2007 Citigroup $1.58 Billion. Significant Historical Sale Leaseback Transactions. CVS/pharmacy Portfolio $519 Million

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1 Sale Leaseback An Alternative Means For Raising Capital Sale Leaseback History Sale leasebacks have become more common in the marketplace over the past two decades, given they can provide numerous benefits to companies and investors alike. There are no shortages of companies looking to raise capital or improve their financial position; likewise, there are no shortages of investors looking for stable, long-term investment options. A sale leaseback achieves both of these objectives. By definition, a sale leaseback (SLB) is when a company sells the real estate it owns and occupies to a buyer while simultaneously signing a long-term lease to continue to occupy and use the property. The subsequent pages provide an overview of the SLB market, potential benefits of SLBs, as well as key factors to consider before executing an SLB CMS Energy $2.3 Billion 2007 Citigroup $1.58 Billion 2009 HSBC HQ $1.2 Billion 2015 Verizon HQ $650 Million Significant Historical Sale Leaseback Transactions 1898 Great Britain Hong Kong 99 Year Leaseback Market Overview 2004 CVS/pharmacy $519 Million 2008 SunTrust Bank $735 Million 2014 Red Lobster $1.5 Billion Sale leasebacks have occurred in nearly every commercial real estate sector: retail, office, industrial, manufacturing, healthcare and hospitality. It is also commonplace to see sale leasebacks with products other than real estate, such as commercial aircraft, cargo barges, solar plants as well as large scale machinery and equipment. 1

2 Market Overview Continued Deal sizes vary as well, from tens of thousands of dollars for smaller equipment to multi-billion dollar portfolios, headquarters facilities and power plants. The variance further illustrates the breadth of application for sale leasebacks across diverse industries. One misnomer is that most sale leaseback candidates are smaller, midmarket companies with limited access to capital and/or in need of additional liquidity. While this is certainly a sub-segment of the marketplace, there is an abundance of sale leaseback candidates with strong financial positions such as a corporation looking to re-invest capital in their core business, a private equity group executing an LBO, an organization wanting to reduce the residual risk of their real estate, or a strong franchisee acquiring a smaller franchisee. As illustrated by these examples, there are a multitude of reasons why companies utilize sale leasebacks. Today s Market Conditions Are Ripe For SLBs Since the low point of the recession in 2009, sale leaseback volume has increased over 12x to more than $12 billion in transaction volume in Many of the underlying factors which have led to the increase include: $12 $12 $10 $10 Total Sale Leaseback Activity (Billions) Total Sale Leaseback Activity (Billions) The economy has significantly improved since the recession - GDP, job growth and M&A activity have rebounded and companies need capital to continue to grow Continued strong demand for commercial real estate and an abundance of buyers (both domestic & foreign as well as institutional & non-institutional) looking to acquire attractive real estate investments 2 $8 $8 $6 $6 $4 $4 $2 $2 $0 $ * Data source RCA and SJC research group Imbalance between quality net lease supply and demand for the product The lack of new product supply, traditionally from corporate expansion via build-to-suit construction, makes SLBs with long-term leases attractive to real estate investors Current market conditions result in real estate not being properly valued within the context of overall company capitalization Continued volatile capital markets and interest rate uncertainty

