Conventional Drugstore Design Focused on General Merchandise with Drug Store Counter Might Pave The Way to Reimagined Health Care Hub
Last week’s blockbuster deal in which CVS Health (NYSE: CVS )consented to acquire Aetna Inc. (NYSE: AET) for $77 billion, including presumption of financial obligation, has the prospective not just to fundamentally change the health insurance market but also drastically improve the retail and healthcare realty markets.
With about $245 billion in combined profits and around $19 billion in combined EBITDA, CVS and Aetna are relying on the potential to redefine the method individuals access healthcare services in lower-cost, retail/pharmacy locations. Aisles of welcoming cards and sodas could ultimately make room for wellness treatments, scientific and drug store services, vision and hearing screening, as well as the anticipated nutrition, charm and medical devices offerings.
CVS Health’s present network consists of more than 9,700 CVS Drug store places and 1,100 MinuteClinic walk-in centers. In addition, CVS Health has more than 4,000 nursing professionals on staff offering in-clinic and home-based care throughout the country.
Aetna is a leading diversified health care benefits company, guaranteeing 22 million people and providing services to an approximated 44.6 million people in other ways.
At the heart of the mix is a business proposition to deal with the growing expense of delivering healthcare services by reducing check-ups and other “in between” doctor check outs through in person therapy at a store-based health center.
“These types of interventions are things that the conventional healthcare system might be doing,” noted Larry J. Merlo, CVS Health president and CEO. “However the traditional health care system lacks the key elements of convenience and coordination that assist to engage customers in their health. That’s what the combination of CVS Health and Aetna will provide.”
Among the proposed merger’s goals is to provide more healthcare services in CVS shops and its retail centers, moving the conventional healthcare shipment design further away from more expensive settings, consisting of immediate care centers, doctor workplaces and hospital emergency rooms.
This shift has been ongoing however could speed up following the CVS-Aetna merger. CVS has actually been transitioning space in its stores for the last two years, including such things as vision and audiology centers.
“There’s no concern that we have the chances to repurpose a few of the space in our shops,” Merlo stated. “You can think about this as more of a hub-and-spoke design in that there will be a core set of services that would be readily available broadly, and there likely would be a subset of shops that would have enhanced services. Which delta would certainly be reflected in the space allotment within the store. But, undoubtedly, we’ll have a lot more to say about that as we get these pilots underway and go from there.”
With its offer to acquire Aetna, CVS might even more sharpen its concentrate on making healthcare its core service, said Brian McDonagh, a director with CBX Brand name Technique in Minneapolis.
“For far too long, U.S. chain drugstores have suffered from a little an identity crisis,” McDonagh stated. “Regardless of the coolers and front-of-the-store merchandise, CVS, for one, has understood that it isn’t mostly a food seller, nor is it a discount seller or c-store. Increasingly, CVS has actually been attempting to imitate a health care business.”
Realty Market Paying Attention
As CVS begins to remake its retail drug store shops to end up being a new “front door” to a fragmented health care system, investor will have to pay very close attention to both near- and long-lasting consequences of the combination, said Quinn McCarthy, an expert with JLL Capital Markets, Net Lease.
“In the short-term, I expect the acquisition to give lots of risk-averse net lease investors stop briefly concerning CVS-leased assets,” McCarthy said. “CVS will nearly undoubtedly experience a multi-notch credit downgrade as an outcome of the acquisition cost, and will also see their EPS watered down substantially. The other threat that stands apart to me is the future practicality of present CVS locations.”
Without understanding how CVS plans to physically implement the expanding health services arm of its service, rents approaching expiration of the initial term might be approached with a significant discount up until the future of CVS’s model is understood, McCarthy said.
“If it is exposed that they intend to lower retail flooring area in existing shops to include dedicated health service area, this concern will likely be lightened. However the threat of an essentially different new model making existing layouts outdated will be a typical investor concern,” McCarthy stated.
Nevertheless, over the long-term, presuming effective execution by CVS, McCarthy said he can see the merger increasing net lease investors’ interests in CVS as a tenant.
Milt Charbonneau, a senior director at Cushman & & Wakefield in Iselin, NJ, sees any development in health care shifting to more conveniently situated retail area as a drawback concern for financiers in medical office buildings. Charbonneau said the concern would be a lot more if other merchants, such as Walmart and Walgreens, broaden their health care offerings in a comparable fashion.
“The CVS/Aetna deal may be the start of ‘the department store of healthcare,’ stated Mike Polachek, executive vice president at SRS Realty Partners. “In addition to their fleet of stores, I might see them opening selective stores in former large boxes and housing, in addition to their retail format including an insurance coverage office, immediate care (without over night) stays, physical rehab, concierge physicians and other medical providers. They could form a hub-and-spoke circulation with the center being these big format operations and the retailers being the spokes.”
Preventing an Amazon Incursion
Tony Miller, owner of The Miller Household Cos. in Agoura Hills, CA, said the merger is plainly a protective play to the anticipated entryway into the pharmaceutical field by Amazon, using steeply marked down prescription drugs via mail order.
“By integrating forces, the newly formed entity could offer ‘in-store’ medical care, producing a one-stop buy medical needs. I am not exactly sure how Amazon would compete with the human interaction a medical staff offers,” Miller stated.
But the potential Amazon incursion is just enough of a concern that significant investors are already changing their pharmacy holdings. Agree Real Estate Corp (NYSE: ADC) said last month that it lowered its net leased pharmacy holdings from 30% to 13.2% in the last 3 years. Walgreens, Agree’s biggest tenant, has actually been taken down to 8.5% from 22% in that time.
“We’re devoted to taking Walgreens down to sub-5%, not due to the fact that we do not believe in the occupant or the business, but we believe it’s the right thing to do to divest and redeploy on an accretive basis there, and you’ll continue to see that trajectory,” stated Joey Agree, president and CEO of Agree Realty.
“While we remain followers in the pharmacy area, I will tell all investors simply to [compare] what we have actually accomplished to their diversification efforts,” Agree said. “It’s one thing for Amazon if when they do get in the drug store area to enter it and interrupt it. It’s another thing for them to operationally affect the Walgreens and CVS’s of the world. So we have not seen those rumors drip down. What we have actually seen is simply normally a continued flight to safety. And honestly, individuals have actually gotten in line behind the method, which we’ve been stating upon given that 2011 in terms of e-commerce.”