Drug store operator Rite Aid's $3.4 — billion proposed acquisition of 337 Brooks and 1,521 Eckerd stores is a bold bid to catch industry leaders CVS and Walgreen's — and that could be good news for net lease investors.

The deal is critical to Rite Aid's continued recovery from accounting fraud and other missteps under former CEO Martin Glass. For investors, the expansion could mean more buying opportunities if Rite Aid ups its sale/leaseback pool. Drug stores are popular targets for 1031 exchangers and other small investors.

Walgreens and CVS currently account for 90 percent of available net lease supply in the category and fetch prices of $392.04 and $352.44 per square foot, respectively, according to net lease real estate investment firm Boulder Group. Rite Aid, despite a stock of more than 3,000 U.S. stores, has very few sites up for sale. It is among a group of several chains accounting for just 2.6 percent of current available supply. Eckerd, meanwhile, represents about 7.8 percent of the supply and gets an average $320.63 per square foot.

Boulder Group president Randy Blankstein thinks the combination of Rite Aid and Eckerd will help both brands and make those assets more palatable to net lease investors.

“I think that many people were uncomfortable with Eckerd because it was controlled by a Canadian entity,” Blankstein says. “Rite Aid is a publicly traded company, with publicly traded debt, and it is a much better-known chain, so people will feel more comfortable buying them.”

Joseph French, senior vice president of institutional retail sales with Sperry Van Ness, believes that investors have gone overboard in their love for Walgreens — which fetches 6.3 percent cap rates in contrast with 6.46 percent for CVS, 6.91 percent for Eckerd and between 7.5 percent and 7.75 percent for Rite Aid.

“It's going to be interesting to see how this all plays out, but I think that it is a good move for Rite Aid to go into states they were not in before and it's going to be a lot faster than doing one store at a time,” French says.

The acquisition will bring Rite Aid's portfolio to 5,000 stores in 51 states. Rite Aid will invest approximately $500 million to upgrade the newly acquired stores, with plans to open another 800 to 1,000 locations in the next five years.

NET LEASE DRUG STORE MARKET REPORT
Percent of Chain Avg. Supply Cap $/Sq. ft. Avg. rate Credit Price Rating (S&P)
Walgreen's 56.03 $392.04 6.35% $6.12M A+
Eckerd 7.82 $320.63 6.91 $3.97M Unrated
CVS 33.55 $352.44 6.46 $4.15M BBB+
Misc 2.61 $349.26 6.7 $4.50M Unrated
Source: The Boulder Group