Posted 11/3/2015 | GlobeSt.com
By Brian J. Rogal

View Original Article Here

78 Broad St

CHICAGO—The recent decision by Walgreens to buy Rite Aid for more than $9.4 billion in cash will set off ripples in the market for triple net lease properties. Drug stores like these are among the most popular options for investors, but the uncertainty surrounding this latest combination in the healthcare industry should put a damper on new trades, at least for awhile.

 

“You would always rather own a Walgreens than a bedding store, but for now the bedding store will not have regulatory issues that need to be resolved,” Tim Henry, a Chicago-based principal in Avison Young’s national retail advisory services group, tells GlobeSt.com. Deerfield, IL-based Walgreens currently has about 8,200 stores, and the purchase of Rite Aid will add roughly another 4,600 to its portfolio. Antitrust regulators, among other federal agencies, will have to approve the deal, which would make Walgreens significantly larger than its other major competitor, CVS Health, which has about 7,800 locations. “They are just going to have to wade through the regulatory process, and until then, many will adopt a wait-and-see attitude.”

 

Eventually, however, the deal could make Rite Aid’s stores significantly more attractive to investors. Cap rates for the brand “are typically a full point below that of Walgreens outlets,” Henry says, due to the greater financial strength of Walgreens. Rite Aid has lost a lot of money in recent years, and “will certainly get some benefits to being owned by a stronger company.” Perhaps most importantly, the vast size of the new entity “will enable them to cut better deals with the pharmaceutical companies.”

 

Another short-term consideration, Henry adds, particularly for commercial real estate professionals, is that late last year Walgreens outsourced a lot its real estate functions to Chicago-based SRS Real Estate Partners. Therefore, it currently has “a very small internal, domestic real estate office. They have reduced their staff to such a point that they may have to staff up again,” partly to begin making decisions about consolidating the new outlets that overlap with existing locations. The company could stick with SRS, but “the jury is out on how successful the outsourcing decision has been.” Henry is a former senior vice president of SRS.

 

One thing that probably won’t change is the drug stores’ branding. Walgreens has already announced that Rite Aid will continue to operate its own name, and that makes a lot of sense to Henry. “Consumers in many regions of the country know and trust the Rite Aid brand, and it would not benefit them or the stores to change the names.”

 

According to third quarter research just published by the Boulder Group, a net lease investment brokerage firm located in suburban Chicago, the median asking rate for Walgreens’ properties just reached 5.5%, and that for Rite Aid’s stores was 6.63%. Henry does not expect the rates for Walgreens’ will change very much, but “Rite Aid’s will definitely come down once the regulatory landscape becomes clear.”

 

And drug stores with many brands will remain popular with investors in the triple net lease market due to their long lease terms and recession-proof products, he adds. “Investors don’t have any obligation except to collect the rent.”