Pensacola, Fl

There are 3 major drugstore chains in the United States: Walgreens, CVS, and Rite Aid. Here are some key statistics about the three major pharmacy chains as of 2012:

1. Walgreens ranks first with a market capitalization of $ 28.51 billion, $ 72.2 billion in total revenue for 2011 ($ 45.1 billion in prescription revenue), and a S&P ranking of A. According to Walgreens, 75% of the U.S. population lives some distance away. 3 miles from its stores. In April 2010, it acquired 258 Duane Reade drug stores in the New York Metropolitan area bringing in a total of 7,841 drugstores operating to Walgreens as of February 2012, including 137 on-site pharmacies.

2. CVS ranked second with market capitalization of $ 56.56 billion, revenue of $ 107.1 billion ($ 40.5 billion in revenue from CVS prescriptions and $ 16.1 billion in revenue from Caremark’s prescription mail orders), and the S&P ranking for BBB +. As of December 31, 2011, CVS 7404 operates a drug store.

3. Rite Aid ranks third (fourth, behind Walmart in terms of prescription revenue) with a market value of $ 1.49 billion, $ 26.1 billion revenue ($ 17.1 billion in prescription revenue), and operates 4,714 drug stores as of February 2011. S&P rating B-.

Investors purchase properties that these pharmacy chains occupy for the following reasons:

1. The pharmacy activity is insensitive to stagnation. People need medicine when they are sick, regardless of the state of the economy. Both the rich and the poor in the United States have access to medicines. Some even argue that people with lower incomes use more drugs because of free or low-cost drugs offered by government-backed programs. So tenants have to do well during tough times and have the money to pay rent to landlords.

2. The pharmacy industry has good opportunities in the United States:

People live longer and need more medication to maintain longevity, for example Actonel for osteoporosis, Aricept for Alzheimer’s symptoms. Older adults tend to use medications more than younger people because they often have more medical problems. With 78 million baby boomers approaching retirement age starting in 2008, pharmacy chains expect an increase in demand for drugs in the next 20 years.

The pharmaceutical market continues to expand as the US population continues to grow. More and more Americans suffer from various diseases. The number of Americans with seasonal allergies has doubled in the last 15 years to 37 million per Fortune. They spent $ 5.4 billion in 2009 on allergy medication. With enlarged waistlines (75% of Americans are expected to be either overweight or obese by 2020), more Americans are being diagnosed with diabetes, along with higher blood cholesterol at younger and younger ages. Additionally, doctors also recommend treating various diseases sooner rather than later due to a better understanding of diseases. For example, doctors now prescribe antiretrovirals to patients shortly after contracting HIV rather than waiting for the infection to pass into AIDS. More doctors combine insulin with oral medications to treat type 2 diabetes rather than the oral medications alone. All these factors increase the size of the pharmaceutical market.

• Advances in genetic engineering have led to the introduction of new sets of genetic DNA testing tools that allow the genetic diagnosis of vulnerabilities to inherited diseases and disorders. Genetic testing is currently the highest growing segment of the diagnostic industry. Some of these genetic tests will likely turn into direct-to-consumer test kits available in drugstores in the near future, and after FDA approval, these new products will likely bring additional revenue to drug stores.

Using a new method for designing particles called structure-based design. Pharmaceutical companies are creating new drugs that they would not otherwise have discovered, for example Xalkori from Pfizer for treating lung cancer.

• Passage of the Healthcare Reform Bill on March 23, 2010 provides insurance coverage for an estimated additional 33 million Americans. This is a great gift for the pharmacy industry.

• There are new drugs to treat diseases that could not be treated previously, and new diseases, such as Viagra for male misery, Avastin for colon cancer, Herceptin for breast cancer,. Newer drugs are very expensive, for example the cost of a one-year supply of Avastin is around $ 55,000. Eli Lilly sold about $ 4.8 billion of Zyprexa in 2007 for schizophrenia yet most people have never heard of this drug before.

