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Cleveland: Downtown: Sherwin-Williams Headquarters

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Looking at Sherwin Williams Q2 report I was struck by two things. First, is how fast they are paying off their debt. But second is they have listed a 1.362 billion long term operating lease liability that they didn’t have a year ago. @KJP is that in reference to their potential new building or something else?

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Edited by cle_guy90
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It's too soon for long-term debt from a new HQ/R&D to show up on SHW's books, if SHW does in fact decide to lease its new HQ/R&D.

 

My guess is that it could be related to SHW selling off its retail stores.

 

But here's the kicker -- if SHW was so concerned about its debt, then why did it take on $1.3 billion in new debt at a time they are supposedly so desperate to reduce the debt they added from the Valspar deal? And, by the way, the full measure of debt is by the debt-to-equity ratio. Note that SHW's equity value has been largely immune to the overall market's volatility. This is pretty steady share price growth, YTD....

 

SHW stock price 2019.JPG

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Operating leases and finance leases (fka capital leases) are not treated the same (operating leases are not treated as debt). The Company would need to analyze whether the lease would met the criteria of a finance lease (https://www.fasb.org/leases). A 30-year lease may still be accounted for as an operating lease, which would result in a balance sheet only gross-up under ASU 2016-02.

Edited by jfristik
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34 minutes ago, cle_guy90 said:

Looking at Sherwin Williams Q2 report I was struck by two things. First, is how fast they are paying off their debt. But second is they have listed a 1.362 billion long term operating lease liability that they didn’t have a year ago. @KJP is that in reference to their potential new building or something else?

 

 

I'm out of my element here, but I think it was just an accounting rule change that now requires certain leases be reported as both assets and liabilities. Note the operating lease right-of-use assets line item that also newly appeared in 2019. Might reflect new stuff, might reflect a bunch of random real estate/equipment leases that only now have to be shown here.

Edited by StapHanger
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3 minutes ago, jfristik said:

Operating leases and capital leases are not treated the same (operating leases are not treated as debt). The Company would need to analyze whether the lease would met the criteria of a capital lease (https://www.fasb.org/leases). A 30-year lease may still be accounted for as an operating lease, which would result in a balance sheet only gross-up under ASU 2016-02.

 

 

DBA6AEA3-3CF8-4B1D-9DF8-8FF89BBE4372.gif

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The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial position.

 

For finance leases, a lessee is required to do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position 2. Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income 3. Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

 

For operating leases, a lessee is required to do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position 2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis 3. Classify all cash payments within operating activities in the statement of cash flows.

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It is a balance sheet only gross-up. Does not impact the income statement, or key operating ratios. 

 

Previously future operating lease payments were off-balance sheet and disclosed in the footnotes to the financial statements. This is a form over substance change for operating leases with no real impact to the users of the financial statements. 

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1 hour ago, jfristik said:

It is a balance sheet only gross-up. Does not impact the income statement, or key operating ratios. 

 

Previously future operating lease payments were off-balance sheet and disclosed in the footnotes to the financial statements. This is a form over substance change for operating leases with no real impact to the users of the financial statements. 

My CPA sense is tingling.

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13 minutes ago, Boomerang_Brian said:

 

He must have missed the other half of that blog post. 

 

He's a writer for the Brecksville Magazine. His readers are interested in Brecksville. I spoke to him after he put the story to bed. That's OK, it's looking more likely that SHW stays and its R&D stays with it. BTW, I also told him that Brecksville-based Cross Country Mortgage is likely to move its HQ downtown too. The company has bought a lot of property on the east end of downtown, between Superior and Payne.

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9 minutes ago, KJP said:

 

He's a writer for the Brecksville Magazine. His readers are interested in Brecksville. I spoke to him after he put the story to bed. That's OK, it's looking more likely that SHW stays and its R&D stays with it. BTW, I also told him that Brecksville-based Cross Country Mortgage is likely to move its HQ downtown too. The company has bought a lot of property on the east end of downtown, between Superior and Payne.

 

Good to hear SHW is more likely to stay in downtown at this point, although do we know for sure that Brecksville is starting to look like a long shot/be out of the picture at this point? 

