On May 22nd, 2006, Lubert-Adler acquired Central Parking in joint venture with private equity firms Kohlberg & Co. and Chrysalis Capital Partners. The publicly traded company was purchased for $22.53 per share, or an equity value of $750 million (€575 million), and a gross enterprise value of approximately $1 billion.
The investment thesis of the joint venture partners was to acquire the industry leader in the parking space and achieve a competitive cost advantage through the maximization and monetization of the company's exceptional portfolio of owned real estate. This portfolio, which encompassed 139 assets, accounted for more than half of Central Parking's enterprise value, and represented a focused opportunity to significantly reduce the joint venture's basis in the remaining operating company through the monetization of less than 5 percent of the company's parking facilities.
As the Lubert-Adler team began to learn more about the parking business, it became apparent that it shared a lot of similar characteristics with the asset-rich retailers the firm had underwritten and acquired historically. The ability to change the use of the underlying asset base, the presence of a significant portfolio of leasehold interests and the opportunity to capitalize on the arbitrage between OpCo EBITDA and real estate net operating income were all common threads that spanned both sectors.
Central Parking, founded in 1968, is the largest parking company in the United States. Its operations span more than 3,000 locations. Central's entire portfolio encompasses over 1 million parking spaces, and the company parks over 2 million cars per day.
The portfolio of real estate owned by Central Parking is a diverse pool of assets, both geographically and by property type. The 139 assets include surface lots, garages and condominium properties and are spread across the country with assets from California to New York, as well as in Canada (see charts).
For Lubert-Adler, the acquisition was an extension of the public-to-private investment strategy that it has previously employed in the retail sector, most notably in the case of Mervyn's and Albertsons. As the Lubert-Adler team began to learn more about the parking business, it became apparent that it shared a lot of similar characteristics with the asset-rich retailers that the firm had underwritten and acquired historically. The ability to change the use of the underlying asset base, the presence of a significant portfolio of leasehold interests and the opportunity to capitalize on the arbitrage between OpCo EBITDA and real estate net operating income were all common threads that spanned both sectors.
As in Mervyn's and Albertsons, Lubert-Adler teamed up with traditional private equity groups to acquire a “real estate rich” operating company. In today's competitive real estate environment, the firm has looked towards operating company acquisition opportunities, in which it can achieve discounted pricing through the wholesale purchase of diverse pools of real estate assets. The firm seeks to combine the option value embedded in these pools of assets with a significant value-added business plan in order to ultimately achieve a competitive cost advantage in the underlying asset base.
Acquiring large pools of assets requires a significant level of work that serves as a significant barrier to entry to “financial buyers.” Lubert-Adler does not look to value pools of assets via top-down spreadsheet analytics, or by hiring appraisers and consultants to do the work for them. Instead, the deal team personally reviewed every asset in Central Parking's major markets, including: New York, Denver, Boston, Cincinnati, Atlanta, Nashville and Houston. The focus of this ground-up approach was to determine the “highest and best use” for each individual asset, as well as to identify potential strategic buyers who had a “need” for their specific assets. Lubert-Adler's vast network of operating partners reviewed the remaining secondary market assets and provided superior “local” valuation feedback. By valuing the assets from the ground up, the firm identified significant additional value (above and beyond parking) that could help Lubert-Adler with its goal of buying down its basis in the operating company. Though the economic and opportunity costs of this approach are significant, the firm has always viewed this intense level of due diligence as an insurance policy against making investment decisions without near perfect information.
Real estate execution/disposition
One of the key aspects to maximizing the value of Central Parking's owned asset base was identifying the numerous retail and strategic buyers for each of the individual properties. Prime candidates included owners of neighboring office buildings, hotels, academic or medical institutions, as well as developers looking to complete assemblages. Also fundamental to the firm's real estate maximization strategy was the fact that most of Central Parking's surface lots and garages represent call options on future vertical development opportunities.
Lubert-Adler believes that its national network of local operating partners provided the firm with a competitive advantage in executing this development-centric real estate strategy. In many situations where private equity firms purchase a company with a large real estate portfolio, local operators or developers attempt to acquire these real estate assets at a discount to their true value due to the belief that the private equity firm does not have the ability to unlock the development value themselves. By contrast, Lubert-Adler and its operating partners can execute a value-maximizing development in every major market if buyers are not willing to pay a fair price for the assets.
