Craftmade International Completes Sale-Leaseback Transaction Jul 15, 2011 OTC Markets Group Inc. News Service
Coppell, TX— Craftmade International, Inc. (OTCQX: CRFT) (“Craftmade”), a Delaware corporation, today announced that on July 8, 2011, CM Real Estate, LLC, a Texas limited liability company and wholly-owned subsidiary (“Subsidiary”) of Craftmade, closed a transaction whereby the Subsidiary sold its facility located at 650 S. Royal Lane, Coppell, Texas (“Facility”), which Craftmade previously had contributed to Subsidiary in exchange for its 100% interest in Subsidiary. Pursuant to a Contract of Sale (“Sale”) with Huntington Industrial Partners LLC (“Huntington”), a Colorado company, Facility was sold for consideration of $15,214,500 received in cash. Craftmade believes that after taxes, transaction costs and prepayment penalty on the existing note secured by Facility, that it will retain net proceeds of approximately $12,800,000 which it will use to pay off debt, including the existing note secured by Facility and a portion of its operating line of credit with Bank of America. Craftmade has no pre-existing relationship with Huntington and considers this to be a fair market transaction being executed at pricing and terms in line with other comparable transactions in the marketplace.
Pursuant to an Industrial Building Lease (“Lease”) executed concurrently with the Contract of Sale, Craftmade will lease Facility from Huntington for an initial period of 10 years, with optional renewal for two subsequent periods of five years each. Base rent to Huntington commencing immediately will be as follows:
Months Monthly Base Rent
The initial lease period will expire on July 30, 2021. Other terms of the Lease are in line with normal and customary industrial leases, and Craftmade has no obligation beyond the initial term of the lease. There are no terms under which the base rent may be accelerated or increased, beyond the payments detailed above. The foregoing is a summary of the terms of the Sale and Lease and does not purport to be complete.
CRFT appears to have a liquidity problem since they were willing to accept a prepayment penalty (remember how strongly they suggested Litex could not afford assuming the mortgage and absorbing the prepayment penalty) so that they could free up cash. CRFT probably needed to come up with some cash to get in compliance with their Bank of America line of credit covenants. CRFT had to modify their debt coverage terms (see 3rd quarter financial statements) in order for them to meet their fixed charge coverage since they did not have sufficient excess availability on their borrowing base at the end of their 3rd quarter. This may have been a way for CRFT to generate immediate cash at the expense of their long-term profitability. Since the rents are stepped (increasing over the term of the lease) CRFT will need to amortize the rents to expense on a straight-line basis but they will have more cash in the short-term due to the rents initially being less than the old mortgage payments. I am curious as to whether or not the building was worth $15 million or whether CRFT has to pay a significantly higher discounted rent (versus the old mortgage) in order to free up cash.
Thanks for the informative posts. As far as the market value of the facility, just looking at the lease back rates, aside from the sharply discounted first year at 2.5% of the sales price, the other years seem like reasonable rates. I come up with years 2 through 5 at an annual rate of 7.5% of the purchase price and years 6 through 10 at 8.7% of the purchase price.
I wonder if this transaction makes Craftmade more or less attractive to someone like Litex on a buyout. I have no idea how locked into the lease payments a new owner would be if they wanted to combine their offices.
Just looking at the lease payments, it should help near term earnings a little due to the back loaded nature of the lease terms. I suppose if they are able to grow the company, the higher payments a couple years out will not matter much.
CRFT will need to amortize the rent on a straight-line basis. However, it will save cash in the short-term (after significant closing costs and penalties of $2.4 million) on rent versus old mortgage payment. Again, (see my previous post), I am curious as to whether or not the building was worth $15 million or whether CRFT was forced to accept a higher discount rate on its future rental payments in order to generate immediate cash.