Net-Leased Rite Aid Stores Offer Value—And Risk

By Gavin Behr

Gavin Behr

Asking cap rates for U.S. single-tenant Rite Aid properties average 7.05 percent, according to CoStar data. This figure represents a significant, 80-basis-point spread over the 6.25 percent average asking cap rate for Walgreens properties. CVS properties on the market command an even lower asking cap rate, averaging roughly 5.71 percent.

These yield spreads reflect several factors, most notably:

• a variance in corporate credit
• the potential closure of stores recently acquired by Walgreens
• uncertainty regarding Rite Aid’s future as an independent company in the aftermath of failed merger discussions with Albertsons

Credit considerations

Most real estate investors consider the lease guarantor’s credit rating to be paramount when underwriting an acquisition. Indeed, creditworthiness is one of the single greatest determinants of asking cap rates.

It is for this reason that Rite Aid properties have the potential for outsize returns. While Walgreens and CVS both hold investment-grade ratings of BBB and BBB+, respectively, from Standard and Poor’s, Rite Aid holds the less desirable B rating.

This lack of investment-grade credit may remove Rite Aid from the radar of institutional and private investors who use this credit classification as a litmus test for acquisitions. As a result, buyers who are less concerned with investment-grade credit—and instead focus on the underlying real estate and store sales data, when available—will likely face fewer competitors for acquisition of Rite Aid stores. Given the generally higher caps available on many of those assets, those same investors may achieve more attractive yields relative to those of similar Walgreens or CVS properties.

Closure risk

Walgreens’ recent acquisition of more than 1,900 Rite Aid locations added opacity to the market, due to the potential closure of redundant stores. The uncertain viability of some Rite Aid locations is driving market cap rates upward as potential buyers assign a greater risk factor. This translates into better returns for buyers who identify recently acquired Rite Aids in markets free from immediate competition and potential cannibalization by surrounding Walgreens stores.

After Albertsons

The failed merger between Albertsons and Rite Aid would have consumed the roughly 2,600 remaining stores not acquired by Walgreens. While Rite Aid retains the flexibility to pursue other merger opportunities, the uncertainty of Rite Aid’s future as an independent company could exert continued upward pressure on cap rates. This would create opportunities for astute investors to acquire Rite Aid properties at an attractive cap rate.

Creditworthiness, potential store closures and Rite Aid’s future prospects create a unique cap rate climate. The resulting opportunities may appeal to the yield-conscious investor looking to enhance their portfolio with higher-yield assets in the net-leased pharmacy space.