• There are existing drugs that are now approved to treat new diseases and thus increase their sales revenues. For example, Lyrica was originally intended to treat pain caused by nerve damage in people with diabetes. It is now approved by the U.S. Food and Drug Administration to treat fibromyalgia that affects 5.8 million Americans per WebMD.

• It is expected that the great advances in genetics, biology and stem cell research will lead to the production of a new class of drugs for treating diabetes, Parkinson’s disease and various rare genetic disorders. For example, Novartis’ new drug Ilaris targets the genetic causes of a genetic disorder in which there are only 7,000 known cases worldwide. However, Novartis hopes to gradually expand its drugs range to include more common drugs that are caused by similar genetic factors.

Advances in technology and modern life and demands new products, for example pregnancy test kits, Lamisil for stronger and clearer toenails, Latisse for longer and thicker eyelashes, Propecia for male hair loss, Premarin for symptoms of menopause, diabetes monitors, electronic toothbrushes, contact lenses , Lens cleaners, diet pills, vitamins, birth control pills and IUDs, nutritional supplements and cholesterol-lowering pills (Americans spent nearly $ 26 billion in 2006 on cholesterol medications alone per IMS Health, a Connecticut-based consulting firm that monitors drug sales.)

• Before customers can reach drug lanes or pharmacy offices, they must pass by chocolate, soft drinks, digital cameras, watches, toys, toys, beer, wine, cosmetics, video games, flowers, perfumes and greeting cards. Drug stores are hoping to use the one-hour photo services there. The stores also have seasonal items, for example Halloween costumes and “as seen on TV” merchandise, for example Shamoo. As a result, customers buy more prescription and over-the-counter medications at these pharmacies. CVS reported that non-pharmaceutical sales accounted for 30% of the company’s total sales in January of 2007. The figure for Walgreens is 34% and 37% for Rite Aid. Many pharmacy locations are actually small stores especially those in residential or rural areas. And so Walgreens hopes that customers will also get WD-40 and screwdrivers from their stores instead of Home Depot; Thai jasmine rice and fish sauce to avoid traveling to the Safeway or Kruger supermarket. During the recession, sales of these non-medicinal items decreased as customers buy what they need rather than what they want. Walgreens is trying to reduce the number of items by 4,000 items. It also offers its own brand with higher profit margins.

There are more and more generic drugs on the market as a number of the most famous brands are losing their 20-year patents, for example Lipitor (the world’s best-selling drug for lowering cholesterol) in 2010, Viagra (you know its purpose) in 2012 Pharmacies prefer to sell generic medicines to customers due to higher profit margins than brand-name medicines.

Many people are addicted to pain relievers, for example hydrocodone / oxycodone. According to the Drug Enforcement Administration in 2012, there are 1.5 million Americans who are addicted to cocaine but 7 million are addicted to drugs.

• This author estimates that at least 10% of prescription drugs are never used and remain idle in medicine cabinets. They eventually expire and are disposed of.

3. These companies sign long-term leases from NNN, secured by their corporate assets. This makes investing in the base property fairly low risk, especially for Walgreens with a S&P rating of “A”. In fact, these properties are sometimes referred to as investment grade real estate. Once pharmacy chains sign the lease agreement, they pay the rent promptly and on time. This author is not aware of any properties rented by one of these pharmacy chains where their tenants have failed to pay their rents. Even when stores are closed due to poor sales (Walgreens closed 119 stores in 2007), these companies may sublease properties to other companies, for example upfront auto parts and continue to pay rents on prime leases.

• A typical Walgreens lease consists of 20-25 base years with 8-10 options for five years. During the initial period and options, there will be no rental increases in most leases. This is the major disadvantage of investing in Walgreens pharmacies.

• A typical CVS lease consists of 20-25 years for an initial period with 4-5 options for a five year period. The rent is usually fixed during the initial period and then there is a rent increase of 2.5% to 10% in each 5-year option.

• A typical ritual assistance lease consists of 20-25 years for an initial period plus 4-8 options for a period of five years. Often a lease agreement will have a rent increase every 5-10 years.

