earnings alone is less than Walgreens if earnings from its Caremark group is taken out), and S&P rating of Bbb+. Cvs opened its 7000-th store in diminutive Canada, Minnesota on October 5, 2009 and currently operates 7025 drug stores..
5. Rite Aid
6. ranks #3 with market cap of 9 Million, .53 Billion in revenue, 4780 drug market and S&P rating of B-.

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

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

1. The drugstore firm is very recession-insensitive. people need treatment when they are sick, regardless of the state of the economy. Both rich and poor people in the Us have way to medicine. Some even argue that low-income people 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 firm has a good anticipation in the Us:
   • People are living longer and need more treatment to support longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer's symptoms. Older people tend to use more treatment than younger ones as they often have more healing problems. As the 78 million baby boomers are getting closer to retiring age starting from 2008, the drugstore chains anticipate the request for treatment to growth in next 20 years.
   • The drug market continues to develop as the Us people will continue to grow. More and more Americans suffer from discrete diseases. The number of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million people per Fortune magazine. They spent .4 Billion in 2009 for allergy drugs. As their waist lines balloon (75% of Americans are forecasted to be either overweight or obese by 2020), more Americans are diagnosed with diabetes, high cholesterol at younger and younger ages. In addition, doctors also recommend treating discrete diseases sooner than later due to best comprehension about the diseases. For example, doctors now designate antiretroviral drugs for patients soon after infected with Hiv virus instead of waiting for the infection to come to be Aids. More doctors integrate insulin with oral medicines to treat type-2 Diabetes instead of just oral medicines alone. All these factors growth the size of the drug market.
   • Advance in genetic engineering has introduced discrete new genetic Dna testing kits which allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the top growth segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits available in drug market in the near future. Upon Fda approval, these new products will potentially bring in additional earnings 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 present 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 discrete new drugs for Aids and concentration Deficit Disorder (Add). The new medicines are very expensive, e.g. A year's supply of Avastin costs about ,000. Eli Lilly has sold about .8 billion of Zyprexa in 2007 for schizophrenia and yet most people have never heard of this medicine.
   • There are existing drugs now stylish to treat new illnesses and thus growth their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damage in people 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 study are improbable to produce a new class of drugs to treat diabetes, Parkinson's and discrete 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 gently broaden its drugs to a blockbuster drug to more common disorders caused by similar genetics.
   • Technology and contemporary life introduce and want new products, e.g. Gravidity test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, experience lenses, lenses cleaners, diet pills, vitamins, birth-control pills, Iuds, food supplements and Cholesterol-lowering pills (Americans spent nearly B in 2006 on Cholesterol medications alone per Ims Health, a Connecticut-based consulting firm 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 management 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 market hope you use the one-hour photos services and change your liquid propane tanks there. The market 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 market while Walgreens has 22,000 distinct 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 result convenience market 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 market 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 reduce the number of items by 4000. It also introduces its own underground label which has higher behalf margins.
   • There are more and more generic medications on the market as a number of enormously beloved 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 behalf margins than the brand-name medications.
   • Some people are addicted to pain killers, e.g. Hydrocodone and consume a large number of medicine, e.g. 30-day dosage in a day to get high. According to testimony from the National found on Drug Abuse, Us retail pharmacies dispensed nearly 180 million prescriptions in 2007 for opiates, e.g. Hydrocodone. A high percentage of these prescriptions are probably not used for any legitimate healing purposes.
   • This author estimates that at least 10% of the dispensed designate drugs are not used at all and sit idle in the treatment cabinets. They are ultimately expired and thrown away.
3. These clubs sign very long-term, Nnn leases, guaranteed by their corporate assets. This makes the venture in the underlying 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 market are terminated due to weak sales (Walgreens terminated 119 market in 2007), these clubs may sublease the properties to other clubs and continue to pay rents on the specialist leases.
   • A typical Walgreens lease consists of 20-25 year former term plus 8-10 five-year options. while former 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 former term plus 4-5 five-year options. The rent is ordinarily flat while the former term and then there is a 2.5%-10% rent growth in the in each 5-year option.
   • A typical Rite Aid lease consists of 20-25 year former term plus 4-8 five-year options. The lease often has a rent growth every 5-10 years.

