4/19/2002: CIA Commercial Investment Advisors

By Leila Zogby
April 19, 2002
The Daily Deal

Financial professionals and corporate executives seeking capital in today's credit-tight environment are discovering, "There's gold in them there buildings," to paraphrase the California Gold Rush prospectors. Increasingly, the sale-leaseback of corporate real estate is providing funding for expansion, debt restructuring, acquisitions and other business objectives.
"With the slowdown in the economy, traditional sources of financing – banks, credit and equity markets – have dried up," explains Gordon J. Whiting, executive director and deputy director of acquisitions at W. P. Carey & Co. LLC (NYSE: WPC), a leading real estate investment banking firm in New York. "At the same time, many decision makers are finding that it's a great time to acquire a competitor who isn't doing so well or to invest in the new technology the company will need to really grow when the market improves. They're also looking at realigning their balance sheets. So executives are realizing that selling and then leasing back the real estate they own may be the ideal way to raise the money they need to accomplish their goals."
A proven corporate finance tool
Atrium Companies Inc., a major manufacturer and distributor of residential windows and doors, was able to restructure its debt through the $16.2 million sale-leaseback of two manufacturing and distribution facilities to W. P. Carey in December 2001.
"As a leveraged buyout company, certainly the most efficient use of our assets and the lowest cost of capital are the most important things besides managing day-to-day operations well," says Jeff L. Hull, Atrium president and CEO. "The sale-leaseback was an opportunity for us to take various assets that cost a lot of money and monetize them to lower our cost of capital, improve our liquidity and improve our debt."
A sale-leaseback was also beneficial for Minneapolis-based P.W. Eagle Inc. (NASDAQ: PWEI), the country's second-largest manufacturer of polyvinyl chloride (PVC) pipe and fittings and polyethylene (PE) pipe and tubing products. P.W. Eagle is controlled by members of Spell Capital Partners LLC, a private equity and buyout firm based in Minneapolis.
The year 2001 was challenging for the company and CEO William Spell was seeking some breathing room. "We were looking to reduce our fixed charges, which is the cost of our principal, interest and capital expenditures, and to create additional liquidity," he explains.
The best option
he sale-leaseback in March 2002 of three P.W. Eagle manufacturing facilities and an office building to W. P. Carey, which raised $13.7 million, proved the best way to accomplish the task. "Taking on more mezzanine financing was not an option, since our latest acquisition had involved a tranche of mezzanine financing and adding a second tranche was not practical. So we focused on using our real estate," Spell says.
"We looked at the possibility of a mortgage, but concluded that the sale-leaseback was more advantageous. A sale-leaseback provides 100% loan to value, while a mortgage might give you 70%. And a mortgage has amortization, which the sale-leaseback does not. The interest on a sale-leaseback may be higher than on a mortgage, but if it accomplishes what you need, it can be a great thing," he adds.
For P.W. Eagle it has proven to be a good move. "We used the proceeds to pay down a term loan and a revolving line of credit, essentially to restructure our existing debt and create a more accommodating capital structure given the recession and the nuances of our business, which tends to be cyclical," Spell says. "The Carey money was used to accommodate a stressful time for us, and it solved the problem. Business has been picking up and the outlook for us is positive."
While sale-leaseback transactions are not new, Hull believes that corporate executives do not always recognize the role they can play in the overall capital structure of a company. "A sale-leaseback isn't for every capital structure. But for businesses that are asset intensive and currently have leverage on them, it's a complementary way to balance their capital structure from a debt perspective," he notes. "You can lock in 15- and 20-year financing, money that is not normally found in the market, and use it to balance your short- and medium-term financing."
For companies that currently have tax retention operating leases on property, also known as synthetic leases, a sale-leaseback offers a long-term solution. Last December, W. P. Carey purchased and leased back 12 retail stores and a distribution center from PETsMART Inc. (NASDAQ: PETM) for $71 million. The properties had been self-developed by the pet supply retailer under five-year tax retention operating leases, which were funded long term through the Carey transaction proceeds.
