Real Estate Sale and Leaseback LBO

t1993h's picture
Rank: Monkey | 62

Hi all,

I am currently looking at a target for a potential LBO. The target owns almost all of its retail stores and there have been suggestions of selling these stores to a REIT. Obviously, the stores would need to be leased back. I am no expert with real estate assets, so I was wondering, how to roughly (and quickly) estimate the leases that would be required each year to lease the sold stores. If it helps, I know the total square feet of the stores and the estimated value of the stores. Is there some sort of approximation to estimate the annual lease payments using the value of the stores?

Would be highly appreciated!

Comments (14)

Best Response
Mar 17, 2017

How many stores are there? What is the approximate sf of each store? As a ballpark I would start with NNN rent around 10% of gross sales for each location. From there you will have to look at comps in each market.

What is the goal of selling the RE? You need to consider the long term implications. If you go to cheap and don't protect the company with lots of options they could risk losing their locations. If you sign leases that are substantially above market then investors will be worried about replacing that income if the tenant ever leaves.

It probably doesn't make sense to package them as a REIT unless there are a ton of them and you can stagger lease renewals. If they have decent credit ratings and will give you a term of over 10 years you will probably get more value selling them as individual NNN leases.

EDIT: I thought you said form a REIT... selling them as a portfolio to a REIT will likely save you a lot of money.

Mar 17, 2017

Thanks for your answer.
The goal is essentially to unlock the capital. Many competitors fully lease their stores and we want to follow that trend, mainly to pay down debt (probably). I am looking at REITs, because it was suggested to the target before to do that.
We have about 1.14m sq ft in retail stores, which we want to sell and hope to make around $300m.
For now just looking for a ballpark figure how much rent to add to the income statement. But 10% sounds good. Maybe the additional info helps a bit

EDIT: How much money could selling to a REIT save? Is it possible to ballpark a percentage of sale value for renting it from a REIT?

Mar 17, 2017

If you are looking to get $300MM for a NNN portolio the rent on a 6% cap deal the total rent would be around $18 million a year... Is that in the neighborhood of 10% of gross sales? That would require decent credit and lease terms... For What it's worth brand new 15 year NNN lease dollar generals were selling at 6.5% cap rates a couple months ago. I'm not sure whats happened since the election.

Mar 17, 2017

Thanks a lot!

Mar 20, 2017


Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Mar 17, 2017

PM me I have worked with a bunch of funds that specialized in NNN deal. NNN only makes sense in certain situations. Depending on the balance sheet and earning of the business and the location of the real estate you may be able to get a loan backed by the real estate with an additional lien against the company.

Mar 17, 2017

Can't provide much but I did an LBO case study in grad school of a retailer who owned their stores. My group considered doing a sale-leaseback and we just did some research and pulled some comps on their properties in major cities and then used pretty conservative projections. Made a huge difference in the IRR vs status quo.

Mar 21, 2017

Might if sharing this case study to me? I am curious how this LBO thing works.


Mar 17, 2017

There wasn't that much given to us, our prof told us about a public retailer who's pretty well known but had been underperforming their peers. We were given their 10k and most recent Q and a couple articles about their corporate culture (it's pretty unique). And then we were given a deadline and told to have a 20+ page memo outlining whatever we wanted to (change in MGMT, different ways to run daily ops, proposed capital structure, earnouts, potential M&A, etc). It was super broad.

Mar 17, 2017

Thanks a lot guys! Helped a lot and was sufficient for a first analysis

Mar 20, 2017

I can't help but wonder who is peddling this deal out there.... I'm so damn curious

Apr 12, 2017

I am as well. My team acquires NNN real estate and this is exactly the type of transaction we focus on. Have to wonder what target company is about to send $300MM of single-tenant NNN retail assets to market

Apr 12, 2017

Interested on what market rates are if people have color -- I've always seen 2.0x property-level EBITDAR coverage. Based on other deals, I'd say you can assume have REITs have 5.0x leverage @ 4.50% and adjusted FFO capped at @ 7.75%. Example: $50mm property level EBITDAR = $25mm rent stream. Adjusted FFO of ~$19.5MM after deducting ~$5.5mm interest on $125mm debt results in ability to pay of $375mm ($125mm debt + $250mm equity).

Tax leakage due to low basis in the properties could be a huge drawback though if you can't structure around it at close.

    • 1
Apr 12, 2017
    • 3