Investment Risks: Although the pharmacy firm in general is recession-insensitive, there are risks complicated in your investment:

1. The main downside about investing in pharmacies is there is diminutive 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 appeal to younger investors.
2. The 3 drugstore chains now have a new formidable competitor, Wal-mart. Wal-mart sells designate drugs in more than 4000 Wal-mart, Sam's Club and Neighborhood market market in 49 states. The retail giant is known for launching in 2006 a highly-publicized generic designate drug agenda which now sells 350 generic medications for a 30-day supply. The actual number of medications is less as the medications with distinct strengths are counted as distinct medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart probably makes very diminutive 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 market with other prescriptions where it has higher behalf margins. In an unscientific scrutinize with just one brand-name designate of Lyrica, this author finds the bottom price at Costco, the top price at Walgreens and Wal-mart at the middle. Other drug chains try to counter Wal-mart in distinct ways. Target now offers the same 350 generic medications for for a 30-day supply. Walgreens has a designate drugs club with membership fee which offers 1400 generic medications for as diminutive as /week. Cvs says it will match any offers from its competitors.
3. Chief firm Correspondent Rick Newman from Us World & News description improbable that Rite Aid might not survive in 2009. While Rite Aid is still around in 2010, dire predictions continue. The study by Audit Integrity gave Rite Aid about a 10.5 percent occasion 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 market or Walmart to conveniently 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 market 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 earnings 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 irregularity 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 across the street when the lease expires. This risk is high when the asset is located 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 improve its bottom line. The possibility is higher if the tenant is Rite Aid and if the store has low sales earnings and/or higher than market rent.
8. More Americans are walking away from their prescriptions, especially the most high-priced brand-name medicines. This may have negative impact on the sales earnings and profits of drug market 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 people with market 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 general 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 bottom graduates to save costs. When possible all drugstore chains try to fill the prescriptions with generic medications which have higher behalf margins

Walgreens: the firm was founded in 1901 by Charles Walgreen, Sr. In Chicago. While the firm has existed for more than 100 years, most market are only 5-10 years old. This is the best managed firm among the three drugstore chains and also among the most admired social clubs in the Us. The firm has been run by executives with proven track records and hires the top graduates from universities. Due to its excellent financial strength--S&P A+ rating-- and excellent irreplaceable locations, properties with leases from Walgreens get the top price per quadrilateral foot and/or the bottom cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent growth 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 withdrawal age. They are looking for a safe venture where it's more leading to get the rent check than to get appreciation. They often correlate the returns on their Walgreens venture with the lower returns from Us treasury bonds or Certificate of Deposits from banks. Walgreens opened many new market in 2008 and 2009 and thus you see many new Walgreens market for sale. It will slow down this expansion in 2010 and focus on reparation of existing market 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 market in the Us, mostly 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 market 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 market in Northern Ca and Arizona. Besides, the price also included real estate. It is also bought Caremark, the largest pharmaceutical services firm 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 safety 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 executive officer in 1995, Rite Aid was the nation's largest drugstore chain in terms of total market and No. 2 in terms of revenue. His son, Martin Grass, took over but was ousted in 1999 for overstatement of Rite Aid's earnings 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 market value. The integration of Brooks and Eckerd did not seem to go well. earnings from some of these market went down as much as 20% after they turn the sign to Rite Aid. In 2009, Rite-Aid had over 4900 market and over Billion in revenues. The figures went down in 2010 to 4780 market and .53 billion in revenue. On January 21, 2009 Moody's Investor Services downgraded Rite Aid from "Caa1" to "Caa2", eight notches below venture grade. Both ratings are "junk" which indicate very high reputation risk. Rite Aid contacted a number of its landlords in 2009 trying to get rent concession to improve the bottom 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 consider when invested in a pharmacy

