A merger between Walgreens Boots Alliance and Rite Aid, the two most widely held tenants in commercial mortgage securitization, would bring massive consolidation in the pharmacy space, potentially resulting in vacancies in CMBS impacted by the merger.
Walgreens said Tuesday that it will buy Rite-Aide for about $9.4 billion. Walgreens already operates over 13,000 stores worldwide. The drugstore has been growing its portfolio steadily; since 2010 it has snapped up Duane Reade, USA Drugs and Kerr Drug, adding more than 8,200 stores. The company reported revenue of $76 billion in 2014.
The acquisition of Rite-Aid will give Walgreens and another 4,600 stores located in 31 U.S. states.
It could do for pharmacies what the OfficeMax/Office Depot deal did for paper suppliers over time — "that is, a whole lot of consolidation," Trepp stated in a report published Wednesday.
In CMBS land, Walgreens shows up as the number one tenant in 384 conduits, while Rite-Aid is the third largest tenant and shows up in the pool of 280 transactions, according to Trepp. "A quick look at the some of the single tenant Walgreens loans indicated that most of the lease expiration dates are decades away, literally," Trepp said in the report. "We don't yet know if these have early terminations options. As for the handful of Rite Aid loans we looked at, it appeared most of them had lease expirations going out at least 10 years."
That at least staggers the lease expiration schedules and stretches the timelines for possible defaults out over several years.
To be sure, the November 2013 merger of Office Depot and OfficeMax promised to bring at least 400 store closures over 2014 and 2015. At the time of the merger, Office Depot was the 43rd largest tenant exposure (by loan balance) while OfficeMax was the 53rd largest tenant exposure (by loan balance) in CMBS, together the two firms operated around 2700 stores.
This consolidation has already resulted in store vacancies, and the merged company plans to drop the number of locations further, to 1,500 from 1,900, by 2016, according to Trepp.
Trepp detailed the impact on CMBS in a April report. To take one example, the closure of an Office Depot in the Gainesville Towne Center in Gainesville, Georgia in May left 17.6% of that complex. Office Depot was the third largest tenant of the 142,288 square-foot center. The two largest parcels are occupied by Farmers Furniture and Big Lots. The Gainesville Towne Center produced a 1.59x DSCR for the first three quarters of 2014 with a 96% occupancy rate. The property backs an $8.5 million loan that makes up 0.57% of the JPMCC 2006-CB16 deal.