Potential Impacts Of A Rite Aid/Walgreens Merger

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CORONA DEL MAR, CA—Like with any merger, consolidation creates vacancies, but same-location stores are not a guarantee if and when the impending merger between Rite Aid and Walgreens is approved by the FTC and finalized, Hanley Investment Group’s EVP Kevin Fryman tells GlobeSt.com. Combined, Walgreens/Rite Aid would have a reported 46% US market share.

Fryman recently represented the seller, Parkcrest Construction Inc. A Real Estate Development Co., of Ontario, CA, in the sale of a new single-tenant, absolute-net-lease Rite Aid property at 28995 Newport Rd. in Menifee, CA. The purchase price was $9 million, which represented a cap rate of 4.72%. Fryman says, “The sale of the Rite Aid represents the lowest cap rate for a single-tenant Rite Aid in the Inland Empire ever. It was also one of the lowest cap rates for a fee-simple Rite Aid nationwide.”
The buyer, a private investor, was represented by Ron Duong, first VP investments of Marcus & Millichap of Newport Beach, CA.

We spoke exclusively with Fryman about the transaction and the impact the imminent merger would have on the drugstore sector.

GlobeSt.com: What makes this particular property so attractive?

Fryman: There is a Stater Bros. and CVS/pharmacy-anchored shopping center that is currently being developed across from Rite Aid, which will further define this intersection as the “daily needs” destination for the nearby residential communities. Additional retail development along Newport Rd. includes a shopping center at the southwest corner of Newport and Haun Rd. that includes an ALDI, PetSmart, Party City, Rubio’s, Buffalo Wild Wings, Sonic Drive-In and Habit Burger Grill.

GlobeSt.com: What is causing cap rates for Rite Aid to compress so much?

Fryman: The recent compression in cap rates for Rite Aid is due to the quality of the new development sites, combined with the optimism that the merger will be approved, improving their credit.

GlobeSt.com: What impact would the proposed Rite Aid/Walgreens merger have on the drugstore sector of CRE?

Fryman: Like with any merger, consolidation creates vacancies. The combined company of Rite Aid and Walgreens will get rid of their redundant stores, some of which will be backfilled by Fred’s Pharmacy, a publicly traded company based in Memphis. As part of the latest merger agreement, Fred’s would acquire up to 1,200 Rite Aid stores; however, that doesn’t guarantee that Fred’s will operate a store at that divested-store location. Depending on the lease agreement for that location and the final merger agreement, landlords could conceivably have a dark store without the ability to recapture the space. If the divested store is a single-tenant location, that is one situation; but, if the drug store is situated within a shopping center where you have shops and co-tenancy clauses, the drugstore going dark can create a domino effect and severely impact values even more. Notices have already been mailed out to many of these landlords informing them that Fred’s will be taking over the lease if the merger is approved. It will be interesting to see how this plays out and whether or not Fred’s will be successful in these new markets. According to the Fred’s website, Fred’s currently has over 650 discount-general-merchandise stores with 350 stores and pharmacy locations primarily in the Southeast.

GlobeSt.com:  How does the demand for daily-needs retail fit in with the demand for experiential retail in shopping centers?

Fryman: The daily-needs-driven product type, like a grocery- and/or drug-anchored shopping center, has been and most likely will continue to be the most sought-after type of retail real estate. Certainly, the Rite Aid/Walgreens merger has challenged investors and landlords, much like we saw the consolidation within the grocery-store industry in the last decade. However, overall, daily-needs retailers are thought to be more Internet-resistant and can drive foot traffic to other shops in the center, which is why institutional investors prefer this type of retail asset.

“Experiential retail” has become a popular term to describe a variety of retailers that are finding ways to give shoppers an experience that they can’t get online. Retailers that can fit in this category include nail and beauty salons, spas, gyms, yoga studios and arts-and-craft stores. We are seeing operators that feature “jump castles” and trampolines backfill spaces that used to be occupied by bookstores or apparel, as well as “Eatertainment” retailers that combine food and entertainment such as Dave & Busters, John’s Incredible Pizza, AMC Dine-in Theatres and a variety of bowling-alley operators. There are a lot of tenant-improvement dollars that are tied up in these spaces that cannot be used by other retailers, so investors often shy away from these type of experiential retail-driven shopping centers. We are seeing a difference of 100 basis points between the daily-needs driven shopping center versus the experiential retail anchored centers—this is quite significant.

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