If you are concerned 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 stable or growing areas, the degree of safety is the same either 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 principal benefit to spend 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 exterior of California may offer up to 10% cap rate in 2010. However, among the 3 drug chains, Rite Aid has 10.5% occasion of going under in 2010. Should it speak bankruptcy, Rite Aid has the choice to pick and pick which locations to keep open and which locations to discontinue the lease. To minimize the risk that the store is shuttered, pick a location with strong sales and low rent to earnings 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 create 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 consider a Cvs pharmacy. It has Bbb+ S&P reputation rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer best 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 bottom line of the store.
5. All 3 drugstore chains have similar requirements. They all want very visible, standalone, rectangular asset around 10,000 - 14,500 Sf on a 1.5 - 2 acre lot, preferably at a projection 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 occasion that these drugstores may not want to renew the lease unless the asset is located in a densely-populated area with no vacant land nearby. In addition, if you obtain 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 best location. Drugstore chains do not open the store 24 hours day unless the location draws customers.
7. Many properties may have a percentage lease, i.e. The landlord can get additional rent when the store's each year earnings exceeds a clear figure, e.g. M. However, the earnings used to compute percentage 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 earnings could account for as much as 70% of store's gross revenue. As a result, this author has seen only 2 market in which the landlord is able to obtain additional percentage rent. The store with a percentage rent is required to description its monthly sales to the landlord. As an investors, you want to spend in a store with strong gross sales, e.g. Over 0 per quadrilateral foot a year. In addition, you also want to check the rent to earnings ratio. If the outline is in the 2-4% range, the store is likely to be very profitable so the occasion 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 market share. However, if a competitor opens a new location in the area, earnings may be severely affected. These properties are easy to buy now and hard to sell later. In 2009 where the reputation market 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 thoughprovoking 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 change and may be liable to pay capital gain.
10. With few exceptions, drugstore chains do not own the market they occupy for some reasons. Here are just a integrate of them:
    • They know the pharmacy firm but don't know real estate. Stock investors also don't want Walgreens to come to be a real estate venture 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 number 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 thoughprovoking in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, the investor has no clear cash flow. This requires you to come up with exterior cash to pay earnings tax on the rental profits (the contrast in the middle of the rent and mortgage interest). The longer you own the property, the more exterior cash you will need to pay earnings 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 mountainous losses from other properties. By acquiring this zero cash flow property, they may offset the earnings from the drugstore tenant against the losses from other venture properties. For example, a asset has 5,000 of rental profits a year, and the investor also has losses of 0,000 from other venture properties. As a result, the combined dutible profits are only ,000.
    • The uninformed investors who fail to consider that they have to raise additional cash to pay earnings taxes.

Out of the Box mental If you put too much weigh on the S&P rating of the tenants, you may end up either 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 spend in. It's often said a lousy firm should do well at a great location while the best tenant will fail at a lousy location. A Walgreens store that is terminated down later on (yes, Walgreens terminated 119 market in 2007) is still a bad venture even though Walgreens continues paying rent on time. So you don't want to blindly spend in a drug store plainly because it hasa Walgreens sign on the building.
2. No firm is crazy sufficient to close a profitable location. It does not take a rocket scientist to understand that a financially-weak firm like Rite Aid will make every attempt 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 settle if a drug store location is profitable or not if the tenant is not required to disclose its behalf & loss statement? The write back is you cannot. However, you can make an educated guess based on store's each year gross earnings is often reported to the landlord as required by the percentage clause in the lease. With the gross revenue, you can settle the rent to earnings ratio. The lower the ratio, the more likely the store is profitable. For example, if the each year base rent is 0,000 while the store's gross earnings is M then the rent to earnings ratio is 5%. As a rule of thumb, it's hard to make a behalf if this ratio is more than 8%. So if you see a Rite Aid with 3% rent to earnings 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 earnings ratio offering 11% cap, chances are it's a low risk venture with good returns. The infirmity of corporate guaranty from Rite Aid is probably not as principal and the risk of having Rite Aid as a tenant is not authentically that significant.
3. Drug market with new 25 years leases tend to sell at lower cap, e.g. 7-7.5% cap on new market 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 result many lenders will not finance drug market 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 consider investing in drug market with 5-10 years left on the lease. They might plainly ignore the fact that the established market may be at irreplaceable locations with very strong sales. Tenants plainly have no other choices other than renewing the lease.

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