Triple Net Retail Walgreens, CVS, and Rite Aid – Growth Projections for 2012

Walgreens, CVSThere are big differences on expansion plans for 2012 as we come out of this giant downturn and Obama Care goes into to full effect in 2014.  To summarize: Rite Aid hopes to return to limited growth.  Walgreens ramps up again after restrained growth over the last three years and CVS is full speed ahead.

These are triple net or absolute net, long lease and generally flat rent growth.  In the case of CVS and Walgreens, exceedingly safe investments.  Walgreens and CVS are two of the very most desired of the triple net retail or absolute net investment properties for out of area investors and some of the most desired for 1031 exchanges.

Walgreens

The retailer began 2012 with 7,841 stores and that was up 151 over year end 20120.  They are expected to add around 200 retail stores in 2012 so the growth rate is coming back to historical normals.  The slowed store growth over the last three years to invest in their existing stores of 14,000 to 15,000 square feet.

Walgreens is just about as safe a triple net long term investment as there is in retail with a S&P credit rating that hangs around an A or AA-, which is slightly better than their nearest competitor, CVS.

The biggest problem for investors is that their absolute net lease is 25 years with options for 50 more, but its generally flat.  Once in a long long while I find one that has 2% or so compounded annual increases, but a lower going in CAP.  For a long term investor, this is great, but these usually have an accepted offer in a couple of days.

CVS

With 7,428 locations already operating, CVS is heading for more aggressive growth with plans for 300 more stores in 2012.  In just the first quarter 2012, CVS opened 32 new stores and relocated 40 more.

In addition to the growth, CVS opened 100 Minute Clinics giving it 657 clinics in 25 states, caring for 11 million patience in the company’s history.

“We believe our plans to double our clinic count over the next several years will position us well to play an important role in providing care for the newly insured beginning in 2014,” CVS president and CEO Larry Merlo said.

As far as investors are concerned, CVS with its S&P BBB+ rating is almost as safe as Walgreens with generally that same fixed period on the absolute net lease, but they don’t tie an investor up with 50 years of options.   In summary, either one is a choice long term investment.

Rite Aid

Rite Aid is another retail story entirely compared to Walgreens and CVS with the store count dropping from 5,059 in 2007 to 4,714 now.  The cut another 47 stores in 2011.

They claim to be through the worst and expect to generate positive cash flow this year, which could help to improve their S&P B- credit rating.  They are also paying $80 – $85 million on dark stores.

On the positive side is that they picked up the in network coverage from pharmacy benefit management firm Express Scripts, which stopped providing in-network coverage of prescriptions filled at Walgreens as of Jan. 1, 2012.

The impact for triple net real estate investors is that CAP rates for a retail property tenanted by Rite Aid is a couple of points higher than CVS and Walgreen, and it had better be.  There’s a bunch of risk with this one.

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