Transaction Mechanics
Considerations
FINANCIAL IMPACT
USE OF PROCEEDS
VALUATION ARBITRAGE
STRATEGIC IMPORTANCE
COST OF CAPITAL
OBSOLESCENCE RISK
DRIVERS
STRATEGIC
Redeployment of Capital. Reinvest the capital allocated to real estate back in the business where the returns are higher.
Core Competency Focus. Shift financial resources dedicated to owning real estate into growing higher return operations.
Managing Stakeholders. SLB’s create immediate liquidity, which can be used for distributions, buyouts and consolidations.
Preparing for a Sale. Most of the time the total enterprise value is higher when the real estate is separated from operation.
Eliminate Residual Risk. Over time property obsolescence is inevitable and values are near all time highs, so harvest the capital now.
FINANCIAL
Value Arbitrage. SLB’s cap rates commonly imply multiples of 12x-16x, which are typically higher than a company’s EBITDA multiple.
Cost of Capital. If the cap rate on a SLB is lower that the WACC, then a SLB is the least expensive cost of capital for that asset class.
Capital Management. SLB’s can improve debt coverage ratio, de-lever the balance sheet, strengthen credit metrics and the capital stack.
Tax Advantages. Operating leases can be 100% expensed, ware owned assets are limited to interest only and long term depreciation.
Acquisition Financing. SLB’s can be used as a financing vehicle that effectively “buys down” an acquisition multiple, if done concurrently.
Process
SALE LEASEBACK REVIEW
- Key Features of SLB
- Strategic Importance
- Financial Impacts
BUSINESS & MARKET REVIEW
- Credit Analysis
- WACC Review
- Market Review
PROPERTY VALUATION
- Cap Rate Comparables
- Real Estate Appraisal
- Value Arbitrage
- Lease Structure (N/NN/NNN/Bond)
- Lease Terms (term, increases)
- Value Engineering Price
DEAL UNDERWRITING
- Accounting Compliance
- Modeling & Analytics
- Financial Validation
EXECUTION STRATEGY
- Real Estate Extraction
- Property Packaging
- Investor Engagement
UNDERWRITING
| FINANCING COMPARISON | SENIOR | SLB | MEZZ |
|---|---|---|---|
| Asset Value | 10,000,000 | 10,000,000 | 10,000,000 |
| Loan to Value | 70% | 100% | 90% |
| Capital Raised | $7,000,000 | $10,000,000 | $9,000,000 |
| Cost of Capital | 6.00% | 8.00% | 18.00% |
| Amortization/Lease Period (yrs) | 20 | 20 | 20 |
| Maturity Period (yrs) | 10 | 20 | 3 - 5 |
| Loan or Rent Constant | 8.72% | 8.00% | 18.68% |
| Annual Debt Service/Rent Payment | $610,292 | $800,000 | $1,681,380 |
| Annual Tax Deduction (ave./rnd down) | $251,000 | $800,000 | $1,216,000 |
| Debt Coverage Ratio | Yes | No | Yes |
| Liquidity Ratio Covenant | Likely | No | Yes |
| EBITDA Ratio Covenant | Likely | No | Yes |
| Borrowing Base Limit Covenant | Yes | None | Yes |
| Payment in Kind (PIK Rate) | No | No | Negotiable |
| Financial Reporting Covenant | Yes | None | Yes |
| Equity Warrants | None | None | Negotiable |
| EBITDA | No SLB | OpCo | PropCo | SLB | ||
|---|---|---|---|---|---|---|
| 100 | Real Estate Included | Real Estate Extracted and Valued Separately | ||||
| 90 | ||||||
| 80 | ||||||
| 70 | ||||||
| 60 | ||||||
| 50 | ||||||
| 40 | ||||||
| 30 | ||||||
| 20 | ||||||
| 10 | ||||||
| 0 | ||||||
| EBITDA | No SLB | OpCo | PropCo | SLB | ||
| EBITDA | $10,000,000 | $9,000,000 | $1,000,000 | $10,000,000 | ||
| Multiple | 8x | 8x | 12.5x (8 cap) | 8.6x | ||
| EV | $80,000,000 | $72,000,000 | $14,300,000 | $86,300,000 | ||
| Capital Stack | Rate | % of Total |
|---|---|---|
| Senior | 6.00% | 40.00% |
| Mezzanine | 18.00% | 20.00% |
| Revolver | 9.00% | 10.00% |
| Equity | 15.00% | 30.00% |
| WACC | 11.40% | 100.00% |
