In the past, most industrial companies managed their real estate assets in the same manner – by owning – with the rationale that depreciation is less costly than rent. But as the business changes from being manufacturing based to a more service-oriented platform, so does the need for operational flexibility. It is this need that brought Rockwell Automation to a crossroads in 2004, and the model that evolved in the next year fundamentally changed the way in which the 100-plus-year-old company handled its real estate.
Since its inception, Rockwell Automation had grown into a leading global industrial automation company. Headquartered in Milwaukee, the company’s global portfolio has more than 380 locations consisting of manufacturing, distribution, R&D and office buildings totaling approximately 14 million sq. ft. (1.3 million sq. m.), with approximately 7 million sq. ft. (650,321 sq. m.) in 41 owned facilities.
Traditionally, when Rockwell no longer needed to be in a building or area, it would simply vacate the building, which could sit vacant for quite some time because of its rural location. Since Rockwell’s business was demanding greater operational flexibility to exit markets when appropriate, the real estate team realized that a new model needed to be put in place to provide the company greater efficiency and flexibility. The process started by evaluating every owned facility in North America to determine its strategic value to the company over the short and long term. From there, the team began researching the market values of the assets, both from an empty sale value and a market lease rate. Different cap rates were applied to each of the facilities based on quality, location, and potential lease term to establish a property by property valuation of the entire portfolio. The assumption was made that the company did not know how long it would need to occupy an asset, but needed the flexibility to support a timeframe that may be shorter or longer than originally predicted.
Due to the various stakeholders and business units with vested interest in the results, changing the status quo was not easy. The team began meeting with each of the key business units at Rockwell – Operations, Finance, Treasury, Tax, Risk Management and Financial Planning. Each of these groups had different issues, parameters of need, and different time horizons for growth or expansion. The key to creating a model for managing the real estate assets was to address the concerns of each business unit, allowing them to maintain the operating expenses, while also maintaining control of the assets. The model had to leverage the platform and satisfy the demands of the business. Examining all of this information, the CB Richard Ellis (CBRE) team devised a model for Rockwell in which the company would sell a portion of its owned portfolio and then lease back each building.
A sale/leaseback of this caliber had never been executed for a manufacturing company like Rockwell, and the CBRE team then had to show the six business units the value and savings in this type of model. The key to this type of model was increased portfolio flexibility and a better return on the asset than Rockwell had been achieving from owning the facilities. The CBRE team engaged each business unit into a process that caused them to think about their strategic goals for the next five, 10 and 15 years. The team then took the initial components for the groups and showed how the model would refute or support their thinking. The model the team built was customized to address all six groups’ ideas and concerns.
In January 2005, the CBRE team brought together a panel of investors for a daylong forum to educate Rockwell Automation executives about the investment market and what buyers looked for in terms of the quality of the property and credit rating. Rockwell Automation was under the assumption that investors’ only interest was in high quality office properties instead of manufacturing, distribution or R&D facilities. From that meeting, Rockwell Automation’s perception began to change. The CBRE team also pulled together financial proformas with projections showing Rockwell Automation not only how the transaction would look to an investor, but also gave the company a 360-degree analysis and quantified how a manufacturing company such as Rockwell Automation would benefit. The return recognized from the proceeds of this strategy far exceeded the gap in monthly rent. Rockwell knew that no other manufacturing company had taken this kind of leap but also understood how Rockwell’s high credit ranking would help it attract a high price and low cap rate (ie. lower occupancy costs).
After more than a year of building a model that reflected the diverse needs of the company, and providing a business case for why Rockwell Automation should engage in a sale/leaseback, the company saw that to achieve a lower rent and operational flexibility, the sale/leaseback plan made sense. So, CBRE engaged the market, identifying more than 2,000 potential investors, including private and institutional as well as investors from Europe, Australia and the Middle East. The first round of the offering brought in 28 offers competitive in price and in lease terms. The buyers were qualified, short listed and brought back for a Best and Final round. In just 90 days from the time the initial offering memorandum was distributed, Rockwell Automation executives chose the offer from First Industrial Realty Trust.
First Industrial Realty Trust purchased the 24 property portfolio, consisting of 3.8 million sq. ft. (353,031 sq. m.), which was then leased back to Rockwell Automation through triple net leases ranging in terms from five to 15 years. The sale price was approximately $150 million and was First Industrial’s largest corporate acquisition from an operating company. Not only did the transaction provide Rockwell Automation with the flexibility to terminate each lease early or extended each lease for up to twenty additional years, it provided a solution that better fit its needs, and ultimately demonstrated a fundamental shift in the typical reasons behind sale/leaseback transactions. These transactions, which had been focused on monetizing real estate assets to free up capital, are now thought of as an operational strategy.
Since the close of the transaction, Rockwell’s leaders noticed a phenomenal change in how the company was perceived by investors. Prior to the transaction, the company was seen as a manufacturing and technology company. Today, Wall Street analysts view the company as a technology company. The transaction also laid the framework for increased flexibility allowing the business to be more aggressive without being hampered with assets.
Traditional views of a sale/leaseback would be that ownership is always less expensive than a lease and also provides more control for a company. As Rockwell found, this was not true and, in fact, was quite the opposite. While a number of factors ultimately resulted in the decision the company made, the key drivers were the ability to monetize under-performing assets and provide more flexibility to the various business units.
About the Authors
Denis DeCamp is Director of Global Real Estate for Rockwell Automation.
Chris Reynolds is Senior Vice President of CB Richard Ellis.
