After years of complaints about out-of-control noise, petty crime and sidewalks crowded with tables and oversized umbrellas, Miami Beach is taking steps to clean up Ocean Drive.
The city’s land use committee, made up of city commissioners, on Wednesday heard from members of the Ocean Drive Task Force, a group of business owners who approached the city about a year ago with complaints of deteriorating conditions on the iconic street.
The task force submitted about 30 recommendations, calling for upgrading lighting, increasing police presence, banning music from golf buggies and other vehicles and having restaurant and bar owners scale back the size of café umbrellas that many complain have created “a tunnel effect” along sidewalks in front of many businesses.
Commissioners approved sending the recommendations on to the full city commission but some expressed doubts about measures in the task force report to reduce vehicular noise, noting that police have had difficulty in the past enforcing noise control measures. While they said they supported efforts to reduce the “tunnel effect” created by large multi-colored umbrellas in front of restaurants and bars, commissioners said operators on the street should not be forced to use a uniform color for their umbrellas but have a selection of “pastel colors” from which to choose.
Commissioners also agreed to start a pilot program to move restaurant tables on sidewalks closer to businesses, even if that means some table space might be lost.
The steps follow a Miami Beach City Commission vote in May to ban alcohol sales on the street from 2 a.m. to 8 a.m.
Jonathan Plutzik, the owner of the hotel the Betsy South Beach on Ocean Drive and the chairman of the task force said he’s encouraged that commissioners seem ready to move quickly on the proposals. “Some items can be moved quickly and others will take some planning,” he said. “All of us agree that it’s tremendously important that we show progress this year on beginning to make Ocean Drive special again.”
The newly announced merger agreement between Walgreens Boots Alliance Inc. and Rite Aid Corp. has the potential to be hugely disruptive to retail real estate across the country, according to industry experts analyzing early details of the proposed deal.
Walgreens and Rite Aid, the second and third-largest drug store chains respectively, reached a deal for Walgreens to acquire Rite Aid for a total enterprise value of $17.2 billion, including acquired net debt. Under the proposed merger, Rite Aid would become a wholly owned subsidiary of Walgreens Boots Alliance, and initially operate under its existing brand name.
The two drug store operators control roughly 200 million square feet of retail space and another 21 million of office and distribution space.
"Our complementary retail pharmacy footprints in the U.S. will create an even better network, with more health and wellness solutions available in stores and online," Walgreens Boots Alliance executive vice chairman and CEO Stefano Pessina said. "This combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time."
Pessina said they have already identified more than $1 billion in savings from potential synergies, although specific decisions regarding the integration of the two companies will be made jointly, Pessina said.
If the merger is approved, it would leave Walgreens and CVS as the two dominant drugstore chains in the country. Walgreens Boots Alliance has more than 13,100 stores in 11 countries, with more than 8,300 in the U.S. The company includes one of the largest global pharmaceutical wholesale and distribution networks with over 11 million square feet of distribution centers in the U.S. and 3 million square feet of office space.
Rite Aid has nearly 4,600 stores in 31 states and the District of Columbia. It owns or leases more than 7 million square feet of distribution space, not counting another 700,000 square feet of office and warehouse space near its corporate headquarters in Camp Hill, PA.
The retailer is currently building a 900,000-square-foot distribution center in Spartanburg, SC. Once operational, it had planned to consolidate its current distribution centers in Charlotte, NC, Tuscaloosa, AL, and Poca, WV.
"This will be a big one. Assuming they get approval from the FTC to merge, which I would assume they would get, this will mean a lot of real estate coming back to market," said Garrick Brown, vice president research, West Region for DTZ.
"I am guessing that they may have to divest some stores first (for Federal Trade Commission approval),” Brown said. “I wouldn't be surprised if they had to divest as many as 1,000 stores or more just to make the deal happen."
The likely closure of a large number of either Rite Aid or Walgreen's stores should the merger win approval could also have a ripple effect in retail centers in which other tenants in the center have co-tenancy clauses that allow them to opt out of their lease should the main drug store anchor in their center close.
"To make matters worse, owners whose shopping centers are collateral for loans run the risk of having their loans put into default or causing a 'trigger period' in the loan because of a major tenancy clause or by lowering debt service coverage ratios below the level the loan allows," said Jack Miller with Florida-based GFCIB and Advisors.
If they are allowed to merge, the stores most likely to be closed are those that either chronically underperform or ones that cannibalize sales from each other, said DTZ's Brown. Walgreens sales per square foot are typically higher that Rite Aid within the same markets, according to Brown and others.
And Rite Aid has a lot of older stores in larger formats that have fallen out of favor with the drugstore industry in general. As a result, there could be a movement to close old, larger Rite Aid stores as leases expire, Brown noted.
According to CoStar data, the two drugstore chains have more than one location in nearly 3,100 zip codes across the country. They operate more than four locations in 410 zip codes. And those counts don’t include overlap between neighboring zip codes.
For its part, Walgreens is already well versed in costs savings having implemented a chain-wide restructuring program. The company previously announced a $1.5 billion cost transformation program through the end of fiscal year 2017, with the cost reductions primarily targeting its Retail Pharmacy USA division.
During its most recent quarter, Walgreens closed 75 stores in the quarter bringing the total closures for the year to 84.
As for Rite Aid, it has been seeking a growth strategy. In an investor presentation this month, Rite Aid said it saw significant store relocations as a possible opportunity to develop new stores in underpenetrated markets and contiguous markets that have positive demographics.
Going forward, investors who like to purchase triple net leased properties could see a potential upside.
"Assuming Walgreens credit stood behind the Rite Aid leases going forward, this event would be a major positive for all Rite Aid owners as their store values would move substantially higher and now trade at Walgreens cap rates,” said Randy Blankstein, president of The Boulder Group in Chicago.
"Depending on the terms of the merger, this deal would make all of the top drug store companies investment grade, and thus would make the whole sector more desirable and likely cause transaction volume to increase as a result."
Currently, CVS and Walgreens have credit ratings of BBB, while Rite Aid is rated B, according to Blankstein.
Cap rates for single tenant CVS, Rite Aid and Walgreens properties hit historic lows in the net lease drug store sector in the third quarter of 2015. But with lower credit ratings, Rite Aid cap rates are the highest of the three with a median asking cap rate for a 20-year lease term at 6.15% compared to a 5% for CVS or Walgreens.
“As Rite Aid’s financial strength improves, investors have gained interest in the extra yield associated with Rite Aid properties. The additional yield can be attributed to Rite Aid not being an investment grade rated company similar to Walgreens or CVS,” Blankstein said.