Investment risk

Although the pharmacy business is generally insensitive to a recession, your investment carries risks:

1) The main downside to investing in pharmacies is having little or no rental bump for a long time, say 20-50 years, especially for Walgreens. So the rent is effectively reduced after taking inflation into account. This is one of the main reasons why these properties do not appeal to younger investors, especially when the cap rate is low.

2) The three drugstore chains now have a formidable new competitor, Walmart. Walmart sells prescription drugs at more than 4,000 Walmart, Sam’s Club, and Neighborhood Market stores in 49 states. As of 2012, Walmart is the third largest drug retailer with $ 17.4 billion in prescription sales, just ahead of Rite Aid with $ 17.1 billion in prescription sales. The retail giant is best known for launching in 2006 a highly publicized $ 4 generic drug program that now sells 350 generic drugs for 30 days. The actual number of drugs is less as the drugs of different strengths are counted as different drugs. For example, metformin 500 mg, 850 mg and 1000 mg count as 3 drugs. Walmart will likely make very little, if any, profit from these drugs. However, the marketing campaign – created by Bill Simon, President and CEO of Walmart US, generates a lot of publicity for Walmart. Walmart hopes to attract customers to its other prescription stores as it has higher profit margins. In an unscientific survey with only one brand-name recipe from Lyrica, this author found the lowest price in Costco, the highest on Walgreens and Walmart in the middle. Other drug chains are trying to counter Walmart in different ways. Target now offers the same 350 generic drugs for $ 4 for 30 days. Walgreens has a membership fee prescription drug club that offers 1,400 generic drugs for $ 1 a week. CVS says it will match any offers from its competitors.

3) Rick Newman, chief commercial correspondent for the US World & News Report, predicted that Rite Aid might not survive in 2009. Rite Aid was still around in 2012. The prediction seems to have disappeared in 2012 as Rite Aid because it was able to Refinancing for a long time increased debt terms and sales revenue.

4) Medicines are also sold in thousands of supermarkets, target stores and Costco warehouses. However, there are no car windows at these stores or Walmart to easily stash prescriptions and pick up medications. Customers will not be able to collect their prescriptions during lunch hour or after 7 pm in Target stores or supermarkets. They need a membership to purchase drugs from Costco. Others may not fill out their Walmart prescriptions because they don’t want to mix with the typical Walmart customers who are in low-income groups. And some baby boomers don’t want to fill out their prescriptions at Target or Walmart because there are no comfortable chairs for them to sit and wait for their medication.

5) The pharmaceutical business is controlled to some extent by Pharmacy Benefit Managers (PBMs). Clients usually get prescription coverage from their health insurance companies, for example Blue Cross. PBM administers these prescription benefits on behalf of insurance companies. In 2012, Walgreens lost a contract worth more than $ 5 billion with Express Scripts, a major PBM company. Walgreen’s revenue immediately plummeted in the first quarter of 2012 as Express Scripts customers couldn’t fill out their prescriptions at Walgreens. PBMs also operate the drug retail trade via mail orders that do not require renting expensive retail space. Prescription mail orders currently account for more than 20% of the market share of total prescription revenue. If customers change their prescription buying habits into mail order (no such evidence exists in 2012), this could have a negative impact on the pharmacy chain business.

6) Many of the leases in regions with hurricanes and tornadoes are NNN leases excluding roof and frame. So if the roof is damaged, you will have to pay the expenses.

7) The lessee may move to a new place on the road or across the street when the lease expires. This risk is high when the property is located in a small town where there are low barriers to entry, meaning a lot of vacant and developable land.

8) The lessee may request a rental lien to improve his net profits during difficult times. The likelihood is higher if the tenant is a Rite Aid and if the store has sales revenue that is low and / or higher than the market rent.

9) More Americans are giving up their prescriptions, especially the more expensive brand name drugs. This may have a negative impact on sales revenue and drug store profits and thus may cause drug stores to close. According to Wolters Kluwer Pharma Solution, a healthcare data company, 1 in 10 new branded drug prescriptions were abandoned by people with commercial health plans in 2010. This is 88% more than it was 4 years ago. Years just before the recession began. This trend is driven in part by higher and higher co-payments for brand name drugs as employers transfer more insurance costs to their employees.

