For sale… and leaseback

Entering into a partnership with a REIT (Real Estate Investment Trust) can help retailers raise needed capital. Bill White always dreamed of owning his own supermarket chain. So when the opportunity arose to purchase Southern Family Markets from C&S Wholesale Grocers, the veteran supermarket executive and his son jumped at the chance. The 57-unit Birmingham, Ala.-based chain was what was left of the old Bruno’s, Food World and Piggly Wiggly stores across Alabama, Georgia, Mississippi and the Florida Panhandle. White planned on renaming the whole operation Belle Foods, which means beautiful, and returning it to its legendary level of customer service, quality perishables and competitive grocery prices. The problem was he and his son did not have enough capital to acquire the company outright. So White monetized non-core assets. He sold the chain’s remaining 16 pharmacies, and he entered into a sale and leaseback arrangement with STORE Capital, a Scottsdale, Ariz.-based real estate investment trust, or REIT. STORE—an acronym for Single Tenant Operational Real Estate—acquired nine of Belle Foods’ freestanding locations and leased them back to Belle. “It gave us the capital to buy the business,” White tells Grocery Headquarters.  “We had another guy who was going to buy the stores and he backed out. We were already living down here [White’s previous job was vice president and CFO at Springfield, Mass.-based Big Y] thinking the deal was going to close any day and we had to find another buyer,” White says. “They called us and were ready to close in 30 days. STORE Capital was tremendous and did its due diligence. They are just real good people to work with and it was a better deal than the first one.” STORE Capital is less than two years old, and Belle Foods is its first supermarket customer, says Mary Fedewa, executive vice president of acquisitions. “We provide long-term capital to single-tenant operators like Belle Foods across multiple industries,” she says. As a sale/leaseback specialist, STORE Capital buys the retailer’s real estate and becomes its landlord on a long-term lease, Fedewa says. “This type of transaction allows the seller to unlock the equity in its properties, converting that equity into cash.” Retailers can then use the cash generated from the sale/leaseback to pay down debt, fund acquisitions, remodels and expansions or return it to shareholders in the form of dividends, Fedewa says. She adds that there are also tax benefits and balance sheet enhancements to be achieved by engaging in a sale-leaseback transaction. “If you own your real estate, you have a lot of money tied up in that investment,” Fedewa says. “The real estate may appreciate over time, but the primary return on your investment comes from your business operations; leaving all that money tied up in your real estate fails to maximize the potential of the business.” “With a sale-leaseback, the customer does not have to provide the 20%-40% equity that is often required in traditional financing, Fedewa says. “We provide 100% of the funds at the appraised value of the real estate on a long-term lease. This allows our customers to lock in a long-term efficient capital structure.” STORE Capital leases the real estate back to the retailer under a triple net lease. That means the retailer will be responsible for paying the building’s property taxes, insurance and the cost of maintenance or repairs. “Our leases give our customers maximum flexibility to operate their business. For example, they allow our customers to capitalize on expansion of their existing locations and to grow through acquisition opportunities,” Fedewa says. In addition to structuring sale/leaseback agreements, STORE Capital also provides financing solutions to help retailers develop land or vacant properties. “If a retailer wants to buy a vacant property and turn it into a supermarket we could help with that,” she says. “We are currently doing that with some of our customers. In fact, we have one customer who purchased a Borders bookstore and turned it into a furniture store and we did the same thing with a vacant Circuit City for a customer looking to build a fitness center.”