More Retailers Exploring Sale/Leaseback Options Putting More Property in Play

Despite a drop in the number of retail property sale/leasebacks in the first quarter of this year, there appears to be a substantial pipeline of deals building up as more merchants explore the option.

Among those actively looking to sell off corporate-owned stores is Mattress Firm Holding Corp., which has begun selling 1,050 Sleepy’s stores it acquired following a merger that closed in February. Fast-food chain Wendy’s has identified about 315 owned eateries it plans to dispose of by the end of the year. Bloomin’ Brands Inc., owners of Outback Steakhouse, agreed to a sale leaseback of 41 eateries and has another 215 restaurants it hopes to sell by early next year. And The Bon-Ton Stores Inc. also is exploring sale/leaseback opportunities as a way to pay down pending debt maturities.

The pipeline of retail property available for sale is such that John Case, CEO of Realty Income Corp. this week raised the firm's guidance on the amount of acquisitions it expects to make this year. Realty Income has been one of the largest buyers of such properties over the last two years.

Case raised his 2016 acquisitions guidance to $900 million from his initial estimate of $750 million while stating, "During the quarter we completed $353 million in acquisitions,” Case said. “And we continue to see a strong flow of opportunities that meet our investment parameters. During the quarter, we sourced $6.2 billion in acquisition opportunities, putting us on pace for another active year in acquisition. We remain disciplined in our investment strategy acquiring just 6% of the amount we sourced, which is consistent with our average since 2010."

Case added that the $900 million estimate does not take into account any as-yet unidentified large-scale transactions that may present themselves.

April Deals

Second quarter sale/leaseback activity among retailers has already kicked off following a couple of large portfolio sales from Bob Evans Farms Inc. and Bloomin’ Brands.

Bob Evans sold and leased back 143 restaurants to subsidiaries of National Retail Properties Inc. and Mesirow Realty Sale-Leaseback Inc. National Retail Properties paid $160.8 million for a portfolio of 117 Bob Evans Restaurant properties; and Mesirow paid $36.4 million for a portfolio of 26 eateries, netting a gain of $164 million on the sale which it plans to use to pay down debt.

As part of the transactions, Bob Evans Restaurants agreed to lease the locations for an initial term of 20 years, with five renewal options of five years each.

National Retail had pursued Bob Evans for more than two years while the restaurant operator weighed its options.

“It was a spectacular real estate deal,” said Jay Whitehurst, president of National Retail Properties. “Our average price per property was around $1.35 million and for that, on average, we obtained a 5,000-square-foot building on about an acre of land. Rent is only about $75,000 per property on average which is very safe, for both the tenant and the landlord.”

Subsequent to the end of the first quarter of 2016, Tampa-based Bloomin’ Brands also sold and leased back 41 of its stores, primarily Outback Steakhouses, to Realty Income Corp. for $141.4 million or about $3.45 million per eatery. It used a portion of the proceeds to pay down $87.6 million in debt.

“Given the attractive real estate environment and the high level demand for these properties, we intend to pursue additional sale-leaseback deals through a combination of individual as well as larger institutional transactions,” said David Deno, CFO of Bloomin’ Brands. (For more information on that transaction, see CoStar Sale Comp #3570146.)

Bloomin’ Brands still owns more than 600 Outback properties and 205 Bonefish Grill restaurants.

“The key will be to balance the potential value opportunity presented in individual transactions with the benefit of speed provided by larger deals,” he said. “Given the current pipeline, we expect to substantially complete the sale of the available portfolio by early 2017. We believe the expected transaction will unlock significant value.”

National Retail Properties said it looked at the recent Bloomin’ Brands portfolio but felt the cost per restaurant was a bit outside its range. But the REIT said it would take a look at smaller portfolio transactions or one-off deals from Bloomin’ Brands.

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