There are 3 major drugstore chains in the U.S.: Walgreens, CVS and Rite Aid. The following table lists the companies by market capitalization and turnover in September 2009:
Walgreens ranks # 1 with a market capitalization of $ 34.26 billion, $ 62.23 billion revenue, S & P rating of A +. According to Walgreens, 75% of U.S. population lives within 3 miles away from their shops. On 1 October 2009 Walgreens opened its 7,000 th store in Brooklyn, New York.
CVS ranks # 2 with a market capitalization of $ 52Billion, $ 93.27 billion turnover (CVS revenue alone is less than Walgreens, if the revenue from the Caremark-deleted group that is), and S & P rating of BBB +. CVS opened its 7,000 th store in Little Canada, Minnesota, on 5 October 2009.
Rite Aid # 3 rows with market capitalization of $ 1.87 billion, $ 26.21 billion revenue, 4901 stores and S & P rating of B-.
The purchase of real estate occupied by the drugstore chains for the following reasons:
The drugstore chain business is veryRecession-sensitive. People need medicine when they are sick, regardless of the state of the economy. Both rich and poor people in the U.S. have access to medicines. Some even argue that people with low incomes and more medicines available through free or low-cost drugs from the government supported programs to use. Thus, the tenant should do well during the difficult time and to pay money to landlords.
The drugstore chain company has good prospects in the U.S.:
People are living longer and need more medicineLongevity obtain, such as osteoporosis, Actonel, Aricept for the symptoms of Alzheimer's disease. Older people tend to use more medicines than younger people. As the 78 million baby boomers are getting closer to retirement age in 2008, the drugstore chains, the demand for the medicine expect in the next 20 years increased.
The drug market continues to expand as the U.S. population will grow further.
There are new drugs to treat previously incurable diseases and new diseases, such as Viagra for menUnfortunately, Zoloft for depression, Avastin for colon cancer, Herceptin for breast cancer, nicotine patches for smokers, the habit, Tamiflu for a possible bird flu pandemic vaccine for pigs kick (H1N1) influenza pandemic, Tekturna / Rasilez for hypertension and several new drugs for AIDS, and Attention Deficit Disorder (ADD). The new drugs are very expensive, for example, one years supply of Avastin costs about $ 55,000. Eli Lilly has sold about $ 4.8 billion in 2007, Zyprexa for schizophrenia and evenMost people have never heard of this drug.
There are already existing drugs now approved to treat new diseases and thus improve their sales. For example, Lyrica was originally caused pain caused by nerve damage in patients with diabetes. It is now approved by the FDA for the treatment of fibromyalgia, which affects 5.8 million Americans per WebMD.
Major advances in genetics, biology and stem cell research is expected that a new class of drugs to treat diabetes, Parkinson's and produce differentrare genetic disorders. For example, the new drug from Novartis Ilaris targets genetic causes of a hereditary disease that only 7000 cases are known worldwide. But hopes to expand gradually Novartis his medication for a blockbuster drug to more common disorders that are caused by similar genetics.
Technology and modern life introduce and require new products, such as a pregnancy test kits, Lamisil for a stronger clearer toenails, Latiss for longer lashes thicker, Premarin for menopausal symptoms,diabetic monitors, electronic toothbrushes, contact lenses, lenses cleaners, diet pills, vitamins, birth-control pills, IUDs, nutrition supplements and Cholesterol-lowering pills (Americans spent nearly $26B in 2006 on Cholesterol medications alone per IMS Health, a Connecticut-based consulting company 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 Vicodin needed, such as for the pain and warfarin to prevent blood clots during surgical procedures.
Before the customers, the aisles can get medicine or pharmacy counters, they have chocolate, lemonade, digital cameras, watches, toys, dolls, beer and wine, cosmetics, video games, flowers, perfumes over, and greeting cards. They hope to have you with the one-hour service photos and share these liquid propane tank. The stores also carry seasonal products, such as Halloween costumes and "As Seenon TV "products, such as Shamwow. As a result, buy sell customers more than their prescriptions and medicine in these drugstores. Rite Aid 28,000 non-pharmacy products in its stores as Walgreens 22,000 different items in the shelves. CVS has reported that non-pharmacy sales represented 30% of the total turnover of the company in January 2007. The figure for Walgreens is 34% and 37% at Rite Aid. Pharmacy Many sites are, in fact, convenience stores, especially those who are in residential areasor rural areas. During the recession, sales of these items as customers buy what they need and not what they want. Walgreens attempts to reduce the number of items from 4000 on. It also leads his own label, which has higher profit margins.
