CaptionImage by Arek Socha from Pixabay
In its heyday, there were over 9,000 Blockbuster locations around the world. And I helped build more than one…It was the good old days of VHS.You could own your favorite movies, watching them over and over again (until the VHS player ate your tape, anyway). Or, if the film was something you wanted to watch just once, you could find your closest Blockbuster Video store.Maybe grab a bag of microwavable popcorn at the counter. Go back home, kick back on your couch, and enjoy the beauty of rented entertainment.As a developer for over two decades, I can tell you that Blockbuster was a golden child for my industry in the ‘80s and ‘90s.I would scout around the southeastern U.S. for at least 0.60 acres of land per site, typically shelling out a few hundred thousand dollars to acquire it. Then I’d build a 5,000-6,000 square-foot building, pave the parking lot, and install landscaping.All in, I’d invest around $1 million into a Blockbuster store and generate returns of around 10%. That was more than enough for bankers and investors to want in on the action, even though the company wasn’t considered an investment-grade tenant.But as good as those days were, I knew they wouldn’t last forever. And of course, they didn’t.We all know the story. Management dragged their feet on investing in DVDs. And then, of course, streaming took over. Ironically, Blockbuster had the opportunity to buy Netflix in 2013 for $50 million, an opportunity the company turned down.Blockbuster filed for bankruptcy in 2010.That’s just the way it goes sometimes. Companies rise and fall.And the sooner their investors acknowledge the inevitable, the more money they’ll walk away with before the end.And there’s one business in particular that could end up being the Blockbuster of the 2020s.
The Drugstore Boom
By the time Blockbuster crumbled completely, my CRE days were already over thanks to the housing market crash. But I did experience some of its troubles when many of those franchised tenants went out of business.Fortunately, I only ever built in the best locations possible. So, I was able to turn those retail spaces over fairly quickly, converting one into an urgent care clinic, another for an auto parts chain, and so on.I also began to seek out better-credit customers like Sherwin Williams and O’Reilly Auto Parts – businesses built on solid, “wide moat” models with extremely reliable rent checks.In fact, I developed over 40 such stores. And to the best of my knowledge, all those original tenants are still there and paying.I also began to expand into another sector by constructing stores for Eckerd Drug (which was then sold to Rite Aid), CVS (CVS), and Walgreens (WBA).At the time, drugstores were on a huge expansion roll. The chart below—showing the number of Walgreens stores—was representative of the entire industry.
My very first drugstore deal was like winning the slot machine.I was developing a shopping center in Spartanburg, South Carolina, and I was able to relocate an old Red Lobster store from one side of town to the other. Then, I snapped up the original property for myself, knowing I could get Eckerd to lease the site.There was only one problem. I needed to come up with $1.2 million in 30 days to buy the land.Now, I knew I couldn’t write that check on my own. I also knew it would take the bank at least 90 days to close.So I picked up my phone and called Ricky instead.
He Who Has the Gold…
Ricky was my go-to business partner and a man who was worth more than $100 million at the time. So I knew he could help.I asked him to buy the land with the intent of then obtaining a construction loan to fund the $5 million project. My thought was we’d be 50-50 partners until Ricky reminded me of the “golden rule.”Or, as he put it, “He who has the gold makes all the rules.” And since he had the gold, he agreed to my proposition, only with him owning 51% of the venture.Within six months, we’d completed the new drugstore and – sure enough – were approached by a buyer who needed a replacement property. He paid us over $6.5 million, which left Ricky and I with over $1.5 million in profit.Then there was some icing on the cake since we sold a slice of excess land to Bruster’s Ice Cream for $300,000.Not bad for my first drugstore deal, if I do say so myself.Like Blockbuster in the ‘80s and ‘90s, drugstores were the place to be for commercial real estate in the 2000s and early 2010s.Those lucrative days are long gone though, and I don’t expect them to come back anytime soon. If at all.Not when Tim Wentworth, CEO of Walgreens, is saying this:
“We are at a point where the current pharmacy model is not sustainable, and the challenges in our operating environment require we approach the market differently.”
As such, the 123-year-old company will be closing a “significant number of its roughly 8,600 U.S. stores.”According to the Journal, Walgreens hasn’t “settled on a final number of locations to close, but it is reviewing about a quarter of its stores that aren’t profitable and could shutter a meaningful percent of those over the next few years.”This is a retailer that was once regarded as the gold standard in free-standing net-lease circles.Oh, how the mighty can fall.
Mark My Words: More Will Fall Still
Walgreens is hardly alone in its struggles.The industry is under attack from multiple fronts, including legally. Two years ago, for instance, the courts ruled against drugstores for their purported role in oversupplying painkillers.The decision helped send Rite Aid into bankruptcy.Another issue is that big online pharmacies like the one offered by Amazon (AMZN) are a real and growing threat. And, rather like Blockbuster before it, there’s only so much drugstores can do in the face of internet convenience.But unlike Blockbuster, Walgreens’ landlords won’t find it so easy to find replacement tenants. There’s a difference between video stores and drugstores, you see, and it’s a big one…The size of the box.As a I said earlier, the Blockbuster stores I built were around 6,000 square feet. But the drugstores were more than double that at 14,000.Remodeling that space to turn it into two or more stores might seem like a logical move. However, these drugstores are usually configured as rectangles that are hard to split up for multiple tenants.Not impossible, mind you. But not easy.In addition, it costs several million dollars to build a drugstore. So, the rent per square foot is generally higher, meaning that making up for that loss is also harder.Given the recent news regarding Walgreens, I believe we’ll see lots of landlords and bankers getting squeezed.Walgreens the business might not entirely go the way of Blockbuster, but it will struggle. And for any companies holding a large percentage of these drugstores on their books, they’re best to be avoided.Two that I’m recommending steering clear of are Alpine Income Property (PINE) and NetStreit (NTST), whose portfolios are exposed to Walgreen’s stores to the tune of 6.3% and 12%, respectively.But for savvy investors, we see an opportunity unfolding. My team at Wide Moat Research will be watching this drama unfold to see which moats are shrinking as a result, which ones are expanding…And which ones feature lowered drawbridges we’d really like to walk across.More By This Author:Three Key Themes From REITweek
When Bankruptcies Are Good News
On Integrity