(These types of articles always make me nervous, especially when they contradict current rumors/assumptions, like the fact that SW will probably stay downtown as mentioned by KJP.)

 

Can't wait for some official announcement and/or the designs to start coming out...

 

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Nothing is for certain until a formal announcement is made. And we may be months away from that. I don't expect anything this year. Keep an eye on SHW's cash flow. If it keeps flowing, we should hear something before this time next year......

 

Sherwin-Williams' (SHW) Shares Rise 34% YTD: Here's Why

https://finance.yahoo.com/news/sherwin-williams-shw-shares-rise-121212292.html

 

BTW, to emphasize the importance of cash flow, consider that, six months ago, SHW had been on a glidepath to get its long-term debt down to a 2:1 ratio by December 2019.

 

But it's already five months ahead of that pace. On June 30, I expected that long-term debt would be $8.12 billion. Instead, it was $7.2 billion. Shareholder equity is only slightly below where I expected it to be on June 30, 2019. I expected that it would be at about $3.77 billion. Instead it was at $3.75 billion.

 

It's debt-to-equity ratio on June 30 was already below 2:1 -- at 1.92:1.

 

According to second-hand sources, SHW officials have said that they wouldn't consider building a new HQ until its debt was down to reasonable levels (I assume that to mean industry norms of 1:1 ratio). I wasn't expecting SHW to hit that level until the end of 2022. If things keep going the way they are, SHW should get its long-term debt down to the industry norm by early 2022. And it takes more than three years to plan and build a skyscraper (even without a site search).

 

 

Edited by KJP
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I can't believe the city center is competing with an outer ring suburb for a Fortune 500 company in this day and age. What in the world is with this region? I was researching the amount of corporations that remain in Cincinnati and it blows my mind the comparison of major jobs between us and out Sourthern brother. The amount of sprawl in this region is appalling and the possibility of Sherwin Williams moving to Brecksville just shows NEO continues to circle the drain.

Edited by AsDustinFoxWouldSay
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No one has left yet. DiGeronimo approached SHW, not the other way around. And just like in Cleveland, where many corporations are moving to downtown from the suburbs, there are always exceptions even in healthy downtowns....

 

TORONTO:

https://business.financialpost.com/real-estate/property-post/suburban-offices-outpace-downtown-for-the-first-time-in-a-year

 

MINNEAPOLIS:

https://finance-commerce.com/2018/03/former-target-campus-may-appeal-to-downtown-tenants/

 

SEATTLE:

https://www.geekwire.com/2019/exclusive-amazon-moving-thousands-employees-seattle-relocating-key-division-nearby-city/

 

SAN FRANCISCO:

https://www.bizjournals.com/sanfrancisco/news/2018/10/09/bay-area-exodus-headquarters-move.html

 

If you think NEO is circling the drain, you're not paying attention to the employment data. 

Edited by KJP
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5 hours ago, KJP said:

Nothing is for certain until a formal announcement is made. And we may be months away from that. I don't expect anything this year. Keep an eye on SHW's cash flow. If it keeps flowing, we should hear something before this time next year......

 

Sherwin-Williams' (SHW) Shares Rise 34% YTD: Here's Why

https://finance.yahoo.com/news/sherwin-williams-shw-shares-rise-121212292.html

 

BTW, to emphasize the importance of cash flow, consider that, six months ago, SHW had been on a glidepath to get its long-term debt down to a 2:1 ratio by December 2019.

 

But it's already five months ahead of that pace. On June 30, I expected that long-term debt would be $8.12 billion. Instead, it was $7.2 billion. Shareholder equity is only slightly below where I expected it to be on June 30, 2019. I expected that it would be at about $3.77 billion. Instead it was at $3.75 billion.

 

It's debt-to-equity ratio on June 30 was already below 2:1 -- at 1.92:1.

 

According to second-hand sources, SHW officials have said that they wouldn't consider building a new HQ until its debt was down to reasonable levels (I assume that to mean industry norms of 1:1 ratio). I wasn't expecting SHW to hit that level until the end of 2022. If things keep going the way they are, SHW should get its long-term debt down to the industry norm by early 2022. And it takes more than three years to plan and build a skyscraper (even without a site search).

