What it means
Many businesses own valuable property, such as hotels, supermarkets, pubs or care homes. A single company holding both the property and the trading operation is valued as a mix of the two, which can hide the true worth of each.
By separating them, owners create a landlord and a tenant. The PropCo is valued like a property investor, based on its rent and the yield investors expect from similar assets.
The OpCo is valued as a trading business, based on its earnings after paying rent. Because property investors often accept lower returns than trading business investors, the combined value can be higher after the split.
The structure also provides financing options. The PropCo can borrow against the property or be sold, while the OpCo is left with less debt and can focus on operations.
A common move is a sale and leaseback, where the group sells the PropCo or the properties and then rents them back, releasing a lump sum of cash. The big risk is that fixed rent makes the OpCo more vulnerable, because if sales fall the rent still has to be paid.
The OpCo can fall into distress more quickly than if it owned its premises outright, so lenders watch the rent cover, which compares operating earnings with rent. Long leases with rents that rise automatically add pressure over time.
A rent review clause can lift costs even when trading is flat, so finance teams model rent growth alongside sales. For stakeholders, the question is whether the split creates real value or just moves cash from the future to the present.
Selling property for a lump sum can fund growth or dividends, but it also commits the business to rent for years to come. Analysts adjust for the leases when comparing companies that own their property with those that rent.
In practice
Real-world examples.
Example
A hotel group owns 30 hotels and moves them into a PropCo. It sells a 49% stake in the PropCo to an infrastructure investor for $200 million. The OpCo keeps running the hotels under a long lease and uses the cash to repay debt.
Example
A supermarket chain sells its stores to a property fund and rents them back for 25 years. The deal raises $500 million, which funds a new distribution centre. Analysts adjust the chain's debt to include the lease obligations when comparing it with rivals.
Example
A care home operator is struggling with debt. Its bank asks for the properties to be placed in a PropCo with lending secured on the buildings. The OpCo is left to focus on staffing and care quality.
Formula
Calculation
Rent cover = EBITDAR / annual rent (EBITDAR is earnings before interest, tax, depreciation, amortisation and rent)
PropCo value = annual rent / capitalisation rate
Suppose an OpCo earns EBITDAR of $9,000,000 and pays rent of $6,000,000 a year.
Rent cover = 9,000,000 / 6,000,000 = 1.5 times.
If investors value the property at a capitalisation rate (yield) of 7.5%, the PropCo is worth 6,000,000 / 0.075 = $80,000,000.
The OpCo's earnings after rent are 9,000,000 - 6,000,000 = $3,000,000. If the OpCo is valued at 6 times those earnings, it is worth 3,000,000 x 6 = $18,000,000, making a combined $98,000,000.Case study
Seen in the real world.
Oakmere Leisure is an illustrative, fictional company that owns 40 pubs and runs them itself. Its shares trade at a low value because investors see a modest trading business with a lot of tied-up property.
The board created a PropCo holding the freeholds, valued at $120 million, and an OpCo running the pubs. It sold the PropCo to a property investor for $120 million and signed a 20-year lease at a rent of $8 million a year, or a yield of 6.7%.
The cash cleared all debt and paid a special dividend, but a downturn two years later cut trading profit sharply. With rent fixed, the OpCo had to cut costs and close five pubs. The illustrative lesson is that the split can release value, but it replaces a flexible debt burden with a fixed rent that must be paid in good times and bad.
Watch out
Common mistakes.
- Treating the cash raised from selling property as free money, when the rent that follows is a fixed commitment.
- Ignoring leases when comparing companies, which makes tenants look less indebted than owners.
- Assuming the split always increases value, when the result depends on the yield investors accept and the strength of the lease.
Questions
People also ask.
What is the main benefit of an OpCo/PropCo split?
It lets each part be valued and financed on its own terms, which can raise the total value of the group.
What is rent cover?
It compares operating earnings before rent with the rent payable, so a higher figure shows more room for a fall in trading.
Is OpCo/PropCo the same as sale and leaseback?
A sale and leaseback is one way of creating the structure, but the split can also be done by moving property into a new group company without selling it.
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