VANCOUVER — The private equity firm that took over MEC last year has put six retail properties it acquired in the roughly $150-million deal up for sale, and plans to lease them back from the new owners.

A confidential offering summary from commercial real-estate firm Jones Lang LaSalle America offers prospective buyers the “outstanding opportunity” to purchase any or all of six MEC properties located in North Vancouver, Calgary, Winnipeg, Ottawa, and Ontario’s North York and Burlington. The sale conditions stipulate that the properties must be leased back to MEC for 15- or 20-year terms, with provisions for “attractive” two per cent annual rent increases and 20-year renewal options.

“You know how private equity firms work, right? Everything’s always for sale,” said MEC’s chief financial officer Peter Hlynsky, who joined the company after Kingswood Capital Management took over MEC last October.

Kingswood’s takeover of the storied outdoor retail co-op last year stirred up controversy. MEC’s board announced the deal that September, saying it had exhausted other options amid ongoing financial struggles that were worsened by the COVID-19 pandemic. A B.C. judge approved the takeover a few weeks later, despite vehement opposition from MEC loyalists who, worried about the loss of the retailer’s co-op model and the private equity sector’s reputation for ruthless cuts, attempted to organize a counter-offer. Kingswood tried to assuage fears, saying it planned to focus on the in-store experience, product assortment and development, and e-commerce. Prior to the deal closing, however, MEC laid off more than 80 active and inactive head-office staff, as well as an undisclosed number at its retail locations.

When Kingswood acquired MEC, the real estate portfolio was part of the deal. That includes the six stores now for sale, which were valued at just shy of $66 million as of Sept. 2, 2020, according to court documents. Before agreeing to the takeover, MEC had considered “marketing certain real estate assets,” which totalled more than $90 million in book value with the inclusion of a distribution centre, according to court documents. But it opted not to sell them after determining the pandemic had “negatively impacted” their value.

“The former MEC board is very pleased with the outcome of the asset sale to Kingswood,” wrote Judi Richardson, who had been chair of the MEC board prior to the takeover, in an email to The Logic, pointing out that the new owners had preserved most of the stores and jobs. “Under all of the circumstances at play at the time in 2020, the board had no choice and as things have unfolded, the choice made has proven to be a very sound one.”

Kingswood managing partner Alexander Wolf declined a request for comment, referring questions to Hlynsky.

Sale-and-leaseback deals are a common strategy for private equity firms to recoup money from a retail investment. But the arrangement can sometimes result in stores paying more in rent. It’s a type of deal that’s been cited as a factor in the downfalls of several American supermarket chains and Art Van Furniture, among others.

Hlynsky, who spent over a decade working in private equity in the U.S. before joining Kingswood, is familiar with scenarios like those. “I know the economics you’re talking about. I’ve seen those situations for myself,” he said, pointing out that in many of those cases the companies were desperate for cash. MEC, on the other hand, isn’t highly leveraged, he said.

He said the sales will amount to little more than a change of landlord. MEC now pays market-rate rent to a Kingswood-owned real estate entity. If the buildings sell, it will pay market-rate rent to a new owner. Annual rental increases are capped. Problems tend to arise when “those rent rates change significantly” after a deal, he said. Additionally, Kingswood knows it can’t saddle MEC with debt as a result of these sales.

Sale-leasebacks are “no smoking gun” suggesting an eventual bankruptcy, said Alexander Dyck, a processor of finance and economic analysis and policy at the University of Toronto’s Rotman School of Management. There are many good reasons why a private equity firm would sell a company’s real estate assets, he said, noting he’d just taught a class about a restaurant chain that sought a competitive advantage by avoiding a real estate play. Kingswood may want MEC’s management to focus on selling outdoor equipment and clothing, its core business, he said. It’s also expensive to own real estate and that money might be better spent on research and development, for example.

Kingswood sees the real estate assets as “downside protection,” said Hlynsky—the company’s security against losing money. But the actual business of MEC, he said, is where Kingswood stands to make money—and ideally a profit selling the business down the line. Dyck said a private equity firm typically holds an investment for a certain period of time before a sale or IPO, usually around five years and not more than 10.

It’s seen a big turnaround already, according to Hlynsky. At the time of the takeover last year, MEC was losing about $1.6 million a week, according to court proceedings. It’s been profitable each month since November 2020, said Hlynsky. “I have no clue how this thing wasn’t generating cash all the time,” he said. MEC has saved $5 million annually by relocating the company’s headquarters and renegotiating some store leases. It helps that the management now has a singular mandate, rather than the disparate interests of a co-op board, he said, focusing on the in-store experience and building out its e-commerce business.

Much like MEC’s real estate, Hlynsky is candid about the fact that the retail business is also for sale. “At any time the business could sell…. Is it going to be tomorrow? Probably not. Is it going to be in five years? Highly likely,” he said. For now, though, the new leadership team is enjoying running the company. “We’re not feeling pressure to sell the business right now. I think we see a lot of upside still in the business.”