To own or rent? That’s the question facing the shareholders of Luby’s, a restaurant chain, at their annual meeting on January 15. Ensnarled in a bitterly contested proxy battle, senior management is fiercely resisting an equally fierce campaign by an activist hedge fund, Ramius Capital Group. Ramius’s goal: to get the company to sell all or part of its real estate and then lease it back.
The company says it would rather invest in its future — which includes the addition of 45 to 50 new restaurants to the 128-unit chain — than be saddled with stiff rents. What’s more, if an eatery’s fortunes head south, it could be costly and tough to get out of a lease.
On the rent side of the argument is Ramius, an activist investment adviser managing a $9.6 billion asset portfolio that includes a more than 6.5 percent stake in Luby’s. Ramius has nominated a slate of four board candidates that will pursue at least a partial sale-leaseback strategy. Arguing that the restaurant’s real estate is worth more than the business itself, Jeffrey Smith, Ramius’s managing partner, has called on Luby’s management to use the cash culled from a sale-leaseback to pay for a special dividend and a share buyback.
For its part, Luby’s leadership rejects Smith’s proposals outright, asserting that the company’s board, aided by outside advisers, carefully vetted sale-leaseback arrangements before Smith presented his plan. They have also argued that such a strategy would sacrifice the company’s long-term interests for a short-term gain “We believe that Ramius’s nominees will add nothing to the Luby’s Board, and will act as Ramius’s agents to pursue its misguided plan to sell and leaseback the company’s owned real estate, thereby depleting Luby’s assets and disrupting future profitable growth,” wrote chairman Gasper Mir and president and chief executive officer Christopher Pappas in an open letter to shareholders on January 10.
But in making that case, the company is going against the conventional wisdom about when sale-leasebacks are most desirable. In the currently intensifying credit crunch, it may be better for a company to sell off nonliquid assets like property and focus on its core strengths, says Benjamin Harris, head of U.S. principal investments at W.P. Carey, a firm that provides lease financing for corporations.
In contrast, demand for sale-leasebacks slackens sharply in booms like the one that preceded the current real-estate bust. When high-yield corporate bonds are in demand, share prices are rising, and banks are looking to lend, sale-leasebacks may seem a much less appealing way to raise capital.
Despite fears that property buyers’ appetite for deals might be plummeting, sale-leasebacks appear to be growing. “We’re seeing a big pickup in our volume” of such deals, says Harris, noting that in an economic climate like the present, “more and more companies look at alternative ways to raise capital, and sale-leasebacks are one of the avenues.” There are signs that the growth might be global: in December The Royal Bank of Scotland reportedly embarked on sale-leasebacks involving 62 of its branches.