Rite Aid Looks To Reject 347 Store Leases as Part of Bankruptcy

Article originally posted on CoStar on October 17, 2023

Pharmacy chain Rite Aid is asking a bankruptcy court to allow it to walk away from unexpired leases for 347 stores as the debt-ridden company looks to downsize what it described as its “sub-optimal” brick-and-mortar footprint.

The Philadelphia-based retailer, which now has 2,100 stores, said closing underperforming locations is a crucial part of the financial reorganization it is undertaking as part of its filing for Chapter 11 bankruptcy protection. Rite Aid also said in court documents on Monday that it will be accepting bids for its retail operations, all of them or parts of them. The auction date for that process will kick off next month.

Home-goods retailer Bed Bath & Beyond took a similar tack when it filed for Chapter 11 earlier this year and started closing stores while at the same time seeking a suitor for the company. But a buyer didn’t come through, and Bed Bath & Beyond ended up liquidating.

Rite Aid was forced to file for Chapter 11 on Sunday in the face of a cascade of problems, not the least of which was addressing the federal, state and private lawsuits that allege it oversupplied prescription painkillers. Such opioid litigation has prompted other companies, including Mallinckrodt Pharmaceuticals, to file for bankruptcy protection, as well.

Other retailers — including drug-store giants Walgreens Boots Alliance and CVS Health, as well as grocery behemoth Kroger — have paid billions of dollars to settle claims relating to the U.S. opioid epidemic. But that trio doesn’t face the mounting debt that Rite Aid has on its books, which has $4 billion in funded debt and $200 million in annual interest payments.

Rite Aid said it had received a commitment of $3.45 billion from some creditors and lenders to support its business operations as it restructures. In one of the court filings, the retailer also supplied a list of 347 stores with unexpired leases that it said it wants to exit. The locations span the country and include closings in New York; Los Angeles; Las Vegas; San Diego; Toledo, Ohio; Pittsburgh; and Portland, Oregon.

Rite Aid said its “store-portfolio rationalization process has accelerated in recent months,” and that during the 12 months ended Sept. 30 it had closed 210 stores. It was unclear if all or any of those 210 stores are part of the 347 Rite Aid said it wants to exit leases. Rite Aid declined to comment on that issue.

The retailer is asking for the lease rejections to be effective as of this past Sunday, when the company filed for bankruptcy protection.

Rite Aid said its “meticulous, well-considered store closure plan is centered on value.” In a court filing, the retailer said it had conducted a comprehensive analysis of its “store portfolio, financial performance and market geography to identify store locations that provided limited or no benefit to the debtors.”

It’s critical for the court to allow Rite Aid to exit certain store leases in that it “will help ease the debtors’ cash burn and increase the debtors’ liquidity,” according to the company. In a court document, Rite Aid did say it had already vacated some of the store locations where it wants approval to reject unexpired leases.

“Therefore, absent rejection, the debtors would be obligated to pay rent under the leases even though they will have ceased operations at, and will no longer be in possession of, such store locations,” Rite Aid said in a filing. “Moreover, in addition to their obligations to pay rent under the leases, the debtors may be obligated to pay certain real property taxes, utilities, insurance, and other related charges associated with the leases. The debtors’ lease portfolio has been, and continues to be, a significant contributing factor to their current financial challenges.”

The company is also seeking authority from U.S. Bankruptcy Judge Michael Kaplan, who is based in Trenton, New Jersey, to initiate additional store closings at a later date.

“They’ll be more,” Bill Read, an executive vice president at industry advisory Retail Specialists, told CoStar News.

Kaplan conducted the first court hearing on Rite Aid’s bankruptcy case Monday, where the retailer offered a 61-slide presentation on the company’s history and recent woes. At that session, Rite Aid said it’s faced stepped-up competition recently from other larger national chain drugstores, supermarkets, independent drugstores and online retailers such as Amazon.

Rite Aid’s stores generally range from 8,000 to 15,000 square feet, according to Read. That’s a size that’s appealing to a number of retailers, such as fast-growing Five Below, he said.

“Drugstores pay a lot of money for good corners,” Read said. “Generally, it’s good real estate.”

One drawback to Rite Aid’s locations is that drugstores generally want to focus and attract customers from a 2- to 3-mile radius, while other types of retailers are looking for space that attracts shoppers from more of an entire region, according to Read.

A&G Realty Partners, which is assisting Rite Aid in its store closing and lease-restructuring program, didn’t respond to an email from CoStar News on Monday seeking comment.

As for the attempt to sell Rite Aid’s retail assets, an auction notice will be issued on Nov. 8. The deadline for any stalking-horse bids is Nov. 20. The cutoff date for bids is Nov. 30, the auction is slated for Dec. 4, and a sale hearing will be conducted Dec. 19.