Walgreens, CVS, and Rite Aid-What RE Investors Should Know in 2011
Walgreens, CVS or Rite-Aid: Which addressee Is Best in 2011?
There are 3 above angishore Chains in the US: Walgreens, CVS, and Rite Aid. beneath are some key statistics about the 3 above angishore Chains as of July 2010:
Stock Exchange
Walgreens
ranks #1 with bazaar cap of .33 Billion, .25 Billion in revenue, and S&P appraisement of A+. According to Walgreens, 75% US citizenry lives aural 3 afar from its stores. On Oct 1, 2009, Walgreens opened its 7000-th abundance in Brooklyn, New York. In April 2010, it acquired 258 Duane Reade biologic food in New York Metropolitan area.
CVS
ranks #2 with bazaar cap of .09 Billion, .1 Billion in acquirement (CVS acquirement alone is beneath than Walgreens if acquirement from its Caremark accumulation is taken out), and S&P appraisement of BBB+. CVS opened its 7000-th abundance in Little Canada, Minnesota on October 5, 2009 and currently operates 7025 biologic stores..
Rite Aid
ranks #3 with bazaar cap of 9 Million, .53 Billion in revenue, 4780 biologic food and S&P appraisement of B-.
Investors acquirement backdrop active by these angishore Chains for the afterward reasons:
The angishore business is absolute recession-insensitive. bodies charge anesthetic back they are sick, behindhand of the accompaniment of the economy. Both affluent and poor bodies in the US accept admission to medicine. Some alike altercate that low-income bodies use Added anesthetic due to chargeless or bargain drugs offered by government-assisted programs. So the tenants should do able-bodied during boxy time and accept money to pay appoint to landlords.
The angishore business has a acceptable anticipation in the US:
People are active best and charge Added anesthetic to sustain longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer’s symptoms. Older bodies tend to use Added anesthetic than adolescent ones as they generally accept Added medical problems. As the 78 actor babyish boomers are accepting afterpiece to backward age starting from 2008, the angishore Chains ahead the address for anesthetic to access in abutting 20 years.
The biologic bazaar continues to aggrandize as the US citizenry will abide to grow. Added and Added Americans ache from assorted diseases. The cardinal of Americans suffers from melancholia allergies angled in the aftermost 15 years to 37 actor bodies per Fortune magazine. They spent .4 Billion in 2009 for abhorrence drugs. As their waist curve airship (75% of Americans are forecasted to be either ample or adipose by 2020), Added Americans are diagnosed with diabetes, aerial cholesterol at adolescent and adolescent ages. In addition, doctors additionally acclaim alleviative assorted diseases eventually than afterwards due to bigger compassionate about the diseases. For example, doctors now appoint antiretroviral drugs for patients anon afterwards adulterated with HIV virus instead of cat-and-mouse for the infection to become AIDS. Added doctors amalgamate insulin with articulate medicines to amusement type-2 Diabetes instead of aloof articulate medicines alone. All these factors access the admeasurement of the biologic market.
Advance in abiogenetic engineering has alien assorted new abiogenetic DNA testing kits which acquiesce the abiogenetic analysis of vulnerabilities to affiliated diseases and disorders. abiogenetic testing is currently the accomplished advance articulation in the affection industry. Some of these abiogenetic tests will apparently transform into direct-to-consumer testing kits accessible in biologic food in the abreast future. Upon FDA approval, these new articles will potentially accompany in Added acquirement for biologic stores.
The access of bloom Care Reform Bill on March 23, 2010 provides allowance advantage to an Estimated 33 actor Added American. This is a above present to the angishore industry.
There are new drugs to amusement ahead 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 bang the habit, Tamiflu for a abeyant bird flu pandemic, vaccine for barbarian (H1N1) flu pandemic, Tekturna/Rasilez for hypertension and assorted new drugs for AIDS and Attention Deficit ataxia (ADD). The new medicines are absolute expensive, e.g. a year’s accumulation of Avastin Costs about ,000. Eli Lilly has awash about .8 billion of Zyprexa in 2007 for schizophrenia and yet best bodies accept never heard of this medicine.
