Even as the role of retail pharmacy stores is changing, the physical buildings and land continue to be worthwhile investments, with a steady rate of return.
At one time, the retail pharmacy was where you would go to fill a prescription. Some of these locations offered other things, ranging from non-prescription health and beauty care products, to candy and gifts.
Much like the whole healthcare industry, the retail pharmaceutical sector is undergoing a seismic shift, thanks to mergers, acquisitions and new delivery methods. For the time being, and likely into the future, these retail properties are set up to offer a steady return on investment, combined with long-term earning potential.
As of this writing, Walgreens Boots Alliance (which owns Walgreens stores) expects to close on its acquisition of 1,932 Rite Aid stores in spring 2018, marking the end of a three-year acquisition/merger activities between the two stores. Once the Rite Aid locations are merged into the Walgreens’ fold by late 2020, the latter’s US store count will be close to that of rival CVS Health.
Speaking pf which, the Woonsocket, RI-headquartered CVS is moving through the regulatory red tape in its own efforts to acquire Aetna. The Department of Justice has asked both companies to provide additional information, meaning another 30-day waiting period for federal approval. But, CVS and Aetna aren’t concerned; both companies scheduled shareholder votes on March 20, 2018.
When the deal closes, CVS plans to offer a more integrated healthcare experience by delivering preventative care services, and combining pharmacy and health benefits.
Meanwhile, on the Investment Side . . .
Though Walgreens and CVS are looking toward the future, their stand-alone retail properties can be viable investments today, for the following reasons.
- Lease Structure. The tenants commonly take down double net (NN) or triple net lease (NNN) leases, meaning less money coming from the owner for maintenance, property taxes, build-outs or repair.
- Credit-Worthiness. CVS and Walgreens enjoy BBB+ and BBB investment-grade credit ratings, respectively, and are backed by well-known, national companies. Though remaining Rite Aid stores have a marginal investment-grade rating, they can be bought at a discount.
- Longevity. These tenants don’t go anywhere in a hurry; their leases can last for 20-25 years.
- Effective Cap Rates. At one point, the retail pharmacy sector capitalization rates averaged approximately 20 basis points (bps) below the single tenant net lease average. As of the end of 2017, the average cap rate for STNL was 6.28%.
- Locations. The majority of these retail spots are highly visible, situated on heavily trafficked intersections.
- Demographics. The aging US population means increased demand for healthcare services. This, in turn, could mean an increase in visits to retail pharmacies.
Retail pharmacies are morphing from drug dispensaries to healthcare delivery centers. Right now, however, free-standing pharmacy retail centers can be viable investments, with the outlook for these assets very bright.