The real estate thesis is already being validated with sales that have occured both pre- and post-closing. As an example, the first real estate sale was of a surface lot located at 1217 Walnut Street in Philadelphia. The valuation of the lot as an ongoing parking facility was approximately $4.5 million based upon $250,000 of EBITDA. Recent sales comps for a similar 22,000-square-foot, mid-block site would support a development value of no more than $200 per square foot, or $4.4 million. That said, Lubert-Adler's due diligence identified a strategic institutional buyer that needed this parking facility for its long-range plan. The buyer paid $10 million for the lot, the equivalent of 40 times 2007 budgeted EBITDA or $450 per square foot of developable surface area. The pursuit and identification of this type of strategic buyer for each of these assets is central to the execution of the value-maximizing real estate strategy.
Additionally, the joint venture is working to create value in the 1,300 locations that Central Parking operates under a lease. Where most acquirers may view leaseholds as liabilities, Lubert-Adler sees them as potential assets with significant upside. The firm expects to create significant value by acquiring the underlying fee interest in certain leasehold locations, or by selling the lease back to the fee owner at a premium, thereby allowing the fee owner to develop his site in the context of today's market. Because so many urban markets are commanding premium pricing for hotel and office sites, landlords will often pay top dollar to buy out the lessee position in order to capitalize on the development value today as opposed to potentially missing the market.
Part of what made the Central Parking acquisition so appealing to Lubert-Adler was the fact that 10 of the 139 owned assets in the real estate portfolio, representing almost 45 percent of the value of the company's owned real estate, were located in the highly liquid Manhattan market. Of the ten assets, five are stand-alone garages that still own 100 percent of their air rights. Given that the office, hotel and residential markets are still red-hot in New York City, these sites are ripe for redevelopment and Lubert-Adler is well equipped to capitalize on the opportunity.
Lubert-Adler has a long standing partnership with World-Wide Holdings, a New York City developer with a superior track record in assemblage and vertical development. While the two groups normally spend years acquiring brownstones and air rights to create assemblages to develop in New York City, the Central portfolio provided five footprints large enough to build on right away. The firms intend to market the assets for sale immediately, but can develop the properties themselves if buyers don't step up.
The company's real estate holdings allowed for favorable acquisition financing and, upon the successful execution of the real estate strategy, will also allow the joint venture to own the operating company at a multiple that is approximately 70 percent of the competitive set.
Of course, there is more to this corporate acquisition than just the real estate execution. The company's real estate holdings allowed for favorable acquisition financing and, upon the successful execution of the real estate strategy, will also allow the joint venture to own the operating company at a multiple that is approximately 70 percent of the competitive set. As with all Lubert-Adler investments, the investment thesis focuses first and foremost on downside protection. By achieving an attractive cost basis through real estate maximization, the investment will outperform in an up market and be well positioned in any slowdown that may occur.
The joint venture believes that there are tremendous opportunities to create additional long-term value at the operating company, which is the ultimate goal of all of the parties involved. As a public company, Central's management was forced to focus on growing the number of locations in its portfolio, oftentimes at the expense of profitability. That will no longer be the case as the new sponsorship can focus on pursuing only profitable growth, and can do so with a long-term perspective.
Lubert-Adler believes that the acquisition of Central Parking will generate synergistic relationships as well. Central will be able to tap the Lubert-Adler network of real estate owners and operating partners to expand its asset base and Lubert-Adler will now have a competitive advantage in the pricing and acquiring of mixed-use assets that have significant parking components.
Now out of the public markets, the Central management team can stop worrying about location count and focus solely on driving EBITDA performance. In working with management, the joint venture partners have already identified a number of strategies to increase profitability. This increased profitability, coupled with the reduced cost basis from the real estate execution, should ultimately pay dividends for the new ownership group of Central Parking.
P.J. Yeatman is a managing principal at Lubert-Adler. Michael Trachtenberg is an associate at the firm.