There are more and more generics on the market a series of hugely popular blockbuster brands will lose their 20-year long patents, such as Lipitor (the world's top-selling drug for lowering cholesterol levels) in 2010, Viagra (Youknow what it's) in 2012. Drugstores sell customers prefer generics by larger margins than the branded drugs.
Some people are addicted to painkillers to get as Hydrocodone and consume a large amount of medicine, such as 30-day dosing in a day too high. According to the National Institute on Drug Abuse, U.S. pharmacies account for nearly 180 million prescriptions in 2007 for opiates like Hydrocodone.
The author estimates that at least 10% of thethe dispensed medicines are not used and idle in the medicine cabinet. They are finally expired and discarded.
These companies sign very long-term, NNN leases, guaranteed by its assets. This makes the investment in the underlying property relatively low risk, especially for Walgreens with an A + S & P rating. In fact, these properties as investment grade are called properties. Once the drugstore chains sign the lease, they pay the rent promptly andthe right time. This author is not aware of all the properties through one of these drugstore chains in which the tenant does not pay rent leases. Even if the shops are closed because of weak sales (Walgreens closed 119 stores in 2007), they allow these companies to continue to sublease properties to other companies and pay the rent on the master lease.
Investment Risks
Although the pharmacy in general in the recession-sensitive, there are risks involved in yourInvestment:
The main drawback to investing in pharmacies there is little or no rent bump for a long time, eg 20-50 years, especially for Walgreens. Thus, the rent is actually considered to reduce inflation in. This is one of the main reasons for these properties do not get down to younger investors.
The 3-drugstore chains now have a new formidable competitor, Wal-Mart. Wal-Mart sells prescription drugs in more than 4,000 Wal-Mart, Sam's Club and Neighborhood Market stores in 49States. The retail giant is ready for launch in 2006 published a very $ 4 generic prescription drug program, which now sells 350 generic known for a 30-day supply. The actual number of medications is less than the drugs with different strengths are counted as different drugs. For example, metformin, are numbered 500 mg, 850 mg and 1000 mg than 3 medications. Wal-Mart probably makes little profit on these drugs if available. However, the marketing campaign generated a lotthe public for Wal-Mart (Target is now offering the same medications used for 4 U.S. dollars, but few people know.) Wal-Mart wants to attract customers to his business with other legislation, where it has higher profit margins. In an unscientific poll found only one with branded prescription of Lyrica, this author to the lowest price at Costco, the highest price at Walgreens and Wal-Mart in the middle.
Chief Business Correspondent Rick Newman of U.S. News & World Report predicted that Rite Aidcould not survive in 2009. It looks like he might be wrong. The study by Audit Integrity was Rite Aid on a 10.5-percent chance of filing for bankruptcy in 2010. However, the stocks seem to perform very well in the second half of 2009. For the second quarter ended in August 2009, Rite Aid will reduce the loss of up to $ 116 million, compared with a loss of $ 222 million a year earlier.
Drugs are also sold in thousands of supermarkets, Target and Costco.
Many leases in areas where hurricanes and tornadoesNNN leases with the exception of roof and structure. So, if the roof is damaged, you must pay for the costs.
Less than 3 drugstore chains, Walgreens and CVS pharmacies generally have the best sites at major intersections, Rite Aid, while less than premium sites.
Walgreens: The company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has existed for more than 100 years, most transactions only 5-10 years old. This is the bestmanaged company among the top three drugstore chains and also among the most admired company public in the U.S.. The company was founded by executives with a long history of success running and let the best graduates from universities. Irreplaceable due to its superior financial strength - S & PA + rating - and premium locations, properties with leases from Walgreens get the highest price per square foot and / or the lowest cap rate among the 3 drugstores. In addition, Walgreens will lease property or at very lowRent increase for 20 to 60 years. The cap rate is often in the low 6% to 7.5% in 2009. Investors who buy the Walgreens are generally more mature, closer to retirement age. Are you looking for a safe investment, where it is always important to check for the rent in order to acquire an appreciation as to have. Often compare the returns on their investments Walgreens with the lower income from U.S. government bonds or Certificate of Deposits from banks. Walgreens opened many new stores in 2008 and 2009 and enabledsee many new Walgreens stores for sale. It is this expansion will slow in 2010 and focus instead on the renovation of existing stores
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 ". From 2009, CVS has over 6300 stores in the U.S., mainly through acquisitions. In 2004, CVS bought Eckerd drugstores in 1200 primarily in Texas and Florida. In 2006, CVS bought 700 Savon and Oscodrugstores mostly in Southern California. And in 2008 CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $2.9B 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 company 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 save his own to any Eckerd. Each LLC signs the lease with the owner. In the event of failure of the owner can legally only go after the assets of the LLC and not from any other CVS assets. Even if the owner loses the guarantee of security from the CVS corporate assets, this author is not aware of any incident where CVS closes a store and pay no rent.