3 Key Advantages of a Sale Leaseback Transaction For many companies, whether private or public, real estate is not considered part of their core business, yet it remains one of their largest investments. While motivating factors for sale leasebacks might differ from company to company, unlocking the value in real estate can offer significant benefits when handled properly. Reasons may include: Raising Capital to Re-invest Back into Core Business or Fund Acquisitions SLBs are a means to further a company s overall objectives in its core business. A SLB provides capital for a company to invest in new technology or equipment, expand and improve their facilities, or re-invest in their workforce. A sale leaseback can also provide growth capital for a company to acquire competitors or firms in adjacent industries. Private equity firms can use the proceeds from a sale leaseback to fund platform and add-on acquisitions or pay down debt related to a leveraged buyout (LBO). Improving Financial Health and Flexibility An SLB can improve a company s liquidity by converting a fixed asset (real estate) into a current asset (cash). Proceeds from a sale leaseback can be used to pay down existing debt or fund stock buybacks which in turn can boost investment returns and improve balance sheet metrics. An SLB can lower a company s WACC given that capitalization rates on SLBs are typically favorable compared to a company s overall WACC. Traditional real estate financing typically provides lower loan-to-value, which will limit the amount of capital raised and in many cases require strict debt covenants. As an alternative, an SLB offers 100% of the value of the real estate with no restrictive debt covenants. An SLB also allows for a company to lock-in a rate over the term of a lease, eliminating the frictional costs associated with conventional short-term or floating rate financing. 3 Preparing for a Sale or Restructure In preparation of a company sale, monetizing the real estate via an SLB separate from a business sale enables a company to maximize its returns and net proceeds. On the contrary, if acquiring a company, selling the real estate subsequent to or simultaneous with a business acquisition via an SLB can significantly reduce the investment basis in the acquired business. An SLB can increase a company s liquidity in order to buyout a partner(s) or restructure existing ownership. Reducing Property Ownership Risk While Continuing to Occupy the Property Transferring ownership limits the risk associated with real estate including the risk of property casualty, functional obsolescence and unknown residual value. A short-term or partial SLB can provide much needed flexibility, particularly if the business unit has volatility in staffing or production. Because of the passive nature of an SLB transaction, companies are able to continue to operate business as usual with little or no business interruption by the new landlord.

4 Key Factors to Consider Before Executing a Sale Leaseback Although sale leaseback market conditions are strong and the benefits are numerous, there are many factors to consider before going through with a sale. Such factors may include: Operational Flexibility vs Financial Returns from Sale Is the main objective to maximize cash proceeds to re-invest back into the business or is more flexibility in lease terms required? There is a trade-off that needs to be discussed prior to a sale, as maximizing one aspect will likely necessitate a trade-off that affects the other. Lease Structure and Accounting Implications Whether a lease is treated as a finance lease or an operating lease has different impacts on a company s financial statements as well as its debt covenants. It is important to understand the implications of the new lease accounting standards prior to executing an SLB. Tax Implications Are there any tax benefits or liabilities that arise as a result of an SLB? Various tax issues may arise through an SLB which may require further consultation. These may include: Treatment of the gain on sale of the asset(s) Full rent deduction vs. only interest and depreciation deduction Tax treatment based on company structure: Partnership, LLC, S and C Corp Execution Strategy Are properties sold as individual transactions or as a portfolio? What is the marketing strategy based on the sale objectives? There is no standard approach when executing an SLB. Developing a proper marketing strategy to execute on an SLB is critical and should be custom-tailored depending on the ultimate objectives of the sale. 4

5 In Summary Sale leaseback transactions can often be an effective tool for companies looking to raise capital or redeploy capital into higher return opportunities. The SLB market is very active with an abundance of buyers seeking investment opportunities, thus providing companies an opportune time to take advantage of favorable market conditions. The current market environment enables companies to negotiate advantageous lease terms while maximizing capital raised. The right strategic partner is invaluable when navigating the questions that arise within a sale leaseback transaction. First and foremost, the partner must have both the technical expertise and proven track record within the SLB arena so that they can provide sound guidance as to whether an SLB is the best option based on the client s objectives. A good strategic partner also brings a highly capable and qualified network of industry contacts that can further assist in the sale leaseback process. 5 About Stan Johnson Company Stan Johnson Company ( is one of the nation s leading commercial real estate brokerage and advisory firms. The firm has the largest team of professionals focused exclusively on the acquisition, disposition, and financing of net leased real estate. Building on a 30-year foundation in the net lease industry, completing more than $20 billion in transactions nationwide, Stan Johnson Company is aligned for continued growth. A dynamic team approach, refined marketing processes and a foundation built on integrity, professionalism and relationships create a winning combination enabling the firm to consistently deliver quality service and superior results to each unique client Stan Johnson Company. All rights reserved. No part of this publication may be reproduced by any means without prior written permission of Stan Johnson Company. The information contained in this publication has been compiled from sources believed to be reliable. Stan Johnson Company accepts no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this publication. CONTACT Daniel Herrold Senior Director dherrold@ David Annett Associate dannett@ Stan Johnson Company 6120 S Yale Ave, Suite 300 Tulsa, Oklahoma (918) www.