Blue Cross Maternity Coverage - Walgreens, Cvs, and Rite Aid - What Re Investors Should Know
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Walgreens, Cvs, and Rite Aid - What Re Investors Should Know
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 2012:
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1. Walgreens ranks first with store cap of .51 Billion, .2 Billion in 2011 total earnings (.1B from prescribe revenues), and an S&P rating of A. Agreeing to Walgreens, 75% of the Us citizen lives within 3 miles from its stores. In April 2010, it acquired 258 Duane Reade drug market in New York Metropolitan area which brings a total of 7841 drug market Walgreens operates as of February 2012, together with 137 hospital on-site pharmacies.
2. Cvs ranks second with store cap of .56 Billion, 7.1 Billion in earnings (.5 Billion from Cvs prescribe revenues and .1B from its Caremark prescribe mail order revenue), and an S&P rating of Bbb+. As of December 31, 2011, Cvs operates 7404 drug stores.
3. Rite Aid ranks third (fourth, behind Walmart in terms of prescribe revenues) with store cap of .49 Billion, .1 Billion in earnings (.1B from prescribe revenues), operates 4714 drug market as of February 2011 and has an S&P rating of B-.
Investors purchase properties busy by these drugstore chains for the following reasons:
1. The drugstore firm is very recession-insensitive. citizen need treatment when they are sick, regardless of the state of the economy. Both rich and poor citizen in the Us have access to medicine. Some even argue that low-income citizen 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:
· citizen are living longer and need more treatment to preserve longevity, e.g. Actonel for osteoporosis, Aricept for Alzheimer's symptoms. Older citizen 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 starting from 2008, the drugstore chains anticipate the query for treatment to increase in next 20 years.
· The drug store continues to advance as the Us citizen continues to grow. More and more Americans suffer from discrete diseases. The amount of Americans suffers from seasonal allergies doubled in the last 15 years to 37 million citizen 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, along with high cholesterol at younger and younger ages. In addition, doctors also propose treating discrete diseases sooner than later due to good understanding about the diseases. For example, doctors now prescribe antiretroviral drugs for patients soon after infected with Hiv virus instead of waiting for the infection to come to be Aids. More doctors combine 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 discrete new genetic Dna testing kits which allow the genetic pathology of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the top increase segment in the diagnostics industry. Some of these genetic tests will probably transform into direct-to-consumer testing kits ready in drug market in the near future.Upon Fda approval, these new products will potentially bring in supplementary earnings for drug stores.
· Using a new method of tailoring molecules called structure-based design; drug associates come up with new medicines that they might not have discovered otherwise, e.g. Xalkori by Pfizer to treat lung cancer.
· The passage of condition Care Reform Bill on March 23, 2010 provides guarnatee coverage to an estimated 33 million more American. This is a great present to the drugstore industry.
· There are new drugs to treat previously untreatable illnesses, and new diseases, e.g. Viagra for men's unhappiness, Avastin for colon cancer, Herceptin for breast cancer,. 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 citizen have never heard of this medicine.
· There are existing drugs now beloved to treat new illnesses and thus increase their sales revenue. For example, Lyrica was originally intended to treat pain caused by nerve damagein citizen with diabetes. It is now beloved by Fda to treat Fibromyalgia which affects 5.8 million Americans per WebMd.
· Big advances in genetics, biology and stem cells research are predicted 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 moderately broaden its drugs to a blockbuster drug to more base disorders caused by similar genetics.
· Technology and modern life introduce and need new products, e.g. Fertilization test kits, Lamisil for stronger clearer toe nails, Latisse for longer & thicker eyelashes, Propecia for male hair loss, Premarin for menopausal symptoms, diabetic monitors, electronic toothbrushes, palpate 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 firm that monitors pharmaceutical sales.)
· 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 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. Cvs reported that non-pharmacy sales represented 30% of the company's total sales in January of 2007. The form 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-40, and screwdrivers 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 amount of items by 4000. It also introduces its own underground 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 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.
· Many citizen are addicted to pain killers, e.g. Hydrocodone/Oxycodone. Per the Dea in 2012, there are 1.5 million American addicted to cocaine but 7 million addicted to prescribe drugs.
· This author estimates that at least 10% of the dispensed prescribe drugs are not used at all and sit idle in the treatment cabinets. They are ultimately expired and thrown away.
3. These associates sign very long-term Nnn leases, guaranteed by their corporate assets. This makes the venture in the fundamental asset fairly low risk, especially for Walgreens with a S&P "A" rating. In fact, these properties are sometimes referred to as investment-grade properties. Once the drugstore chains sign the lease, they pay the rent right away 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 concluded due to weak sales (Walgreens concluded 119 market in 2007), these associates may sublease the properties to other companies, e.g. advance Auto Parts 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 ordinarily flat while the original term and then there is a 2.5%-10% rent increase 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 firm in general is recession-insensitive, there are risks involved in your investment:
1) The main downside about investing in pharmacies is there is petite 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 motion to younger investors, especially when the cap rate is low.