Rite-Aid: Rite Aid was founded by Alex Grass, he was (died on August 27, 2009 at theAge 82 years) and opened its first store in 1962 as "thrife D Discount Center in Scranton, Pennsylvania. It formally established as a Rite Aid Corporation and went public in 1968. At the time, Alex Grass joined the company as chairman and chief executive officer in 1995, was Rite Aid stores nationwide the largest drugstore chain in terms of total number and No. 2 in terms of revenue. His son Martin Grass took over, but was ousted in 1999 for overstatement of profits Rite Aid in the late 1990s.Rite Aid is now the financially weakest of the 3 drugstores. In 2007, Rite-Aid bought about 1,850 Brooks and Eckerd drugstores, mostly along the East Coast to catch up Walgreens and CVS. In this process it has recorded a huge long-term debt (currently owes about $ 5.69 billion EUR) and is the leveraged drugstore chain based on its market value. The integration of Brooks Eckerd and seemed to not go well. Revenue from some of these transactions went so far as 20% after the changeSigns, Rite Aid. From 2009, Rite-Aid has more than 4,900 branches and more than 26 billion U.S. dollars in revenues. On 21 January, 2009, Moody's Investor Services downgraded Rite Aid of "Caa1" to "Caa2," eight levels below investment grade. Both ratings are "junk" to indicate the very high credit risk. Rite Aid contacted a number of its owner in 2009, trying to get rent concession to the bottom line improved. Rite Aid in June 2009 successfully completed refinancing of 1.9 billion U.S. dollars of its debt. In September 2009Rite Aid reported a lower loss for the second quarter ended in August 2009.
Things to note when they invested in a pharmacy
If you are in investing in a property leased by drugstore chains are interested, here are a few things you should note:
If you go at low risk investments with Walgreens. In stable or faces, which is the level of certainty is the same whether the property in California, where you get a 6% cap or Texas, where you can get a 7.5% ceiling. So thereno significant advantage in the properties in California, when the value of the property to invest, is placed primarily on the cap is based. In 2009, the top cap rate for Walgreens to about 1% seems to increase as compared to previous years. So you might be able to get some appreciation for your investment if you are selling at lower cap rates in the future.
If you are willing to take more risk, then go to Rite-Aid. Some properties outside of California can offer up to 10.75%% cap rate in 2009. However, among the 3Drug chains, Rite Aid has 10.5% chance of going under in 2010. Should it declare bankruptcy, Rite Aid has the ability to choose to keep open the sites and to terminate at those places, the rental agreement. To minimize the risk that the memory select minimize closure to a location with strong sales and low rent to sales ratio.
If you are not a conservative investor or risk taker, you can check on a CVS pharmacy. It has S & P BBB + rating. The cap is higher than Walgreens, butlower than Rite Aid. Some contracts may offer a better rent bumps. On the other hand, some are CVS leases, especially for homes in hurricane zones, such as Florida do not really NNN lease in which Landlord is responsible for roof and structure. So watch out, the cap rate adjusted down accordingly. Some of the CVS locations have on-the-minute clinic staffed by registered nurses. Since this clinic idea was introduced recently, it is not clear, with a clinic in CVS is a plus or minusto save the bottom line.
All 3 drugstore chains have similar requirements. They all want highly visible, standalone, rectangular property around 10,000 - 14,500 SF at 1.5 to 2 hectares of land, preferably on a corner with about 75 to 80 parking spaces in a growing and high-traffic location. They all require the property have to be a drive-thru. Therefore, you should avoid purchasing an inline property, ie not standalone and property with no drive-thru window. It is possible that these pharmaciesdo not want the lease, if the accommodation is in a densely populated area with no vacant land near to refresh. In addition, if you have a property that can not acquire the new requirements, such as a drive-thru, you have a problem financing as lenders are aware of these requirements.
If the pharmacy is open 24 hours a day, it is in a better position. Drugstore chains do not open the store 24 hours a day, if the location attracts customers.