 

 

KJP: Assume that we live in a perfect world and assume that they build downtown.   If the debt ratio ratio goes down to 1:1 at the end of 2022 -  Is that when they make the announcement

or do they announce sooner ( Like you think - next year ). How long before we see a shovel in the ground after the announcement?   Is 2 years enough time to get thru CPC and the capital Stack.  OR are they going to need layers & layers of TIF's and all kinds of subsidies to get started.  Nucleus is already 5 years and nobody knows where it stands at the moment.

I think a Fortune 500 company won't have that difficult of a time once they get their debts down.

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9 minutes ago, simplythis said:

KJP: Assume that we live in a perfect world and assume that they build downtown.   If the debt ratio ratio goes down to 1:1 at the end of 2022 -  Is that when they make the announcement

or do they announce sooner ( Like you think - next year ). How long before we see a shovel in the ground after the announcement?   Is 2 years enough time to get thru CPC and the capital Stack.  OR are they going to need layers & layers of TIF's and all kinds of subsidies to get started.  Nucleus is already 5 years and nobody knows where it stands at the moment.

I think a Fortune 500 company won't have that difficult of a time once they get their debts down.

 

Stay tuned. New article coming out soon....

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9 hours ago, simplythis said:

KJP: Assume that we live in a perfect world and assume that they build downtown.   If the debt ratio ratio goes down to 1:1 at the end of 2022 -  Is that when they make the announcement

or do they announce sooner ( Like you think - next year ). How long before we see a shovel in the ground after the announcement?   Is 2 years enough time to get thru CPC and the capital Stack.  OR are they going to need layers & layers of TIF's and all kinds of subsidies to get started.  Nucleus is already 5 years and nobody knows where it stands at the moment.

I think a Fortune 500 company won't have that difficult of a time once they get their debts down.

I wouldn't compare a global corporation like SW to Stark Enterprises.  SW has far too many resources to bring its projects to closure.

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9 hours ago, KJP said:

 

Stay tuned. New article coming out soon....

KJP: I absolutely love the rendering you shared of the SW HQ that was submitted for NEO's Amazon proposal.

What a statement and footprint that complex would establish. I wish SW and the Cleveland community the best. It would be awesome by all accounts. 

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52 minutes ago, Frmr CLEder said:

I wouldn't compare a global corporation like SW to Stark Enterprises.  SW has far too many resources to bring its projects to closure.

 

"Capital stack" isn't a phrase that's going to be used for the SHW HQ+R&D. And the city subsidies for this project are likely to be pretty routine. I'm just not getting the sense that those are going to tip the scale for SHW.

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A very reliable source has told me that Valor Acres is only pursuing the SHW R&D facility.  No intention of competing for the HQ.  They feel confident the R&D would relocate, if tax incremental financing is right.

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high-rise-office-building-crop.jpg

 

MONDAY, AUGUST 26, 2019

Sherwin-Williams seeks builders for HQ + R&D project

 

Unless the economy does a crashing repeat of 2008 in the next 6-12 months, Sherwin-Williams (SHW) could make a significant announcement about its headquarters (HQ) as well as it research and development (R&D) facilities by the end of 2020. Even a modest economic downturn is unlikely to put a stop to a multi-year process that has already started.

That process suggests that SHW is on a schedule that could have them start construction on a new HQ and R&D project by 2022. And some aspects of the process point toward downtown Cleveland as the site for most, if not all of this massive project.

 

MORE:

https://neo-trans.blogspot.com/2019/08/sherwin-williams-seeks-builders-for-hq.html

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29 minutes ago, KJP said:

high-rise-office-building-crop.jpg

 

MONDAY, AUGUST 26, 2019

Sherwin-Williams seeks builders for HQ + R&D project

 

Unless the economy does a crashing repeat of 2008 in the next 6-12 months, Sherwin-Williams (SHW) could make a significant announcement about its headquarters (HQ) as well as it research and development (R&D) facilities by the end of 2020. Even a modest economic downturn is unlikely to put a stop to a multi-year process that has already started.