A sale-leaseback removes real estate from a company's balance sheet, improving its financial picture. "If a company takes on a mortgage, that will show up on the balance sheet as a debt obligation. Companies don't want to look more leveraged in this environment," Whiting says. "If a sale-leaseback is structured as an operating lease versus a capital lease, the company will get off-balance-sheet treatment and will look less leveraged. When banks start lending again, these companies will look better."
But, such a move does not obscure a company's liabilities, Whiting says. "The obligation the tenant has for the lease payment is stated clearly in the financial statements. This isn't a complicated financing technique. Everybody understands leasing nowadays," he says.
Private equity firms approve
Private equity firms also are finding that real estate sale-leaseback transactions fit into their overall acquisitions financing programs. "The $20 million we were able to obtain at closing through the sale-leaseback of the Buffets Inc. corporate headquarters to W. P. Carey & Co. provided a very important and beneficial component to the management buyout of that company," explains Steven M. Lefkowitz, managing director of Caxton-Iseman Capital Inc.
More than half the sale-leaseback transactions at W. P. Carey currently involve private equity firms. "Over the past 10 years, the amount of equity contributed to a transaction has been increasing," Whiting says. "Private equity firms would rather that not be the case, but it is. They're finding out however, that they won't have to contribute as much equity if they do a simultaneous sale-leaseback."
With nearly 30 years of experience in the field and a talented group of professionals, W. P. Carey can step in, even at the last moment, to help private equity firms complete a deal. "Of course, we prefer companies to contact us early on, even just to discuss the possibilities of using a sale-leaseback as part of the financing package," Whiting says. "But, we have the ability to move quickly when necessary."
This flexibility was what clinched Caxton-Iseman's decision to go with W. P. Carey. "We had signed a stock purchase agreement in the Buffets deal, which meant we needed to have all financing commitments locked in. We had no room for error," Lefkowitz says. "We selected Carey because we had a high degree of confidence in their ability to close. We needed precision, execution and timeliness, and they delivered.
Companies can focus on business
Real estate sale-leaseback transactions have the added benefit of allowing companies to focus on their core business. "We're in the restaurant business at Buffets Inc., not the real estate business," Lefkowitz says. "There is no reason for us to own our headquarters. "We'd rather deploy our capital into our core business."
Hull of Atrium agrees. "Leasing our facilities is an efficient way to run our business. To tie up a lot of money in building assets is not where we want to spend money. We'd rather invest in automation and debt reduction."
W. P. Carey typically acquires single-tenanted properties and leases them back to the previous owners for a period of 15 to 20 years. Carey offers triple-net leases, under which tenants continue to pay insurance, taxes and maintenance on the building. "The beauty of the arrangement is that the tenants continue to run the facility as though they owned it. There is no disruption in their operation. Unless someone knew the sale-leaseback was done, no one would ever realize it," Whiting says.
Even major renovations can be accomplished by a tenant. In the largest building W. P. Carey purchase from Atrium, the window manufacturer consolidated operations that had been spread among several facilities and spent $3 million to retrofit the facility to accommodate the changes. "This move allowed us to have a more efficient manufacturing process, and we used some of the proceeds from the Carey sale-leaseback to do that," Hull explains.
Performance counts
In reviewing prospective purchases, W. P. Carey scrutinizes a company's financial performance and long-range prospects. "We perform very thorough due diligence both of the company and the real estate," Whiting explains. "We are in this for the long-term, so we want to be sure that our prospective tenants are too."
More importantly, W. P. Carey prides itself on being able to meet their client's needs. "W. P. Carey is a great group to deal with in a sale-leaseback because they act as principal, not as agent," says Spell of P.W. Eagle.
"We appreciated Carey's creativity in structuring the deal in a way that worked best for us. Their access to capital and their reputation in the market allowed us to get the deal we needed," Hull says.
Founded in 1973, W. P. Carey & Co. LLC and its affiliated real estate investment trusts specialize in corporate real estate financing through the corporate net lease, or sale-leaseback, structure. As the largest publicly traded limited liability company in the world, the company owns and/or manages more than 450 commercial and industrial properties throughout the United States and Europe encompassing more than 55 million square feet.
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Copyright © 2002 The Deal LLC Adapted with permission.