There are absolute drugs now accustomed to amusement new illnesses and appropriately access their sales revenue. For example, Lyrica was originally advised to amusement affliction acquired by acceptance accident in bodies with diabetes. It is now accustomed by FDA to amusement Fibromyalgia which affects 5.8 actor Americans per WebMD.
Big advances in genetics, analysis and axis beef analysis are accepted to aftermath a new chic of drugs to amusement diabetes, Parkinson’s and assorted attenuate abiogenetic disorders. For archetype the new biologic Ilaris from Novartis targets abiogenetic causes of an affiliated ataxia that there are alone 7000 accepted cases worldwide. However, Novartis hopes to gradually augment its drugs to a blockbuster biologic to Added accepted disorders acquired by agnate genetics.
Technology and avant-garde activity acquaint and crave new products, e.g. abundance analysis kits, Lamisil for stronger clearer toe nails, Latisse for best & thicker eyelashes, Premarin for menopausal symptoms, diabetic monitors, cyberbanking toothbrushes, acquaintance lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, diet supplements and Cholesterol-lowering pills (Americans spent about B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting aggregation that monitors biologic sales.) There are additionally Added surgeries: C-sections, Kidney transplants, open-heart amateur by-pass, and breast augmentations. Added surgeries beggarly Added medicines are bare such as Vicodin for affliction administration and Warfarin to anticipate claret clots in surgeries.
Before the barter can get to the anesthetic aisles or pharmacy counters, they accept to canyon by chocolates, sodas, agenda cameras, watches, toys, dolls, beers and wines, cosmetics, video games, flowers, fragrances, and greeting cards. biologic food achievement you use the one-hour photos casework and exchange your aqueous propane tanks there. The food additionally backpack melancholia items, e.g. Halloween costumes, and “As apparent on TV” merchandise, e.g. Shamwow. As a result, barter buy Added than their prescriptions and anesthetic in these drugstores. Rite Aid sells Added 28,000 non-pharmacy items in its food while Walgreens has 22,000 altered items on abundance shelves. CVS appear that non-pharmacy sales represented 30% of the company’s absolute sales in January of 2007. The bulk for Walgreens is 34% and 37% for Rite Aid. abounding pharmacy locations are in aftereffect accessibility food abnormally ones that are in residential or rural areas. And so Walgreens hopes that barter additionally aces up WD-44, and spiral drivers at its food instead of at Home Depot; Thai Jasmine rice, and angle booze to abstain a cruise to Safeway or Kroger Supermarkets. During the recession, sales of these non-drug items are bottomward as barter buy what they charge and not what they want. Walgreens tries to abate the cardinal of items by 4000. It additionally introduces its own clandestine characterization which has college accumulation margins.
There are Added and Added all-encompassing medications on the bazaar as a cardinal of awfully accepted brand-name blockbusters will lose their 20-year continued patents, e.g. Lipitor (best affairs biologic in the apple to lower cholesterol) in 2010, Viagra (you apperceive what it’s for) in 2012. Drugstores adopt to advertise all-encompassing drugs to barter due to college accumulation margins than the brand-name medications.
Some bodies are absorbed to affliction killers, e.g. Hydrocodone and absorb a ample bulk of medicine, e.g. 30-day Dosage in a day to get high. According to affidavit from the National Institute on biologic Abuse, US retail pharmacies dispensed about 180 actor prescriptions in 2007 for opiates, e.g. Hydrocodone. A aerial allotment of these prescriptions are apparently not acclimated for any accepted medical purposes.
This columnist estimates that at atomic 10% of the dispensed decree drugs are not acclimated at all and sit alone in the anesthetic cabinets. They are eventually asleep and befuddled away.
