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Is The Sale And Leaseback The Last Hope?

Posted: Mar 09, 2009 13:49 PM by Eric Fox

Tickers in this Article: NYT, GM, YRCW, DIN

Many companies in need of cash are engaging in sale and leaseback programs in which companies sell real estate or other fixed assets to other parties, and then immediately lease them back under a long-term lease.

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The effect of this program is the conversion of a long-term fixed asset to a liquid current asset. This means an immediate boost to a company's cash levels, which the company can use to pay down debt and meet operating expenses. The company can also appear financially healthier when negotiating with lenders.

Companies also pursue this strategy when they don't consider real estate a core business, as selling the real estate removes an inconvenience that the company would rather not deal with.

But while there's no denying that many companies have recently opted for sale and leaseback arrangements, there is some question as to the long-term effects of such a choice. Let's take a look at some companies that have taken this route.

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The Sellers
One company that is attempting this type of transaction due to a rapidly deteriorating financial condition is the New York Times Company (NYSE:NYT). The company is reportedly trying to sell all or part of its 58% interest in its headquarters building for up to $225 million. NYT has a $400 million line of credit that is due in May 2009.

General Motors (NYSE:GM), whose financial distress has reached the point where its accounting firm has issued a "going concern" warning, marketed its ownership in the Renaissance Towers complex last fall. However, the company failed to find a buyer for its interest.

Another company that recently made several sale and leaseback transactions was trucking company YRC Worldwide (Nasdaq:YRCW). The company sold an undisclosed number of its facilities for $122 million, and then leased them back for an annual rent of $11 million. In an earlier transaction, YRC received a total of $151 million.

Last June, Dine Equity Inc. (NYSE:DIN), the owner of Applebee's and the IHOP franchises, sold 181 of its Applebee's locations and then leased them back. The company pocketed $296 million after tax.

The Problems
There are a number of problems with this strategy in today's market. The market for real estate peaked several years ago, so the owners are getting less than they planned on - and not as much as they need. Also, because of financing problems, there is a limited number of buyers. The few buyers that exist might consist of vulture funds looking for distressed assets, and might offer a low price to a company that they think is desperate. In addition, this is a short-term fix only; if the company is not producing free cash flow, it will quickly burn through the income generated by the sale.

Bottom Line
The rising level of financial distress in corporate America has boosted interest in the use of sale and leaseback arrangements. While the effect of such an arrangement is an immediate injection of cash for a troubled company, it is only a short-term fix and will only delay the inevitable consequences of too much debt and leverage. (To learn more about the importance of cash, read The Essentials OF Cash Flow.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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