2) The 3 drugstore chains now have a new formidable competitor, Walmart. Walmart sells prescribe drugs in more than 4000 Walmart, Sam's Club and Neighborhood store market in 49 states. As of 2012, Walmart is the third largest drug retailer with .4B in prescribe sales, just ahead of Rite Aid with .1B in prescribe sales. The sell giant is known for launching in 2006 a highly-publicized generic prescribe drug schedule which now sells 350 generic medications for a 30-day supply. The actual amount of medications is less as the medications with separate strengths are counted as separate medications. For example, Metformin 500 mg, 850 mg, and 1000 mg are counted as 3 medications. Walmart probably makes very petite profits on these medications if any. However, the marketing campaign--created by Bill Simon, the President and Ceo of Walmart Us, generates a lot of publicity for Walmart. Walmart hopes to draw customers to its market with other prescriptions where it has higher profit margins. In an unscientific discover with just one brand-name prescribe of Lyrica, this author finds the bottom price at Costco, the top price at Walgreens and Walmart at the middle. Other drug chains try to counter Walmart in separate ways. Target now offers the same 350 generic medications for for a 30-day supply. Walgreens has a prescribe drugs club with membership fee which offers 1400 generic medications for as petite as /week. Cvs says it will match any offers from its competitors.
3) Chief firm Correspondent Rick Newman from Us World & News report predicted that Rite Aid might not survive in 2009. Rite Aid is still around in 2012. The prediction seems to go away in 2012 as Rite Aid as it was able to refinance the long terms debts and sales earnings has increased.
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 baby boomers don't want their prescriptions filled at Target or Walmart because there are no comfortable chairs for them to sit down and wait for their medicines.
5) Drugs sell firm to some degree is controlled by the Pharmacy Benefits Managers (Pbms). Customers ordinarily get prescribe coverage from their condition guarnatee companies, e.g. Blue Cross. These Pbm administrate prescribe benefits on profit of the guarnatee companies. In 2012 Walgreens lost a contract valued at over Billion with Express Scripts, a major Pbm. Walgreen earnings was immediately fallen in the first quarter of 2012 as Express Scripts customers cannot fill their prescriptions at Walgreens. The Pbms are also in the drugs sell firm via mail orders which do not need leasing expensive sell spaces. The prescribe mail orders currently capture over 20% store share of the total prescribe revenue. Should customers convert their prescribe purchase habits to mail orders (there is no such evidence in 2012), it could have negative impact to the firm of drugstore chains.
6) Many leases in areas with hurricanes and tornadoes are Nnn leases with the exception of roof and structure. So if the roof is damaged, you will have to pay for the expenses.
7) The tenant may move to a new location down the road or over the road when the lease expires. This risk is high when the asset is settled in small town where there is low wall for entry, i.e. Lots of vacant & developable land.
8) The tenant may ask for rent concession to heighten its bottom line while tough times. The possibility is higher if the tenant is Rite Aid and if the store has low sales earnings and/or higher than store rent.
9) More Americans are walking away from their prescriptions, especially the most expensive brand-name medicines. This may have negative impact on the sales earnings and profits of drug market and consequently may cause drug store closures. Agreeing to Wolters Kluwer Pharma Solution, a health-care data company, nearly 1 in 10 new prescriptions for brand-name drugs were abandoned by citizen with industrial condition plans in 2010. This is up 88% compared to 4 years ago just before the recession 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 profit margins.
1) 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 associates in the Us. The firm has been run by executives with proven track records and hires the top graduates from universities. Due to its classic financial strength--S&P A rating-- and excellent irreplaceable locations, properties with leases from Walgreens get the top price per quadrate foot and/or the bottom cap rate among the 3 drugstore chains. In addition, Walgreens gets flat rent or very low rent increases for 20 to 60 years. The cap rate is often in the low 5% to 6.5% range in 2012. Investors who buy Walgreens tend to be more mature, i.e. Closer to resignation age. They are looking for a safe venture where it's more prominent to get the rent check than to get appreciation. They often compare 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 beyond and focus on renewal of existing market instead.
2) Cvs Pharmacy: 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 did not have any market in Northern Ca and Arizona. Besides, the price also included real estate. It is also bought Caremark, one of the largest Pbms 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 protection from Cvs corporate assets, this author is not aware of any incident where Cvs closes a store and does not pay rent.