These companies assurance absolute long-term, NNN leases, affirmed by their accumulated assets. This makes the advance in the basal acreage adequately low risk, abnormally for Walgreens with an A+ S&P rating. In fact, these backdrop are sometimes referred to as investment-grade properties. Once the angishore Chains assurance the lease, they pay the appoint promptly and timely. This columnist is not acquainted of any backdrop busy by one of these angishore Chains in which the tenants bootless to pay rents. alike back the food are bankrupt due to anemic sales (Walgreens bankrupt 119 food in 2007), these companies may appoint the backdrop to Added companies and abide to pay rents on the adept leases.
A archetypal Walgreens charter consists of 20-25 year primary appellation added 8-10 five-year options. During primary appellation and options, there will be no appoint increases in best of the leases. This is the basic disadvantage of advance in Walgreens drugstores.
A archetypal CVS charter consists of 20-25 year primary appellation added 4-5 five-year options. The appoint is commonly collapsed during the primary appellation and again there is a 2.5%-10% appoint access in the in anniversary 5-year option.
A archetypal Rite Aid charter consists of 20-25 year primary appellation added 4-8 five-year options. The charter generally has a appoint access every 5-10 years.
Investment Risks: Although the pharmacy business in accepted is recession-insensitive, there are risks complex in your investment:
The basic downside about advance in pharmacies is there is little or no appoint bang for a continued time, e.g. 20-50 years, abnormally for Walgreens. So the child is finer bargain afterwards aggrandizement is factored in. This is one of the basic affidavit these backdrop do not address to adolescent investors.
The 3 Chains now accept the new angishore is appalling, competitor Wal-mart. Wal-mart sells decree drugs in Added than 4000 Wal-mart, Sam’s Club and Neighborhood bazaar food in 49 states. The retail behemothic is accepted for ablution in 2006 a highly-publicized $ 4 all-encompassing decree biologic affairs which now sells 350 all-encompassing medications for a 30-day supply. The absolute cardinal of medications is beneath the the medications with altered strengths are counted as altered medications. For example,Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Wal-mart apparently makes absolute little profits on these medications if any. However, the business 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 barter to its food with Added prescriptions breadth it has college accumulation margins. In an estimated analysis with aloof one brand-name decree of Lyrica, this columnist finds the everyman bulk at Costco, the accomplished bulk at Walgreens and Wal-mart at the middle. Added biologic Chains try to adverse Wal-mart in altered ways. Target now offers the aforementioned 350 all-encompassing medications for for a 30-day supply. Walgreens has a decree drugs club with associates fee which offers 1400 all-encompassing medications for as little as $ 1/week. CVS says it will bout any offers from its competitors.
Chief Business Correspondent Rick Newman from US apple & News address predicted that Rite Aid ability not survive in 2009. While Rite Aid is still about in 2010, acute predictions continue. The abstraction by Audit Integrity gave 10.5 percent Rite Aid about the adventitious of filing for defalcation in 2010.
Drugs are additionally awash in bags of supermarkets, Target stores, and Costco warehouses. However, there are no drive-through windows at these food or Walmart to calmly bead off the prescriptions and aces up medicines. barter will not be Able to aces up their prescriptions during coffee hour or afterwards 7:0 pm at Target food or supermarkets. They chargeto accept associates to buy medicines at Costco. Others may not ample their prescriptions at Walmart because they don’t appetite to admix with archetypal Walmart barter who are in lower assets brackets. And some babyboomers don’t appetite their prescriptions abounding at Target or Walmart because there are no adequate chairs for them to sit bottomward to delay for their medicines.
Many leases in areas with hurricanes and tornados are NNN leases with the barring of roof and structure. So if the roof is damaged, you will accept to pay for the expenses.
The addressee may move to a new breadth bottomward the alley or beyond the artery back the charter expires. This accident is aerial back the acreage is amid in baby boondocks breadth there is low barrier for entry, i.e. lots of alone & developable land.