Out of the 3 drugstore chains, Walgreens and CVS pharmacies generally have the best locations – at major intersections while Rite Aid has the fewest locations. Walgreens tends to hire only the best graduates from pharmacy schools while Rite Aid settles down with the lowest graduates to save costs. When possible, all pharmacy chains try to fill prescriptions with generic drugs that have higher profit margins.

1) Walgreens: The company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has been around for over 100 years, most stores are only 5-10 years old. This is the best-run company of the three drugstore chains and also among the most admired public corporations in the United States. The company is run by executives who have proven track records and employ the best alumni from universities. Due to its superior financial strength – S&P A rating – and indispensable prime locations, properties with leases from Walgreens have the highest price per square foot and / or lowest maximum rate of the three pharmacy chains. Additionally, Walgreens gets flat rent or very low rental increases for 20 to 60 years. The cap rate is often in the low range of 5% to 6.5% in 2012. Investors who buy Walgreens tend to be more mature, i.e. closer to retirement age. They are looking for a safe investment where getting a rental check is more important than getting an estimate. They often compare the returns on their Walgreens investment to lower returns from U.S. Treasury bonds or bank certificates of deposits. Walgreens opened many new stores in 2008 and 2009 and thus sees many new Walgreens stores for sale. This will slow that expansion into 2010 and beyond and focus on revamping existing stores instead.

4) Medicines are also sold in thousands of supermarkets, target stores and Costco warehouses. However, there are no car windows at these stores or Walmart to easily stash prescriptions and pick up medications. Customers will not be able to collect their prescriptions during lunch hour or after 7 pm in Target stores or supermarkets. They need a membership to purchase drugs from Costco. Others may not fill out their Walmart prescriptions because they don’t want to mix with the typical Walmart customers who are in low-income groups. And some baby boomers don’t want to fill out their prescriptions at Target or Walmart because there are no comfortable chairs for them to sit and wait for their medication.

5) The pharmaceutical business is controlled to some extent by Pharmacy Benefit Managers (PBMs). Clients usually get prescription coverage from their health insurance companies, for example Blue Cross. PBM administers these prescription benefits on behalf of insurance companies. In 2012, Walgreens lost a contract worth more than $ 5 billion with Express Scripts, a major PBM company. Walgreen’s revenue immediately plummeted in the first quarter of 2012 as Express Scripts customers couldn’t fill out their prescriptions at Walgreens. PBMs also operate the drug retail trade via mail orders that do not require renting expensive retail space. Prescription mail orders currently account for more than 20% of the market share of total prescription revenue. If customers change their prescription buying habits into mail order (no such evidence exists in 2012), this could have a negative impact on the pharmacy chain business.

6) Many of the leases in regions with hurricanes and tornadoes are NNN leases excluding roof and frame. So if the roof is damaged, you will have to pay the expenses.

7) The lessee may move to a new place on the road or across the street when the lease expires. This risk is high when the property is located in a small town where there are low barriers to entry, meaning a lot of vacant and developable land.

8) The lessee may request a rental lien to improve his net profits during difficult times. The likelihood is higher if the tenant is a Rite Aid and if the store has sales revenue that is low and / or higher than the market rent.

9) More Americans are giving up their prescriptions, especially the more expensive brand name drugs. This may have a negative impact on sales revenue and drug store profits and thus may cause drug stores to close. According to Wolters Kluwer Pharma Solution, a healthcare data company, 1 in 10 new branded drug prescriptions were abandoned by people with commercial health plans in 2010. This is 88% more than it was 4 years ago. Years just before the recession began. This trend is driven in part by higher and higher co-payments for brand name drugs as employers transfer more insurance costs to their employees.

