Last week's announcement of Walgreens $17B+ acquisition of Rite Aid has sent reverberations throughout the single-tenant net-lease world. The merger would combine the country's largest and third largest pharmacies, creating a retail behemoth with well over $100B+ in annual sales.

Provided it meets with FTC approval, the merger will also create winners and losers in the single-tenant net lease space, with some property owners enjoying a huge windfall, and others missing out completely.

Generally speaking, the biggest winners are the owners of (most) Rite Aid pharmacies. Obviously, if their store closes due to an overlap with Walgreens they may be out of luck, but absent that they've probably just received the single largest boost in their property's value that they'll ever get. There is about 100 basis point difference in the cap rates on these two brands. To go from a mid 6%'s to a mid 5%'s cap rate represents an almost 20% increase in value of the Rite Aid property. If you own a Rite Aid, and there isn't a Walgreens near you, it might be OK to go and pop some champagne.

On the other hand, owners of Rite Aid properties which have an adjacent or nearby Walgreens may need to be more restrained in their joy. It's unclear what the algorithm will be for determining store closings though proximity and store sales are likely to figure prominently in the equation. On top of that, the FTC may well be involved with some of the store closure decisions too. Of course lease guarantees still apply so no landlord is at risk of not getting their contractual rent. The problem is more one of what to do if your store goes on the chopping block. Early indications point to a 1,000+ store closures.

Having said all that, it's probably going to be at least a year before we know exactly how this all shakes out. For those currently selling a Rite Aid (or a Walgreens for that matter) each individual situation is going to be fundamentally different but a much heavier emphasis on the intrinsic value of the underlying real estate is likely to come to the forefront for buyers.

In any case, this merger is a big deal for the net lease industry and property owners would be wise to do an evaluation of their current situation. If you own a Rite Aid or a Walgreens and would like to discuss your property, email us at research@calkain.com.

Instant Insights /

Winners and Losers in the Walgreens-Rite Aid Merger

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