Is the Time Right for Rite Aid?

Yes, the time is right for Rite Aid. An investor will obtain an above average yield commensurate with the market’s view of purchasing a Rite Aid pharmacy.

There is a very active market for Rite Aids with numerous transactions closing in 2010 and 2011. A number of these pharmacies are located on the East Coast. The sales, at cap rates in the 9% range, resulted from the resale of Rite Aids which were originally sold by Rite Aid in 2008. These transactions closed with relatively long periods of time (greater than 17 years) remaining on their base leases. The typical buyers have been individuals and smaller investment firms. In general, financing has been provided by local banks. Cap rates are yielding an approximate 2% premium to comparable CVS and Walgreen locations.

The supply of corporate 2008 vintage Rite Aid stores has been nearly fully absorbed. In addition, Rite Aid has announced that it will not conduct any corporate sale-leaseback transactions in the current year, so that the Company will not add to the available inventory on hand.

Location has reemerged as a critical factor in NNN retail investment analysis. Published asking cap rates for Rite Aids generally are in the 8.5% to 9.5% range, with California locations listing in the mid to high 7’s. A positive indicator that the number of distressed sellers has declined is that asking cap rates of over 10% are rare.

Due diligence for any retail product, but a Rite Aid in particular, should focus on the balance of the remaining base lease term, proximity of national and local competitors and if available, store sales. An absence of any of these factors could have a significant negative impact on the cap rate or even the salability of the property.

Rite Aid’s financial situation has stabilized. Questions about Rite Aid’s future have diminished. Same store sales have begun to rise. Debt maturities have been extended. New management is focused on boosting front-end sales and profitability. In summary, the investor will receive a strong return relative to other investments available in the market.

Rite Aid recently held their first quarter fiscal 2012 earnings conference call. You can view a full report on Rite Aid and that conference call here.