Caltex Australia has found that sale and lease back – one of the usual ways of releasing capital (and favoured by many corporate strategists and private equity) isn’t all its cracked up to be.

The company revealed in its interim results statement yesterday that instead of selling all its $2 billion worth of petrol station real estate sites around the country and then leasing it back from the new owners, is not cost competitive.

Instead it is looking at a sale and lease covering up to a quarter of the those sites by value (around $500 million).

Caltex conducted a review into its convenience retail real estate which concluded that a total sale and leaseback process was “not financially compelling” as the sale benefits (profits) would be offset by the impact of leasing liabilities on the balance sheet.

“Caltex is now exploring with appropriately experienced partners, a potential strategic real estate partnership,” the company said.

“These discussions include consideration of the sale of a material part (15 to 25 per cent) of the existing freehold site portfolio – currently estimated to have a total value of approximately $2 billion – with Caltex retaining between 25 to 50 per cent equity interest.

“This will enable Caltex to benefit from market value and development gains, and allows evaluation of the benefits of the partnership structure, with a view to further monetisation where value can be demonstrated.”

Caltex made it clear this deal would not include its most vital assets – the its fuels and infrastructure assets (depots, distribution points and pipelines).

A review “concluded that, despite strong investor appetite, a significant portion of the company’s infrastructure portfolio comprises key strategic assets, with net proceeds likely to be largely offset by credit rating debt adjustments and tax leakage.

“At this point, it is in the best interests of the company’s shareholders to retain ownership of infrastructure assets and continue to optimise the value of these assets within the company’s integrated value chain.

The news on the sale and leaseback came as the company reported its best first half in six years – boosted by the rebound in global oil (and petrol) prices.

Net profit jumped by 45%, but this was not enough to stop the company from trimming interim dividend to 57 cents a share – a cut of three cents from a year ago.

Net earnings were up from $265 million in the first half of 2017 to $383 million in 2018.

Revenues climbed by 33% from $7.6 billion to $10.2 billion thanks to a slight increase in sales volumes but mainly due to the average oil price increasing by more than third from $US52 a barrel in 2017 to $US71 a barrel for the first half of 2018.

However, costs also increased by 36%, and a weaker Australian dollar added its bit to the higher costs.

On its favoured ‘replacement cost’ basis Net profit was $296 million for the six months to June 30, within its forecast range of $295 million to $315 million, and up fractionally from $294 million in the previous year.

During the half year Woolworths was forced to abandon its attempt to sell its fuel sites supplied by Caltex. BP was the mooted supplier but lost when blocked by the ACCC.

Woolworths is still looking at ways of selling its sites but Caltex has struck a new supply deal.

“On 5 July, Caltex successfully extended and expanded its long term partnership with Woolworths. …We have begun our work with Woolworths to co-create a market-leading convenience offering with compelling customer loyalty and redemption arrangements. The long-term wholesale grocery supply agreement allows us to concentrate on the store offering while completing the transition process,” Caltex chief executive Julian Segal said in yesterday’s statement.

Caltex shares fell nearly 8% to $30.68. Local investors do not understand the balance sheet implications of accounting for leases. It will change a lot of corporate accounts and deals.

The on balance sheet lease liabilities can be self-defeating to sale and lease back deals, unless there’s the creation of a stand alone property trust structure.

Extracted from Share Cafe

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