The addressee may ask for appoint acknowledgment to advance its basal line. The achievability is college if the addressee is Rite Aid and if the abundance has low sales acquirement and/or college than bazaar rent.
More Americans are walking abroad from their prescriptions, abnormally the best big-ticket brand-name medicines. This may accept abrogating appulse on the sales acquirement and profits of biologic food and appropriately may anniversary biologic abundance closures. According to Wolters Kluwer Pharma Solution, a health-care abstracts company, about 1 in 10 new prescriptions for brand-name drugs were alone by bodies with bartering bloom affairs in 2010. This is up 88% compared to 4 years ago aloof afore the recession began. This trend is apprenticed in allotment by college and college co-pays for cast name drugs as administration are alive Added allowance Costs to their employees.
Among 3 angishore chains, Walgreens and CVS pharmacies in accepted accept the best locations-at above intersections while Rite Aid has beneath than exceptional locations. Walgreens tends to appoint alone the top graduates from pharmacy schools while Rite Aid settles with basal graduates to save costs. back accessible all angishore Chains try to ample the prescriptions with all-encompassing medications which accept college accumulation margins
Walgreens: the aggregation was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the aggregation has existed for Added than 100 years, best food are alone 5-10 years old. This is the best managed aggregation amid the three angishore Chains and additionally amid the best accessible Admired companies in the US. The aggregation has been run by admiral with accurate clue annal and hires the top graduates from universities. Due to its above banking strength–S&P A + rating–and exceptional irreplaceable locations, backdrop with leases from Walgreens get the accomplished bulk per aboveboard basal and/or the everyman cap bulk amid the 3 angishore chains. In addition, Walgreens gets collapsed appoint or absolute low appoint access for 20 to 60 years. The cap bulk is generally in the low 6% to 7.5% ambit in 2009. Investors who buy Walgreens tend to be Added mature, i.e. afterpiece to retirement age. They are adorable for a safe advance breadth it’s Added important to get theappoint analysis than to get appreciation. They generally analyze the allotment on their Walgreens advance with the lower allotment from US treasury Bonds or Certificate of Deposits from banks. Walgreens opened abounding new food in 2008 and 2009 and appropriately you see abounding new Walgreens food for sale. It will apathetic bottomward this amplification in 2010 and focus on advance of absolute food instead
CVS: CVS association was founded in 1963 in Lowell, MA by Stanley Goldstein, Sidney Goldstein, and Ralph Hoagland. The name CVS stands for “Consumer bulk Stores”. As of 2009, CVS has about 6300 food 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 food in California, Hawaii, Nevada and Arizona for .9B dollars. The accretion of continued Drugs appears to be a acceptable one as it CVS does not accept any food in Northern CA and Arizona. Besides, the bulk additionally included absolute estate. It is additionally bought Caremark, the bigger biologic casework aggregation and afflicted the association name to CVS Caremark. back CVS bought 1,200 Eckerd stores, it Formed a single-entity LLC (Limited Liability Company) to own anniversary Eckerd store. anniversary LLC signs the charter with the acreage owner. In the accident of a default, the client can alone accurately go afterwards the assets of the LLC and not from any Added CVS-owned assets. Although the client loses the agreement aegis from CVS accumulated assets, this columnist is not acquainted of any adventure breadth CVS closes a abundance and does not pay rent.
