|FORTERRA, INC. filed this Form 10-Q on 08/09/2018|
Notes to Unaudited Condensed Consolidated Financial Statements
13. Sale-Leaseback Transaction
On April 5, 2016, the Company sold properties in 47 sites throughout the U.S. and Canada to Pipe Portfolio Owner (Multi) LP (the “U.S. Buyer”) and FORT-BEN Holdings (ONQC) Ltd. (the “Canadian Buyer”) for an aggregate purchase price of approximately $204.3 million. On April 14, 2016, the Company sold additional properties in two sites located in the U.S. to the U.S. Buyer for an aggregate purchase price of approximately $11.9 million. In connection with these transactions, the Company and U.S. Buyer and an affiliate of the Canadian Buyer entered into master land and building lease agreements under which the Company agreed to lease back each of the properties for an initial term of twenty years, followed by one optional renewal term of 9 years, 11 months. The proceeds received from the sale-leaseback transactions net of transaction costs of $6.5 million amounted to $209.7 million. A deferred gain of $81.5 million related to the sale-leaseback transaction was being amortized over the life of the master leases. In addition, the Company concluded that the leases for land and buildings were operating leases, and the leases for the machinery equipment were capital leases.
On June 5, 2018, the Company entered into Exchange Agreements and Amended and Restated Master Leases with each of the U.S Buyer and the Canadian Buyer (collectively, the “Exchange Transaction”). Under the Exchange Agreement between the Company and the U.S. Buyer, the Company exchanged ownership of a ductile iron pipe facility located in Bessemer, Alabama used in its Water Pipe & Products segment (the “Bessemer Facility”) for 21 facilities used in its Drainage Pipe & Products segment and the U.S. concrete and steel pressure pipe facilities previously part of the Water Pipe & Products segment, including a portion of one property used in both segments, all of which were previously included in the sale-leaseback transaction. Under the Exchange Agreement between the Company and the Canadian Buyer, the Company exchanged ownership of a smaller diameter ductile iron pipe facility located in Bessemer, Alabama used in its Water Pipe & Products segment (the “Mini Mill Facility”) for ownership of three Canadian concrete pressure pipe facilities that were previously included in the sale-leaseback transaction. No cash changed hands in the Exchange Transaction.
Under the Amended and Restated Master Leases, the Company will lease a total of 26 properties from the U.S. Buyer and a total of 2 properties from an affiliate of the Canadian Buyer, each for an initial term of 25 years, through June 30, 2043, followed by one optional renewal term of nine years, eleven months that may be exercised at the Company’s option. The initial base rent under the U.S. Amended and Restated Master Lease is $17.1 million per annum, payable monthly, and is subject to a 2% annual increase during the initial term. If the Company elects to extend the term of the U.S. Amended and Restated Master Lease, the base rent for the first year of the extension will be the greater of 95% of the fair market rental value of the properties and an amount equal to 102% of the prior year’s base rent, subject to an annual increase based on changes in the Consumer Price Index, but capped at 4%. The U.S. Amended and Restated Master Lease restricts the Company’s use of the U.S. properties to heavy manufacturing, industrial, and other related uses. The Company cannot sublease or assign the properties covered by the U.S. Amended and Restated Master Lease without the prior written consent of the U.S. Landlord and subject to certain other restrictions. The terms of the Canadian Amended and Restated Master Lease are similar to those of the U.S. Amended and Restated Master Lease described above, except that the initial base rent is $1.2 million (CAD) per annum. The Company’s aggregate liability in connection with its representations, warranties, covenants and indemnification and other obligations is $5.0 million under the U.S. Exchange Agreement and $6.4 million (CAD) under the Canadian Exchange Agreement, subject to limited exceptions.
The Company accounted for the Exchange Transaction in accordance with the sale-leaseback accounting guidance under ASC 840, Leases. The fair value of the 24 facilities exchanged back was $86.1 million, and was accounted for as the proceeds from the sale of the Bessemer and Mini Mill Facilities after adjusting for the transaction cost of $2.7 million. Consequently, a deferred gain of $67.3 million was recorded at June 5, 2018. The carrying value of the deferred gains of $35.0 million, the deferred rent of $3.1 million, and the deferred transaction costs of $2.4 million from the original sale-leaseback transaction were reclassified to reduce the carrying value of the 24 facilities exchanged back.
The Amended and Restated Master Leases extended the lease terms for all facilities, which caused the majority of the leases to be classified as capital leases instead of operating leases. Consequently, the Company recognized capital lease obligations as well as the gross value of the capital lease assets of $149.0 million,