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Future Looks Bright For NNN Walgreens Investments

Walgreens Is Working To Position Itself As The “Pharmacy Of The Future”

Walgreens is a perennial favorite amongst net lease property buyers thanks to key attributes that include a stellar credit rating, premium real estate locations and long-term leases fully backed by a corporate guarantee.

That strong investor appetite for Walgreens assets is evident in the robust net lease marketplace with more than 1,200+ transactions closed over the last two years. According to Costar, the average transaction price ranged between $4M and $8M with cap rates between 4% – 6.6%. The price variation is a function of NOI, locations, years left on the lease, double net (NN) or triple net (NNN) lease terms and periodic rent increases amongst other factors.

Walgreens NNN leases perfect for rental passive income investors

Yet retail is a complex arena these days, and drug store chains are battling increased competition coming from a variety of channels both online and offline in traditional brick-and-mortar formats. At the same time, there are new growth opportunities emerging from an increased consumer focus on health & wellness, aging demographics and changes in how healthcare services are delivered. Those retailers that not only survive but thrive in the future need to be quick on their feet and adapt to changing market dynamics. In part two of our analysis of Walgreens, we take a closer look at the company’s latest business and real estate initiatives and the impact they might have on net lease investment opportunities.

Current performance and business outlook

The drugstore business is undergoing major transformational changes. With the COVID-19 pandemic as the backdrop, Walgreens has been elevated as the “go-to” pharmacy for vaccinations throughout the country, administering more than 70+ million vaccines to date. The company seeks to elevate the role it plays in communities by positioning itself as a core hub for personal healthcare. The company is focused on building a range of customer-centric healthcare locations and creating differentiated one-stop experiences that drive business to its website and mobile app, and importantly, physical foot traffic to its stores.

Walgreens is already a leader in its sector. More than 75% of Americans live within 5 miles of a Walgreens store. To support its vision of serving as the “pharmacy of the future” Walgreens is orchestrating a consumer journey across the care continuum by leveraging in-house pharmacists, strategic partnerships, technology and digital/ecommerce initiatives.

Walgreen VillageMD integrated healthcare solid for NNN investments

Strategic partnerships

Over the last few years, Walgreens has incorporated health system clinics within its stores in an effort to create “neighborhood health destinations”. Through its strategic partnership with VillageMD, Walgreens is the first national pharmacy chain to offer full-service primary care practices with primary care physicians and pharmacists co-locating all under one roof and at significant scale. The VillageMD strategic initiative began in 2019 with a $300M+ equity investment by Walgreens and a target of 500-700 stores within 5 years. The company has since expanded its target to 1,000 stores by 2027, and announced that it is investing an astounding $5.2B in funding to VillageMD in exchange for 63% ownership stake as an equity partner. This is a huge strategic initiative for Walgreens to transform itself to an integrated healthcare company. It is also game-changing as about half of the target neighborhood health destination stores will be in underserved urban and rural communities.

As part of the highly-touted Walgreens Health initiative to “leverage technology-enabled care model to deliver locally healthcare services,” Walgreens also has invested $330M in CareCentrix, an emerging leader in home healthcare services. Similar to the VillageMD deal, this would transform the arc of healthcare services by connecting the Walgreens pharmacy (with its 26,000+ pharmacists) at a deeper level to local care at the home. The value proposition on this newly built healthcare value chain – Walgreens pharmacists, the CareCentrix home services team and other partners in the healthcare ecosystem – would deliver vastly improved healthcare services and up to 20% - 25% reduction of total healthcare costs for members. In some stores, Walgreens also rents space to diagnostics company LabCorp, optical company For Eyes and weight loss company Jenny Craig.

Walgreens also is accelerating its personalized healthcare revolution by leveraging technology to improve the overall customer experience. Customers can now order their prescription refills on the Walgreens app, receive pick-up notifications over text, pick-up orders at curbside, drive-thru or have orders deliver to home. The app bolsters digital engagement, which further drives physical engagement for in-person advice and health services administered at in-store clinics.

Walgreens small store format fosters deeper relationships

Testing smaller footprint stores

To execute the broader Walgreens Health strategic objectives in reaching underserved urban and rural communities, Walgreens has rolled out over 30 small-format pharmacy locations. These stores are about 2,500 sq ft, about 20% of its typical store size. This is a move away from the “one-size-fits-all approach” and tailors store offerings to local community and consumer requirements. These stores have a sharp focus on health and wellness products such as over-the-counter medications and vitamins, as well as offering easy access to in-store pickup of medications. The smaller store format can facilitate deeper interactions between the consumers and pharmacists and transform the customer experience. Walgreens has announced that it will open another 100 small format stores in 2022.

Impact on net lease investment opportunities

These are just a few highlights of the strategic initiatives Walgreens has underway or in its pipeline. So, what does all this mean for net lease investors who own, or are interested in acquiring Walgreens properties? At a foundational level, net lease real estate investors greatly benefit from having zero responsibility and bypassing any active management duty as a landlord. You can count on Walgreens paying you steady monthly rental income like clockwork while you enjoy your life and freedom.

However, it is important to stay abreast of Walgreens business traction and keep an eye on whether various business model changes could affect you at the real estate level. For example, what are the possible implications on a 14,000 sq ft Walgreens property that you own or are considering buying if the company is ramping up expansion of smaller 2,500 sq ft format stores? Will smaller footprint stores solidify Walgreens position as a leader in the sector, or could the smaller stores cannibalize business from the bigger stores?

Triple net leases zero responsibility perfect for passive NNN investor

To critically assess Walgreens net lease investment opportunities, it is important to consider a deal from all angles. As such, it is advantageous to partner with a real estate professional who has the experiences and acumen not only on real estate deals, but also someone who possesses the strategic business mindset to dissect the business issues, distill findings and provide well-informed data-driven advice. Such a partner that can add value, serve as your trusted partner and act with integrity should definitely be the quarterback of your Net Lease A Team. Please reach out to Andrew Vu at 415-539-1120 for a complimentary NNN Consultation.


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Disclosure:  We do not provide accounting, tax or legal advice. invests should conduct their own due diligence to understand  risk associated with any investment opportunity including net lease assets.  There is potential for loss of part to all of investment capital. By submitting you agree to receive communications including emails, voicemails and text messages.

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