Beauty isn't always skin deep. Not when it comes to smart triple-net investment strategies. Investors who might be using a check-the-box criterion for rooting out solid opportunities might do well to peel back the onion.
As an example, "investment grade" is one of those considerations–one of those boxes–that when checked can lead a buyer to pass over a solid performer. Such is the case with drugstore chain Rite Aid. Not strictly an investment grade brand as far as Standard & Poor's is concerned, the retailer can nevertheless be a solid investment target. With some 2,500 stores in 19 states, the corporation has a track record of long-term leases in desirable locales, and a faithful consumer following.
Now for a little history. Famously, in preparation for a 2016 merger that ultimately went sideways, both Walgreens and Rite Aid shed more than 860 stores. Such moves are ultimately accretive to the bottom line since those chosen for the ax are typically lower producers in less desirable locales. At the same time Rite Aid, a public company, has doubled down in states such as New York; California; Pennsylvania (where it has its headquarters); and New Hampshire.
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Rite Aid, despite its S&P rating of B minus (triple B minus is the agency's lowest investment grade rating), can boast a cap rate solidly in the six-to-eight percent range, depending on the duration of the lease.
It should be noted here that Rite Aid does not stand alone among retailers deserving a second look, despite their ratings. Regional retailer Kinney Drugs–with cap rates also hovering in the six-percent range–and many locally based quick-service restaurants can also provide surprising returns, despite their private status and non-investment grade ratings.
The message here is clear. Investment ratings are not the end of the story, masking as they sometimes do hidden gems. It takes analysis and careful homework to uncover the full story, of course. Peeling back the onion can uncover strong and counter-intuitive opportunities.
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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.