Out of the 3 drugstore chains, Walgreens and CVS pharmacies generally have the best locations – at major intersections while Rite Aid has the fewest locations. Walgreens tends to hire only the best graduates from pharmacy schools while Rite Aid settles down with the lowest graduates to save costs. When possible, all pharmacy chains try to fill prescriptions with generic drugs that have higher profit margins.

1) Walgreens: The company was founded in 1901 by Charles Walgreen, Sr. in Chicago. While the company has been around for over 100 years, most stores are only 5-10 years old. This is the best-run company of the three drugstore chains and also among the most admired public corporations in the United States. The company is run by executives who have proven track records and employ the best alumni from universities. Due to its superior financial strength – S&P A rating – and indispensable prime locations, properties with leases from Walgreens have the highest price per square foot and / or lowest maximum rate of the three pharmacy chains. Additionally, Walgreens gets flat rent or very low rental increases for 20 to 60 years. The cap rate is often in the low range of 5% to 6.5% in 2012. Investors who buy Walgreens tend to be more mature, i.e. closer to retirement age. They are looking for a safe investment where getting a rental check is more important than getting an estimate. They often compare the returns on their Walgreens investment to lower returns from U.S. Treasury bonds or bank certificates of deposits. Walgreens opened many new stores in 2008 and 2009 and thus sees many new Walgreens stores for sale. This will slow that expansion into 2010 and beyond and focus on revamping existing stores 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 had about 6,300 stores in the United States, most of them through acquisitions. In 2004 CVS bought 1,200 Eckerd Pharmacy mostly in Texas and Florida. In 2006, CVS bought 700 Savon and Osco pharmacies mostly in Southern California. In 2008, CVS acquired 521 Longs Drugs stores in California, Hawaii, Nevada and Arizona for $ 2.9 billion. The acquisition of Long Drugs appears to be a good thing because CVS does not have any stores in Northern CA and Arizona. Besides, the price includes real estate as well. It also purchased Caremark, one of the largest PBMs and changed the company name to CVS Caremark. When CVS purchased 1,200 Eckerd store, it formed a Limited Liability Company (LLC) to own every Eckerd store. Each LLC signs a lease agreement with the property owner. In the event of a default, the owner can only legally pursue the assets of the LLC and not from any other assets owned by CVS. Although the owner loses the escrow guarantee from CVS assets, this author is not aware of any incident in which CVS closes a store and does not pay the rent.

3) Rite-Aid: Rite Aid was founded by Alex Grass (just died August 27, 2009 at the age of 82) and opened its first store in 1962 as the “Thrif D Discount Center” in Scranton, Pennsylvania. It was officially incorporated as Rite Aid Corporation and went public in 1968. By the time Alex Grasssted stepped down as chairman and CEO of the company in 1995, Rite Aid was the nation’s largest pharmacy chain by total stores and # 2 in terms of Revenues. His son Martin Grass took over but was ousted in 1999 due to overstating Rite Aid’s earnings in the late 1990s. Rite Aid is now the financially weakest of the three pharmacy chains. In 2007, Rite-Aid acquired about 1,850 pharmacies in Brooks and Eckerd, most of them along the East Coast to catch up with Walgreens and CVS. In the process, it has added huge long-term debt and is the most effective pharmacy chain based on its market value. Brooks and Eckerd’s merger does not seem to be going well. Revenue from some of these stores has decreased by as much as 20% after the tag changed to Rite Aid. In 2009, Rite-Aid had 4,900 stores and over $ 26 billion in revenue. The numbers dropped in 2010 to 4,780 stores and $ 25.53 billion in revenue. On January 21, 2009, Moody’s Investor Services downgraded Rite Aid from “Caa1” to “Caa2”, by eight notations below investment score. Both ratings are “Junk”, indicating a very high credit risk. Rite Aid contacted a number of landlords in 2009 in an effort to obtain the rental franchise to improve the bottom line. In June 2009, Rite Aid successfully completed a refinancing of $ 1.9 billion of its debt. In 2012, Rite Aid took advantage of Walgreens contract issue with Express Scripts. Same store sales increased by 2.2%, 3.2% and 3.6% for January, February and March 2012 respectively. Rite Aid is still losing money in fiscal year 2012 that ended March 3, 2012. However, it is losing less, $ 0.43 per share in 2012 versus $ 0.64 per share in fiscal year 2011. The company expects better outlook in fiscal year 2013.