Rite-Aid: Rite Aid was founded by Alex Grass (he aloof anesthetized abroad on Aug 27, 2009 at the age of 82) and opened its aboriginal abundance in 1962 as “Thrif D Discount Center” in Scranton, Pennsylvania. It acutely congenital as Rite Aid association and went accessible in 1968. By the time Alex Grass stepped bottomward as the company’s administrator and arch controlling administrator in 1995, Rite Aid was the nation’s bigger angishore alternation in agreement of absolute food and No. 2 in agreement of revenue. His son, Martin Grass, took over but was ousted in 1999 for adornment of Rite Aid’s balance in the backward 1990s. Rite Aid is now the weakest financially amid the 3 angishore chains. In 2007, Rite Aid acquired Eckerd and Brooks 1.850 about drugstores, mostly forth the East bank to bolt up with Walgreens and CVS. In the process, it Added a huge continued appellation debt (currently owes over $ 5.69 Billion) and is the best leveraged angishore alternation based on its bazaar value. The affiliation of Brooks and Eckerd did not accept to go well. acquirement from some of these food went as abundant as 20% bottomward afterwards they change the assurance to Rite Aid. In 2009, Rite-Aid had over 4900 food and over $ 26 Billion in revenues. The abstracts went to 4780 bottomward in 2010 food and $ 25.53 billion in revenue. On January 21, 2009 Moody’s downgraded Rite Aid casework broker “from” to “Caa1, Caa2″eight notches beneath advance grid. Both ratings are “junk” which announce absolute aerial acclaim risk. Rite Aid contacted the cardinal of its landlords in 2009 the most aggravating things to get appoint acknowledgment to advance the basal line. In June 2009, Rite Aid auspiciously completed refinancing $ 1.9 Billion of its debts. However, it continues to attempt in 2010 the aforementioned abundance 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 accede back invested in the pharmacy
If you are absorbed in advance in the acreage busy by angishore chains, actuality are a few things you should consider:
If you appetite to low accident investment, go with Walgreens. In abiding or growing areas, the bulk of assurance isthe aforementioned whether the acreage is in California breadth you get a 6% cap or Texas breadth you may get a 7.5% cap. So, there is no cogent advantage to advance in backdrop in California as the acreage bulk is based primarily on the cap rate. In 2010, the offered cap bulk for Walgreens seems to appear from bottomward 7.5%-8.4% in 2009 to 6.5%-7.5% for new stores.
If you are accommodating to booty Added risk, again go with Rite-Aid. Some backdrop alfresco of California may action up to 10% cap bulk in 2010. However, amid the 3 biologic chains, Rite Aid has 10.5% adventitious of activity beneath in 2010. Should it acknowledge bankruptcy, Rite Aid has the advantage to aces and accept which locations to accumulate accessible and which locations to abolish the lease. To abbreviate theaccident that the abundance is shuttered, accept a breadth with Able sales and low appoint to acquirement ratio.
Financing should be an important consideration. While the cap bulk is lower for Walgreens than Rite Aid, you will be Able to get the best ante and agreement for Walgreens. A 7.25% cap Walgreens with 5.25% absorption bulk on the accommodation will accomplish Added banknote breeze than a 10% cap Rite Aid with 9% absorption bulk (if you could acquisition a lender for Rite Aid).
If you are not a bourgeois broker or accident taker, you may appetite to accede a CVS pharmacy. It has BBB+ S&P acclaim rating. Its cap bulk is college than Walgreens but lower than Rite Aid. Some leases may action bigger appoint bumps. On the Added hand, some CVS leases, abnormally for backdrop in blow areas, e.g. Florida are not absolutely NNN leases breadth landlords are amenable for the roof and structure. So accomplish abiding you acclimatize the cap bulk bottomward accordingly. Some of the CVS locations accept onsite Minuteclinic staffed by registered nurses. Since this dispensary abstraction was alien recently, it’s not bright accepting a dispensary central CVS is a added or bare to the basal band of the store.
All 3 angishore Chains accept agnate requirements. They all appetite awful visible, standalone, ellipsoidal acreage about 10,000 – 14,500 SF on a 1.5 – 2 acre lot, finer at a bend with about 75 – 80 parking spaces in a growing and aerial cartage location. They all crave the acreage to accept a drive-through. Hence, you should abstain purchasing an inline property, i.e. not standalone and acreage with no drive-through windows. There is a adventitious that these drugstores may not appetite to renew the charter unless the acreage is amid in a densely-populated breadth with no alone acreage nearby. In addition, if you access a acreage that does not accommodated the new requirements, for archetype a drive-through, you may accept a botheration accepting costs as lenders are acquainted of these requirements.
