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Capital redeployment

Sovereign Investment Company's latest deal speaks to the value of sale-leaseback strategies in the current market environment.

Princeton, New Jersey-based Sovereign Investment Company has completed a $69 million (€43.7 million) sale-leaseback deal for 32 Lone Star Steakhouse & Saloons steakhouses operated by private equity firm Lone Star Funds, allowing Lone Star to recapitalize its investment in the restaurants. Purchased by Sovereign, the properties will be leased back for at least 15 years on a triple-net lease basis.

Lone Star Funds acquired the casual dining steakhouse chain – which currently operates 180 Lone Star Steakhouses and Texas Land & Cattle restaurants in 30 states – in December 2006.

Jeff Hoppen, chief investment officer for Sovereign Investment, spoke to PERE about the company's specialization on sale-leaseback deals. He argued that private equity firms were now factoring in this financial tool before even considering a deal, rather than much later down the line: “In today's market it's even more of a tool.”

Companies eager to turn a debt asset into an earning asset look to sale-leasebacks as a way of redeploying much-needed capital, he said.

“[Private equity firms] don't need to own the real estate. [Sale-leaseback] has always been a part of the strategy, it's just that now rather than planning this along the way after the company has been bought, more and more and more we are seeing it as part of the acquisition.”

Sovereign is actively working with five private equity firms on saleleaseback deals. Hoppen added that the firm was focusing on private equity real estate as part of its strategy.

Sale-leasebacks are often the “biggest” part of the financial package for a deal, said Hoppen. “It is a consistent source of capital. It's the financial choice de jour.

“I would say it's probably one of the most important, if not the most important, strategies right now,” said Hoppen.

In a statement announcing the Lone Star deal, Peter Mavoides, chief executive and president of Sovereign Investment Company, noted that with the credit market dislocation chief executive officers were looking to alternative capital strategies and seeing “sale-leasebacks as more attractive then they have been in the past.

“We are very excited about the recent pick up in activity and look forward to creating new partnerships in the coming year,” he added.

Sovereign Investment Company has invested more than $825 million in single-tenant real estate with recent sale-leaseback acquisitions, including a $78 million deal for 28 Joe's Crab Shack restaurants, a $15.3 million deal for 20 Pizza Hut restaurants in Wisconsin and a $75.5 million acquisition for seven ShopKo department stores in the western US.

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