Things to consider when investing in a pharmacy

If you are interested in investing in drugstore leased property,

Here are a few things to consider:

1. If you want a low risk investment, go to Walgreens. In stable or growing areas, the degree of safety is the same whether the property is in California, where you get a 5.5% ceiling, or Texas, where you might have a 6.5% ceiling. Therefore, there is no great advantage to investing in real estate in California as the property value mainly depends on the cap rate. In 2012, Walgreens’ cap rate appears to have decreased from 7.5% -8.4% in 2009 to 5.5% -6.5% for new stores.

2. If you are willing to take more risks, go to Rite-Aid. Some properties outside of California may offer a cap rate of up to 9% in 2012. However, of the three drug chains, Rite Aid has a 10.5% chance of receding in 2010. In the event that it declares bankruptcy, Rite Aid has the option of picking and selecting locations. Which locations must be kept open and which locations must end the lease. To reduce the risk of store closures, choose a location with strong sales and a low rental-to-revenue ratio.

3. Funding should be an important 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 or risky investor, you may want to consider CVS Pharmacy. It has a BBB + S&P credit rating. Its cap rate is higher than Walgreens but lower than Rite Aid. Some lease contracts may offer better rent pitfalls. On the other hand, some CVS leases, especially for properties in hurricane regions, for example Florida are not really NNN leases where the owners are responsible for the roof and the structure. So make sure to set the cap rate down accordingly. Some CVS sites have an on-site Minuteclinic staffed by registered nurses. Since this clinic idea was introduced recently, it is not clear that having a clinic within CVS is a plus or minus minus to the store.

5. All three pharmacy chains have similar requirements. They all want a very visible, rectangular, independent property of 10,000 to 14,500 sfs on 1.5 – 2 acres, preferably in a corner of 75-80 parking spaces in a busy and crowded location. They all require property to have a path. Hence, you should avoid buying embedded property, i.e. not a single property and windowless properties that can be accessed. There is a possibility that these pharmacies will not want to renew the lease agreement unless the property is located in a densely populated area and there is no vacant land nearby. Additionally, if you acquire a property that does not meet new requirements, for example, you may have trouble obtaining financing because the lenders are familiar with these requirements.

6. If the pharmacy is open 24 hours a day then it is in a better location. Pharmacy chains do not open store 24 hours unless the site attracts customers.

7. Many real estate properties may have a rental rate, that is, the owner can obtain additional rent when the annual store revenues exceed a certain number, for example $ 5 million. However, the revenue used to calculate the percentage of rent often excludes a page-long list of items, for example wine and soft drinks, tobacco products, items sold after 10 PM, and drugs paid by government programs. Excluded sales revenue can represent up to 70% of total store revenue. As a result, this author saw only two stores where a landlord could charge an additional rental percentage. The store with a rental percentage is required to inform the landlord about their annual sales. As an investor, you want to invest in a store with strong total sales, for example over $ 500 per square foot per year. Additionally, you also want to check your rental to revenue ratio. If the number is in the 2-4% range, the store is likely to be very profitable so the chance of the store closing is low.

8. No matter how good the tenants are, avoid investing in dips, for example Detroit and / or low-income areas or small cities with fewer than 30,000 residents within a 5-mile range. In a small town, it might be the only drugstore in town and capture most of the market share. However, if a competitor opens a new location in the region, revenue could be severely affected. In addition, the tenant can always move to a new location down the road when the lease expires due to the low barrier to entry in a small town. These properties are easy to buy now and hard to sell later. When the credit market is tight, you may face problems finding a lender to finance these properties.

9. Many properties have an existing loan that the buyer must take on. If you have an exchange of 1031, consider purchasing this property carefully. You must clearly understand the requirements for the loan assumption for lenders before moving forward. If you fail to take on the existing loan (assuming the current loan is much more difficult than getting a new one), you may run out of time to exchange 1031 and you may be liable for a capital gain payment.

