Moody's Downgrades Walgreens Credit Rating to Junk

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JUNK IN THE TRUNK

Moody's Downgrades Walgreens Credit Rating to Junk (Read Here)

WAL-JUNK: Moody's downgrades Walgreens' credit rating, raising concerns about financial health and healthcare transition.

Downgrade Impact: Shares tumble as investors worry about high debt, persistent financial challenges, and viability of new patient care strategy.

• Debt Load: Forecasted peak debt at six times earnings by 2024 amidst transition to patient care model.

• Market Reaction: Walgreens' shares decline while broader market remains flat.

• Industry Challenges: CVS Health also experiences operational pressures due to healthcare services shift.

Looking Ahead: Walgreens must successfully execute healthcare strategy, manage debt, and address rising costs to avoid further downgrades and instability.

Comparable Trends: Major players in drugstore sector, including CVS Health, face complexities and risks as they adapt to evolving healthcare landscape.

🧠 EDITOR’S THOUGHTS

Rite Aid recently filed for bankruptcy protection with announcements to reduce rent expenses and optimize its portfolio to strengthen its overall financial position. Now it looks like Walgreens may also be in a position to do the same if their situation doesn’t improve quickly.

Walgreens once stood tall as one of the biggest names in the drugstore scene.

As the golden child of net lease properties, Walgreens was a hot commodity in the investment realm due to the typically low risks associated with these sites.

When it comes to real estate, Walgreens demands top-tier real estate, sprawling over an acre on prime hard corners. Usually, they target 1.5 - 2.0 acres to fit their 14,500-square-foot store blueprints, but their units can range from 10,800 to 15,000 square feet. To outdo rival CVS, Walgreens doesn’t shy away from splashing out top-notch rent to lock down those primo spots for a solid 25-year lease.

Their recent lease tweaks—opting for some that stretch up to 75 years, with a twist allowing an annual out after the 25th year—have raised eyebrows among investors. This small shift has sparked significant concern, potentially making these assets tricky to finance after the initial 25-year term.

📝 WALGREENS CHEAT SHEET

• Average Cap Rate: 5.5% - 6.5%

• Lease Type: Absolute NNN

• Rent Increases: None in base term

• Base Term: 25 Years plus Options (50 Years in Options)

• Average Rent: $300,000 - $375,000

• Lot Size Requirement: 1- 2 Acre Average

• Building Size: 14,000 - 15,000 SF Average

TRIPLE NET TENDIES

🧠 Thought Leader: Kyle Matthews shares his thoughts on why Walgreens will now trade at 8-10% CAPs

👂 Ear Hustle: Meet Kevin shares his thoughts before the CPI announcement tomorrow

💎 Web Gem: Noah Kagan interviews three entrepreneurs who make over $1M/year with zero employees

NET LEASE NUGGIES

• Macy's potential privatization bid emerges amid turnaround efforts Investment firms Arkhouse Management and Brigade Capital Management have offered $5.8 billion to acquire remaining Macy's stock, aiming to take the company private. The bid, which represents a 32% premium above the stock's closing price, taps into Macy's undervalued status, according to Wall Street Journal sources. Macy's sizeable real estate portfolio, including its Herald Square property in New York City worth about $3 billion, adds appeal. The retailer has undergone a digital-focused transformation and plans to open smaller off-mall stores, following better-than-expected Q3 results that surpassed sales and earnings estimates. (Read More)

• PREIT files for Chapter 11 bankruptcy protection. Owner of 18 regional and super-regional malls, PREIT intends to keep its mall portfolio in operation with debtor-in-possession financing of up to $60 million. Exit revolver financing of up to $135 million has also been secured. PREIT has executed a restructuring support agreement and plans to emerge from bankruptcy by February 2024. The company has committed to pay all vendors, suppliers, and employees during the process. (Read More)

• Sears quietly reopens stores as it aims to protect valuable real estate. The struggling retailer, which once operated over 3,500 stores, now operates fewer than 20 locations under parent company Transformco. Despite years of decline, Sears has reopened stores, such as one in Burbank, California and another in Union Gap, Washington, to safeguard lease rights and preserve real estate value. Retail industry analysts remain skeptical about Sears' long-term sustainability, as the brand's diminished assortment and unimpressive store experience make it difficult to attract customers and generate sufficient revenue. (Read More)

BEAST TWEETS x POSTS

🐦 Aleksey Chernobelskiy: Every single one of those Walgreens properties is now worth less than it was yesterday…

🦅 Kyle Matthews: This will have a massive negative effect on Walgreens STNL values. No longer is a buyer purchasing yield from "investment grade" credit…

🦢 Kendall Whitaker: Moody’s cutting Walgreens credit to junk just lost NNN investors millions…

🦆 Jason Miller: This former Walgreens drugstore building in Metro Cleveland was repurposed into a #carwash…

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