real-estate-lease-summary.docx

1003-00004 · Harrowgate Private Equity Fund IV LP · Diligence

real-estate-lease-summary.docx DOCUMENT M&A / Corporate

23 / 39 ← → ✕

Contract analysis Extract to table

MEMORANDUM

TO: Oliver Mackenzie, Responsible Partner, M&A; Ryan Kowalski, Lead Associate, M&A — Calderwood & Harkness LLP

FROM: Megan Chu, Working Associate, M&A — Calderwood & Harkness LLP

DATE: March 25, 2025

RE: Real Estate & Lease Portfolio Summary — Pennfield Holdings, Inc. (Project Summit)

MATTER NO.: 1003-00004

CLIENT: Harrowgate Private Equity Fund IV LP

Right-click to update Table of Contents

I. Executive Summary

The purpose of this memorandum is to summarize the findings of our review of the real estate and lease portfolio of Pennfield Holdings, Inc. ("Pennfield" or the "Company") in connection with the proposed acquisition of Pennfield by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Sponsor") for an aggregate equity purchase price of approximately $980,000,000 (the "Transaction"). The Transaction is structured as a reverse triangular merger in which Pinnacle Merger Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of HPE Fund IV formed for the purpose of consummating the Transaction, will merge with and into Pennfield, with Pennfield surviving as the surviving corporation and becoming a wholly owned subsidiary of HPE Fund IV (the "Merger"). The anticipated closing date for the Transaction is on or about June 30, 2025 (the "Anticipated Closing Date"), subject to satisfaction of customary closing conditions, including regulatory approvals and certain third-party consents as described in this memorandum.

Scope of Review. This memorandum is based upon our review of lease documents, property schedules, rent rolls, landlord correspondence, estoppel certificates, and related real estate materials uploaded to the Project Summit virtual data room hosted on the Thackeray Solutions platform (the "Data Room"), commencing February 10, 2025 and continuing through the date of this memorandum. In preparing this summary, our team reviewed approximately 1,450 individual documents, including original leases, lease amendments, modifications, guarantees, memoranda of lease, subordination, non-disturbance, and attornment agreements ("SNDAs"), and ancillary real estate documentation. We have also relied upon certain schedules and summaries prepared by Pennfield's internal real estate team and provided to us through the Data Room. We have not independently verified the accuracy or completeness of the Company-prepared materials, and this memorandum should be read subject to that caveat.

Portfolio Overview. Pennfield is a specialty retailer focused on outdoor lifestyle, sporting goods, and adventure apparel, operating a total of 209 retail locations (comprising 187 company-owned store locations across 34 states and 22 outlet locations), one corporate headquarters facility located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202, and several distribution and warehouse facilities supporting its retail operations. The Company's brand positioning in the outdoor and adventure lifestyle segment has driven its geographic footprint, with concentrations in the Southeast, Mid-Atlantic, and Western regions of the United States where outdoor recreation and adventure tourism are prevalent.

Key Takeaways. Based upon our review of the materials in the Data Room, we highlight the following key findings for the deal team's attention:

(i) Leased vs. Owned Portfolio. The vast majority of Pennfield's retail locations — both company-owned stores and outlet locations — are leased rather than owned. Of the 209 retail locations, 207 are operated pursuant to lease agreements, with only two freestanding retail properties held in fee simple. The corporate headquarters is also leased. This lease-heavy structure is consistent with standard practice in the specialty retail industry but creates a significant body of third-party agreements that must be analyzed in connection with the Merger.

(ii) Change of Control Provisions. A significant number of leases across the portfolio contain change of control provisions that will be triggered by the Merger. As detailed in Section VII below, we have identified approximately 118 leases (representing approximately 56% of the retail portfolio) that contain some form of change of control provision, ranging from consent requirements to termination and recapture rights. The prevalence and range of these provisions represent one of the most significant real estate diligence issues for the Transaction.