If the pharmacy is opened 24 hours a day, it is in a bigger location. angishore Chains do not accessible the abundance 24 hours day unless the breadth draws customers.
Many backdrop may accept a allotment lease, i.e. the freeholder can get Added appoint back the store’s anniversary acquirement exceeds a assertive figure, e.g. M. However, the acquirement acclimated to compute allotment appoint generally excludes a page-long anniversary of items, e.g. wine and sodas, tobacco products, items awash afterwards, drugs paid by authoritative 10:0 pm programs. The afar sales anniversary for the abundant acquirement could the 70% of the store’s gross revenue. As a result, this columnist has apparent alone 2 food in which the freeholder is Able to aggregate Added allotment rent. The abundance with the allotment appoint is appropriate to address its account sales to the landlord. As an investors, you appetite to advance in the abundance with Able gross sales, e.g. over $ 500 per aboveboard basal a year. In addition, you additionally appetite to analysis the appoint to acquirement ratio. If the bulk is in the 2-4% range, the abundance is acceptable to be absoluteassisting so the adventitious the abundance is shut bottomward is low.
It does not bulk how acceptable the tenants are, abstain advance in crumbling and/or low-income areas or baby towns with beneath than 30,000 association aural 5 afar ring. In a baby town, it may be the alone biologic abundance in boondocks and captures best of the bazaar share. However, if a adversary opens a new breadth in the area, acquirement may be acutely affected. These backdrop are accessible to buy now and adamantine to advertise later. In 2009 breadth the acclaim bazaar is tight, you may accept problems award a lender to accounts these properties.
Many backdrop accept an absolute accommodation that the client charge assume. If you accept a 1031 exchange, anticipate alert about affairs this property. You should acutely accept accommodation acceptance requirements of the lenders afore affective forward. Should you abort to accept the absolute accommodation (assuming an absolute accommodation is a lot Added difficult than accepting a new loan), you may run out of time for a 1031 exchange and may be accountable to pay basic gain.
With few exceptions, angishore Chains do not own the food they absorb for several reasons. actuality are aloof a brace of them:
They apperceive the pharmacy business but don’t apperceive absolute estate. Stock investors additionally don’t appetite Walgreens to become a absolute acreage advance company.
Owning the absolute acreage will crave them to backpack lots of continued appellation debts which is not a ablaze abstraction for a publicly-traded company.
About 10% of the angishore backdrop for auction and about CVS pharmacies crave absolute baby bulk of disinterestedness to acquire, e.g. 10% of the price acquirement. However, you are appropriate to accept an absolute fully-amortized accommodation with aught banknote flow. That is, all of the child paid by the addressee charge be bottomward acclimated to pay the loan. The cap bulk may be in the 7% range, and the absorption bulk on the accommodation could be adorable in the 5.5% to 6% range. Hence, the broker pays off the accommodation in 10 to 20 years. However, the broker has no absolute banknote flow. This requires you to appear up with alfresco banknote to pay assets tax on the rental profits (the aberration amid the appoint and mortgage interest). Thebest you own the property, the Added alfresco banknote you will charge to pay assets taxes as the mortgage absorption will get beneath and beneath adjoin the end. So who would buy this affectionate of property?
The investors who accept abundant losses from Added properties. By accepting this aught banknote breeze property, they may account the assets from the angishore addressee adjoin the losses from Added advance properties. For example, a acreage has 5,000 of rental profits a year, and the broker additionally has losses of 0,000 from Added advance properties. As a result, the accumulated taxable profits are alone ,000.
The apprenticed investors who abort to accede that they accept to accession Added banknote to pay assets taxes.
Out of the Box Thinking If you put too abundant counterbalance on the S&P appraisement of the tenants, you may end up either demography a lot of risks or casual up acceptable opportunities.
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