10. With few exceptions, pharmacy chains do not own the stores they operate for a number of reasons. Here are just two of them:

They know the pharmacy business, but they don’t know real estate. Equity investors also don’t want Walgreens to become a real estate investment company.

Owning real estate will require them to take on a lot of long-term debt and it is not a great idea for a public company.

11. About 10% of pharmacy property is for sale and CVS pharmacies usually require a very small amount of stock to acquire, for example 10% of the purchase price. However, you are required to assume a fully amortized loan with no cash flow. That is, all the rent that the tenant pays must be used to repay the loan. The cap rate may be in the range of 7-9%, and the interest rate on the loan can be attractive in the range of 5.5% to 6%. Thus, the investor repays the loan within 10 to 20 years. However, you do not have a positive cash flow. This requires you to come up with outside funds to pay income tax on rental earnings (the difference between rent and mortgage interest). The longer you own the property, the more external cash you will need to pay income taxes as the mortgage interest will ultimately decrease. So who will buy this type of property?

Investors who suffered heavy losses from other investment properties. By having this zero cash flow property, they might offset income from a drugstore tenant against losses from other investment properties. For example, the property owns $ 105,000 in rental profit per year, and the investor has losses of $ 100,000 from other properties. As a result, the taxable consolidated profits are only $ 5,000.

Uninformed investors who don’t think they need to raise extra cash to pay income taxes.

Think outside the box

If you place too much importance on the S&P rating of tenants, you may end up either risking too much or missing out on good opportunities.

A good location should be the key in your decision about which drugstore to invest in. It is often said that a poor business must do well in a great location while a better tenant will fail in a poor location. The subsequently closed Walgreens store (yes, Walgreens closed 119 stores in 2007) remains a bad investment even though Walgreens continues to pay rent on time. So you don’t want to blindly invest in a drug store just because it has a Walgreens sign on the building.

No company is crazy enough to shut down a profitable website. It doesn’t take rocket science to understand that a financially weak company like Rite Aid will go to great lengths to keep a profitable site open. On the one hand, a financially strong Walgreens company will need a rationale to keep an unprofitable site open. So how do you determine whether or not a drug store location is profitable if the tenant is not required to disclose the profit and loss statement? The answer is you can’t. However, you can make an informed guess based on the total annual revenue of the store that is often reported to the owner as required by the percentage clause in the lease. By total revenue, you can determine your rental to income ratio. The lower the ratio, the more likely the store will be profitable. For example, if the annual base rent is $ 250,000 while the store’s total revenue is $ 5 million, then the rent-to-income ratio is 5%. As a general rule, it is difficult to make a profit if this percentage is more than 8%. So if you see Rite Aid with a rental income ratio of 3%, then you know that it is potentially a very profitable site. In the event Rite Aid declares bankruptcy, they will keep this site open and keep paying the rent. If you see a drug store in Rite Aid with a rent-to-income ratio of 3% that provides a ceiling of 10%, it is likely a low-risk investment with good returns and a tenant is more likely to renew the lease. Maybe Rite Aid’s corporate guarantee weakness isn’t critical and the risk of acquiring Rite Aid as a tenant isn’t really that important.

Drug stores with new 25-year leases tend to sell at a lower price, for example a 6-7% cap on new stores versus 8.0-8.5% on existing sites with 5-10 years remaining on the lease. This is because investors are afraid that tenants will not renew the leases. Unfortunately, lenders also have the same fear! As a result, many lenders will not finance drug stores with 2-3 years remaining on the leases. The fact that pharmacies with new leases have a premium over price means that they have a 20% probability of depreciation (buy new at 6% and sell at 7.5% when leases have 8 years remaining). Some investors will not consider investing in drugstores with 5-10 years left on the lease. They might simply ignore the fact that established stores may be in irreplaceable locations with very strong sales. Tenants simply have no other options than to renew the lease.

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