Many properties can have aReceive a percentage lease, ie, the landlord may require additional pension, if the business's annual sales have more than a certain number, say $ 5M. But the revenue used to calculate percentage rent often includes a page long list of things such as wine and beverages, tobacco products, items sold at 10 clock, medications, paid by state programs, etc., excluding sales could account for as much as 70% of the gross store. As a result, this author only 1 store in which the landlord is able to have seencollect additional percentage point of hire. The business with a share rent is required to report their monthly sales to the landlord. As investors, you want to invest in a business with a strong gross sales, for example about $ 500 per square meter per year. In addition, you also want to review the rent to revenue ratio. If the number is in the range of 2-4%, the store is likely to be very profitable, so the chance that the business is down low.
It does not matter how good the tenants to avoid investments, decliningand / or low-income areas or small towns with fewer than 30,000 residents within 5 miles ring. In a small town it may be the only pharmacy in the city and captured most of the market share. However, if a competitor opened a new facility in the region, revenues may severely affected. These properties are now difficult to simply buy and sell later. In 2009, when the credit market is tight, you may have problems finding a lender to finance these properties.
Many properties have an existing loan that theBuyer must assume. If you have an Exchange 1031, you think twice about buying this property. They should clearly communicate their loan approval requirements of the lender before it. If you can not take over existing loans (assuming an existing loan is much more difficult as) a new loan, you may run out of time for a replacement and 1031 may be liable to capital gains paid.
With few exceptions aside, the drugstore chains do not own the business they occupy for several reasons. Here are just asome of them:
You know the pharmacy business, but do not know real estate. Stock investors do not want to Walgreens for a real estate investment company.
The possession of the properties will require them to conduct many of the long-term debt that is not a great idea for a listed company.
About 10% of pharmacy homes for sale and typically CVS pharmacies a very small amount of shares necessary to acquire, for example, 10% of the purchase price. You are not requiredto assume an existing fully amortized loan with zero cash flow. This means that all the rent must be paid by the tenant to pay the loan down. The cap rate can be in the 7% range, and the interest rate on the loan could be attractive at the 5.5% is 6%. Therefore, the investor pays the loan in 10 to 20 years. However, the investor has no positive cash flow. This requires that you get cash out of the income tax on the profits to pay the rent (the difference between the rent and mortgageInterest). The longer you own the property, outside the more money you will need to pay the income tax as the mortgage interest will get less and less at the end. So who would buy this kind of property?
The investors, the substantial losses of other real estate or stocks have market. By acquiring this zero cash flow property can be offset income from the drugstore tenant against the losses from other properties or stock market. For example, a $ 105,000 rental property hasWin a year, and the investor also has rental losses of U.S. $ 100,000 from other properties. As a result, the combined profits only $ 5,000.
The uninformed investors who consider that they raise additional money to have failed to pay income tax.
Out of the Box Thinking
If you take too much weight on the S & P rating of the tenant, you can end up either for a set of risks or in transit to a good chance.
Good location should be the key in the decisionthe pharmacy to invest in. It is often said, a lousy business should do well on a superb location, while the best tenant will fail a lousy place. A Walgreens store closed later (yes, Walgreens closed 119 stores in 2007) is still a bad investment, even if Walgreens will continue rent paid on time. So you do not want to invest blindly in a pharmacy, just because it is a Walgreens.
No company is crazy enough to close a profitable location. It does not take aRocket scientist to understand that a financially weak companies such as Rite Aid will make every effort to make to keep open a profitable position. On the other hand, a financially strong justifications Walgreens will have to continue unprofitable erect one location. How do you determine whether a pharmacy site is profitable or not, if the tenant is not obligated to disclose its profit and loss account? The answer is: you can not. However, you can an educated guess based on annual gross revenue is to be storedoften reported that the landlord, as required by the percentage clause in the lease. With the gross revenue, you can determine the rent to income ratio. The lower the ratio, the more likely the business is profitable. For example, if the annual base rent is $ 250,000, while the business's gross revenue $ 5M then the rent income ratio is 5%. As a general rule, it is difficult to make a profit, if this ratio is more than 8%. So, if you rent a Rite Aid with 3% to income ratio then you know it is probably avery convenient location. In the event Rite Aid announces bankruptcy, it will always open the site and will continue to pay rent. If you have a Rite Aid Drug Store you will find a 3% rent to income ratio of 11% cap, chances are it is a low risk investment with good returns. The weakness of the company's guarantee of Rite Aid is probably not so critical and the risk of Rite Aid as a tenant is not really significant.
