In February 2018, Albertsons Companies announced that it would acquire the Rite Aid Corporation. The plan was for Albertsons' to acquire all of the locations not included in Walgreens' purchase of 2,186 stores. This would have added approximately 2,400 pharmacies to Albertsons, which then wanted to rebrand its other pharmacies to the Rite Aid name.
However, Rite Aid shareholders balked, effectively killing the $24-billion dollar merger. Analysts weren't fans of the deal either, with GlobalData Retail Managing Director Neil Saunders pointing out:
“Neither Albertsons nor Rite Aid are stellar retailers. The former has a tired and shabby store portfolio that is in desperate need of investment, while the latter also has a retail proposition that is far from cutting edge.”
Rite Aid is moving forward as a “stand-alone company,” according to John Standley, the company's Chairman and CEO. If you're an investor that either owns or is considering buying a stand-alone Rite Aid retail pharmacy, the scenario and forecast are somewhat mixed.
The Good
Rite Aid net leased properties have some attractive aspects for investors. Rite Aid began a series of sale-leasebacks on corporate owned sites with investor friendly leases. The leases were 20 years long with 10% rental increases every 10 years, which is uncommon for net leased pharmacies.
Investors with a net leased Rite Aid store in its portfolio are in decent shape, as the 11,000-15,000 square foot building on a highly trafficked corner will remain an attractive piece of real estate. If the retail operation closes, the lease remains in place, providing steady cash flow while a new tenant is sought.
The Not-So-Good
While Rite Aid real estate might be compelling, the company's operations are not. It remains highly leveraged, while Seeking Alpha's Vince Martin highlights declining earnings, same-store sales and deleveraging of labor and rent expense. Lower reimbursement rates from insurers are hitting Rite Aid's retail pharmacy segment hard. Topping that, Walgreens, CVS, and Amazon continue to put pressure on margins.
As such, analysts such as Motley Fool's Kristine Harjes aren't impressed with Rite Aid's prospects. “You look at the broader pharmacy retail landscape, and (Rite Aid is) not even the best-positioned in that space . . . it has a really small scale . . . I'm not very bullish on its future,” Harjes said in a recent podcast.
Moody's isn't bullish, either. The credit rating service placed Rite Aid's stock on review for a possible downgrade, noting that “it lacks the scale or the balance sheet to compete in the changing pharmacy landscape with much larger and well-capitalized competitors.” A downgrade of Rite Aid from its current “B” grade could further impact pricing and structure on net lease deals with which it is involved.
The Takeaway
Rite Aid has been struggling for years. Despite CEO Standley's brave words, the company's future is murky, at best.
The real estate should be considered a solid investment, whether operating under the Rite Aid flag, or the Walgreens brand. In fact, locations acquired and operated by other groups could offer the advantage of favorable NNN lease terms, backed by a high credit-rated corporation.
But don't dive into ownership of a Rite Aid stand-alone without plenty of research; this is not a typical NNN investment. Pay close attention to financials, as well as location – and assume that the asset will come with higher risk.
The views expressed here are the author's own and not that of ALM's Real Estate Media.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