That process suggests that SHW is on a schedule that could have them start construction on a new HQ and R&D project by 2022. And some aspects of the process point toward downtown Cleveland as the site for most, if not all of this massive project.

 

MORE:

https://neo-trans.blogspot.com/2019/08/sherwin-williams-seeks-builders-for-hq.html

 

A) Ken - you rocked it as always, great stuff.

 

B) hate to be the bearer of bad tidings, because I want this too... but there WILL be a recession, even if modest, in the next 18-36 months 

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12 minutes ago, YABO713 said:

 

A) Ken - you rocked it as always, great stuff.

 

B) hate to be the bearer of bad tidings, because I want this too... but there WILL be a recession, even if modest, in the next 18-36 months 

 

@YABO713 I don't doubt that there will be a recession. But given the multi-year nature of this project and the stability/size of the company, unless it seriously harms shareholder equity and cash flow, I question whether it will stop this project. It may slow it, but I don't think it will stop it.

 

Edit:  Think about it this way… Sherwin-Williams current cash flow would allow it to pay off this project in a year or two. If its cash flow is cut in half and its shareholder value drops 10-20% in a recession, then the worst that could happen is it will take it for 5 years to finance this project. If it's a worse recession, then that's bad news.

Edited by KJP
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15 minutes ago, CLE_Millennial said:

To put things in perspective, the Key Tower is only 1,249,981 square feet. This thing is going to be absolutely monstrous.

The Amazon rendering looks like the tallest of the SW towers is taller than Key Center.

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12 minutes ago, Frmr CLEder said:

The Amazon rendering looks like the tallest of the SW towers is taller than Key Center.

Yeah it looks slightly taller.

I'm not sure which I prefer... One tall 1,200ft+ skyscraper or a bunch of mid-size buildings that fill up all the parking lots >.<

Either way, it's a win if they stay downtown.

 

(Edit): I think it would be super cool to see a building similar in structure to the BP Building. In my opinion, the Key Tower compliments Terminal tower almost perfectly. It would be nice to see a building compliment the BP building.

Edited by CLE_Millennial
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Call me crazy - because I love a good phallic symbol as much as the next guy, but I'd almost prefer 2-3 buildings in the 300-700 range. I think that would really fill in Downtown and help with pedestrian traffic. 

 

Also - I love that we're discussing this on the Jacobs Lot thread as if its a predetermined locale. (Though where tf else would they put it lol) 

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2 minutes ago, CLE_Millennial said:

My god, looking down Euclid would be so different..

 

also--and that image doesn't show it---the parking lot next to the City Club bldg could be filled in.

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Just now, simplythis said:

OMG - The thread name changed to Sherwin Williams new headquarters from Jacob's public square lot

That must mean IT IS TRUE!  😁

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Just looking for people's opinions but what lots do you think would be the most impactful to build, Weston or Jacob's? I personally would love either one but you don't have a chance to build a super tall or a skyscraper often and the Jacobs lot sits across from 3 so it's only right to build. As long as you include something on the ground floor that creates pedestrian activity.

Edited by MyPhoneDead
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I'm 36 and this is the 2nd chance Cleveland has to Finish The Square in my lifetime (the first being the Ameritrust Tower), which tells how long it may be before the chance comes along again.  As much as I would love for the Parking Lot District to be filled, a new headquarters on the Jacobs Lot could produce spin-off onto the Weston lots.  I don't know if the same could be said the other way around.  

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3 minutes ago, Oldmanladyluck said:

I'm 36 and this is the 2nd chance Cleveland has to Finish The Square in my lifetime (the first being the Ameritrust Tower), which tells how long it may be before the chance comes along again.  As much as I would love for the Parking Lot District to be filled, a new headquarters on the Jacobs Lot could produce spin-off onto the Weston lots.  I don't know if the same could be said the other way around.  

I'm 65 and I am still waiting for Anything. A lot of disappointments in my time. 

I'll take Jacob's lot.

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