PureGym is the lead contender in the court-supervised, Oct. 28 auction of 60 Blink gyms in the New York City/New Jersey area. Blink filed for Chapter 11 bankruptcy protection in August. If successful, the acquisition rapidly would expand the U.K.-based PureGym’s footprint in the U.S. RCS Real Estate Advisors is working with PureGym on the effort, having been hired earlier this year by the firm to drive the expansion of its Pure Fitness subsidiary in North America.

ALSO FROM C+CT: PureGym Aims to Open as Many as 300 Pure Fitness Locations in 5 Years in North America

Since president and CEO Ivan Friedman founded RCS in 1981, it has witnessed plenty of the industry’s ups and downs. The consulting and services firm helps retailers with lease restructuring and portfolio optimization, outsourced real estate management, and growth and development. Commerce + Communities Today contributing editor Beth Mattson-Teig talked with Friedman about the inner workings of lease restructuring deals like the Blink/Pure Fitness ones on which it’s working now.

Distress seems to be quieter these days compared to past periods. What do you see for industry trends?

It is pretty active, surprisingly, in the restructuring area, both outside of Chapter 11 and inside of Chapter 11. You don’t have the big headlines of bankruptcy filings, but then again, Big Lots filed for Chapter 11 and that’s a pretty big name. What I’m seeing in the bankruptcies that we represent and the ones that we don’t represent is that they are filing for Chapter 11 because they were distressed a while ago and now things are just getting worse for them. People are filing for Chapter 11 to facilitate the sale of the company because Chapter 11 eliminates a lot of debt, eliminates bad leases and cures a lot of bills. A lot of private equity firms and other retailers are lining up to buy these companies in bankruptcy. There was a stalking horse bidder announced for the Big Lots bankruptcy. PureGym also was announced as the stalking horse bidder for Blink Fitness.

We just completed the Express bankruptcy, which was taken over by a company that primarily is involved in internet transactions and licensing. That was an interesting situation because part of that partnership includes two of the largest retail landlords. Sometimes landlords get involved in one way or another in purchasing or becoming partners in these companies so that they protect their options.

Are there any trends in the categories that are experiencing distress?

I don’t think it’s as industry specific as it has been before. These are just companies that have been distressed and the sales have been going down and debt has been going up and they can’t control the top line, they can’t control their expenses. So, the three companies I just mentioned, plus most of the current bankruptcies are just companies that have been in distress for a while and just can’t stabilize their business.

What is the high-level view on how these restructuring deals work? Is there a bit of a formula, or is every deal different?

It’s pretty consistent in and out of bankruptcies. Occupancy cost can only be a certain percentage of sales in order for the company to be profitable, and that varies based on their gross margin and certain other things. The first thing you look at is: What is their occupancy percentages as it relates to their retail sales? Is it 5%? Is it 15%? Is it 30%? And what can they afford to pay? That’s your bottom-line structure because the occupancy percentage obviously relates to [earnings before interest, taxes, depreciation and amortization]. So it’s kind of a percentage game.

Can illustrate the scope and the strategy of a restructuring, perhaps with an example from PureGym and Blink?

PureGym very much wants to enter the U.S. market. They only have three locations here, but they have hundreds of locations in the U.K. and Europe. They retained us about six or eight months ago to try to get them a foothold for the U.S. What this bankruptcy does for PureGym is: If they are the successful bidder, it would give them an immediate foothold in the U.S., including 50 to 60 locations that are very strategically placed in New York City and New Jersey. They retained us, and they said: “OK, we have to make all of these locations profitable by our standards. Would you look at the portfolio and give us an idea of what kind of rent relief we’re going to need?”

Is PureGym looking to keep all or most of the Blink New York City-area locations, or is going to come down to the numbers and what they can negotiate?

I believe they’ll keep most of the locations, but the bottom line is that they have to be profitable. There are a number of these locations where it comes down to the dollars that we have to pay the landlord.

What is the biggest challenges to lease restructuring deals? Is it finding that happy medium on what the landlord can do and what the tenant can do?

I’m dealing with the landlord’s perception of what their real estate is worth, and the retailer is looking at it as what they can afford to pay. So I have to bring these two factions together and say: “Let’s make a deal here.” The landlord has incentive to reduce the rent because it means that they have a tenant. They don’t have to go re-lease the space. They don’t have downtime. They don’t have to pay another commission to a broker who brings them the deal. A location could have months or years of downtime. A lease restructure gives the landlord certainty that they will continue to have a tenant. They’re hoping that if they give this rent relief, they’ll have a healthy tenant. If the landlord thinks that they have another tenant that’s going to pay a lot more money and can get them in there quickly, it’s a little more difficult, but we try to deal with it as a business decision: Here’s what we can afford to pay, here’s what our sales are and we have to come to a rent that makes sense for us.

So a landlord’s perception of these deals depends on the situation?

In a case like PureGym where you have individual landlords [each] with only one [Blink] location, it depends on if they think they can get more rent from someone else. But if I have a large bankruptcy that is mall based and the landlord has a lot of exposure to that tenant, then it’s a different situation. We did the Forever 21 bankruptcy back when Simon and Brookfield wound up buying that company out of Chapter 11 to run that retail business because of the amount of space that that particular client occupied: millions of square feet and large stores, as well. There was a lot of leverage on the F21 side, similar to the Express bankruptcy. In a case where the landlord has a lot of locations, they have to look at it globally.

Are cases in which landlords take ownership in the retailers rare?

Most of the stalking horse bidders are strategic, where they are in the business already and they’d like to expand their business, such as PureGym. Many of the 363 sales, [referring to Section 363 of the U.S. Bankruptcy Code], are private equity firms that feel that if they get rid of all the bad stuff, they can operate a profitable business going forward. We represent a lot of companies today that were born out of bankruptcy that are owned by private equity firms, and they’re now running fairly profitably.

Are you watching any companies you think will announce bankruptcy or are on the verge?

Not specifically. We look at the metrics on a monthly basis when retail companies do their financial reporting. We look at their debt and their sales trends. As I see that companies are getting closer to that big problem where the debt exceeds where it should be or the sales continue to go down and go down and go down, those are the people I call and say: “What can I do for you?” Other companies try to sell divisions, or they have a lot of different brands and they want to sell off a brand. They’ll call us and say: “Could you help us with these specific locations?” But every company looks at: Where are there unprofitable stores, and what can be done with them?