In November 2015, Walgreens entered into a contract to buy Rite Aid for $17 billion. The transaction is being reviewed by regulators as the combination of the nation’s number one and number three drugstore chains could be anti-competitive. Walgreens has indicated it has buyers lined up for unwanted Rite Aid stores, but the U.S. government may be concerned whether buyers would present viable offers. With the Federal Trade Commission blocking the combination of office supplies companies Staples and Office Depot, it appears the Obama Administration has become skeptical of big takeovers by industry rivals.
The potential combination is generally a negative for CMBS conduit lenders. While Walgreens’ superior credit will provide support to Rite Aid leases, Walgreens management noted that it would seek to merge some Rite Aid locations into Walgreens stores and viewed Rite Aid stores as “generally inferior” to Walgreens stores. As Rite Aid leases come up for renewal, Walgreens likely would not renew those leases and shut those stores.
So CMBS lenders are pulling up Google maps and plotting both Rite Aid and Walgreens locations in relation to the property being financed. Older Rite Aid stores within a half-mile or mile of a modern Walgreen store are vulnerable, particularly in small towns. Conversely, a newer Rite Aid in proximity to an older or inferiorly located Walgreens is also vulnerable as the Rite Aid could be converted into a Walgreens.
“If there is overlap, CMBS lenders are determining the superior store based on any combination of store sales, location and store age/condition,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “If you are financing the superior store, you are fine. If you are financing the inferior store, the loan will need to amortize to a level at loan maturity based on a reuse of the building. You are operating under the assumption that the store closes and needs to be repositioned for an alternative retail use at what is typically a much lower market rent and requires capital investment for the conversion.” This often means the loan must amortize on a 15- or 20-year amortization schedule to meet this criteria.