3) 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 Grassstepped 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 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 and is the most leveraged drugstore chain based on its store 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 convert 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 credit risk. Rite Aid contacted a amount of its landlords in 2009 trying to get rent concession to heighten the bottom line. In June 2009, Rite Aid successfully completed refinancing .9 Billion of its debts. In 2012, Rite Aid benefits from Walgreens contract qoute with Express Scripts. Same store sales increased 2.2%, 3.2%, and 3.6% for January, February and March of 2012, respectively. Rite Aid is still losing money in fiscal year 2012 which ended in March 3, 2012. However, it is losing less, .43 per share in 2012 versus .64 per share in fiscal year 2011. The firm expects good outlook in fiscal year 2013.
Things to reconsider when invested in a pharmacy
If you are curious in investing in a asset leased by drugstore chains, here are a few things to consider:
1. If you want a low risk investment, go with Walgreens. In garage or growing areas, the degree of protection is the same whether the asset is in California where you get a 5.5% cap or Texas where you may get a 6.5% cap. So, there is no essential benefit to spend in properties in California as the asset value is based primarily on the cap rate. In 2012, the offered cap rate for Walgreens seems to come down from 7.5%-8.4% in 2009 to 5.5%-6.5% for new stores.
2. If you are willing to take more risk, then go with Rite-Aid. Some properties face of California may offer up to 9% cap rate in 2012. However, among the 3 drug chains, Rite Aid has 10.5% opening of going under in 2010. Should it contend bankruptcy, Rite Aid has the selection to pick and choose which locations to keep open and which locations to terminate the lease. To minimize the risk that the store is shuttered, choose a location with strong sales and low rent to earnings ratio.
3. Financing should be an prominent 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.
4. If you are not a conservative investor or risk taker, you may want to reconsider a Cvs pharmacy. It has Bbb+ S&P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some leases may offer good 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 corner with about 75 - 80 parking spaces in a growing and high traffic location. They all need 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 opening 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 accumulate a asset that does not meet the new requirements, for example a drive-through, you may have a qoute getting financing as lenders are aware of these requirements.
6. If the pharmacy is opened 24 hours a day, it is in a good location. Drugstore chains do not open the store 24 hours day unless the location draws customers.
7. Many properties may have a division lease, i.e. The landlord can get supplementary rent when the store's each year earnings exceeds a inevitable figure, e.g. M. However, the earnings used to compute division 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 inventory 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 accumulate supplementary division rent. The store with a division rent is required to report its each year sales to the landlord. As an investors, you want to spend in a store with strong gross sales, e.g. Over 0 per quadrate foot a year. In addition, you also want to check the rent to earnings ratio. If the form is in the 2-4% range, the store is likely to be very profitable so the opening the store is shut down is low.
8. It does not matter how good the tenants are, avoid investing in declining, e.g. Detroit 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, earnings may be severely affected. In addition, the tenant can all the time moves to a new location down the road when the lease expires since there is low wall to entry in a small town. These properties are easy to buy now and hard to sell later. When the credit 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 involving 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 several reasons. Here are just a combine 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 need 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 need very small amount of equity to acquire, e.g. 10% of the purchase 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 7-9% range, and the interest rate on the loan could be involving in the 5.5% to 6% range. Hence, the investor pays off the loan in 10 to 20 years. However, you have no inevitable cash flow. This requires you to come up with face cash to pay earnings tax on the rental profits (the difference in the middle of the rent and mortgage interest). The longer you own the property, the more face 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 ample losses from other venture 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 properties. As a result, the combined chargeable profits are only ,000.
- The uninformed investors who fail to reconsider that they have to raise supplementary cash to pay earnings taxes.
Out of the Box Thinking
If you put too much weight on the S&P rating of the tenants, you may end up whether taking a lot of risks or passing up good opportunities.
A 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 concluded down later on (yes, Walgreens concluded 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 simply because it has a Walgreens sign on the building.
No firm is crazy sufficient to close a profitable location. It does not take rocket science 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 decide if a drug store location is profitable or not if the tenant is not required to disclose its profit & loss statement? The retort is you cannot. However, you can make an educated guess based on the store's each year gross earnings which is often reported to the landlord as required by the division clause in the lease. With the gross revenue, you can decide 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 profit 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 10% cap, chances are it's a low risk venture with good returns and the tenant will most likely to renew the lease. The weakness of corporate guaranty from Rite Aid is probably not as essential and the risk of having Rite Aid as a tenant is not no ifs ands or buts that significant.
Drug market with new 25 years leases tend to sell at lower cap, e.g. 6-7% cap on new market versus 8.0-8.5% cap on established locations with 5-10 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 inherent of 20% depreciation (buying new at 6% cap and selling at 7.5% cap when the leases have 8 year left). Some investors will not reconsider investing in drug market with 5-10 years left on the lease. They might simply ignore the fact that the established market may be at irreplaceable locations with very strong sales. Tenants simply have no other choices other than renewing the lease.
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