(iii) Co-Tenancy Clause Exposure. Co-tenancy clauses are prevalent in Pennfield's mall and outlet location leases. These provisions grant Pennfield certain rent reduction or lease termination rights if specified anchor tenants or minimum co-tenant occupancy levels at a shopping center are not maintained. Given the ongoing restructuring activity in the retail sector, several locations may currently be at risk of co-tenancy failures or are already operating under reduced rent arrangements as a result of anchor tenant departures. This presents both a risk and a potential opportunity for the Sponsor post-closing.

(iv) Lease Expiration Concentration. While the lease expiration profile is generally staggered, we have identified a concentration of lease expirations and renewal option exercise deadlines in the 2026–2028 timeframe. Approximately 62 leases, representing roughly 30% of the retail portfolio, have expiration dates or critical renewal option exercise deadlines falling within this three-year window. This concentration will require significant attention and resources from Pennfield's real estate team in the near-term post-closing period.

(v) Consent Requirements. Certain landlord consents will be required prior to or at closing as a condition to the Merger. As discussed further in Section VII, we recommend early and proactive engagement with landlords to secure these consents, with particular priority given to high-revenue locations and those where the lease grants the landlord a termination or recapture right upon a change of control.

Financial Context. For the fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported revenue of approximately $1.62 billion and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $142 million, reflecting an EBITDA margin of approximately 8.8%. The Company employs approximately 8,400 persons across its corporate, retail, and distribution operations. Occupancy costs (including base rent, percentage rent, common area maintenance charges, real estate taxes, and insurance) represent a material component of the Company's operating expense structure, and the lease portfolio is therefore a critical element of both the operational and financial profile of the business being acquired.

This memorandum should be read in conjunction with the separate Change of Control Analysis memorandum (anticipated to be circulated on March 26, 2025), which addresses change of control provisions across all categories of Pennfield's material agreements, including credit agreements, executive employment agreements, equity incentive plans, and leases, and the Environmental Diligence Summary (also anticipated for March 26, 2025).

II. Portfolio Overview

A. Summary of Real Estate Holdings by Category

The table below provides a high-level summary of Pennfield's real estate portfolio as reflected in the Data Room materials reviewed through March 25, 2025:

As the table above illustrates, Pennfield's real estate portfolio is overwhelmingly leased. Virtually all retail locations and outlet stores are operated under lease agreements with third-party landlords. The two owned retail properties consist of freestanding store locations in Bozeman, Montana and Asheville, North Carolina, both of which were acquired by the Company in connection with store build-to-suit arrangements completed in 2014 and 2016, respectively. The corporate headquarters in Charlotte, North Carolina is leased. The four distribution and warehouse facilities include two owned properties and two leased facilities, as described in further detail in Section VI below.

The total annual occupancy cost across the leased portfolio, including base rent, percentage rent, CAM charges, real estate taxes, and insurance pass-throughs, was approximately $186.4 million for FY 2024 based on the Company's internal rent roll and occupancy cost summary provided in the Data Room. This figure represents approximately 11.5% of the Company's FY 2024 revenue.

B. Geographic Distribution

Pennfield's 209 retail locations are distributed across 34 states, reflecting the Company's national footprint with particular concentrations in regions aligned with its outdoor lifestyle brand positioning. The table below identifies the top ten states by number of store locations based on our review of the Data Room materials:

The geographic distribution reflects meaningful regional clustering in the Southeast (North Carolina, Virginia, Georgia, Tennessee, and Florida, collectively representing approximately 29.7% of the portfolio), the West (California, Colorado, Washington, and Oregon, collectively representing approximately 23.9%), and Texas (10.0%). This clustering is consistent with Pennfield's outdoor lifestyle brand focus and its historical store expansion strategy, which has prioritized markets with high concentrations of outdoor recreation activity and favorable demographic profiles for its target consumer.

The Charlotte, North Carolina corporate headquarters serves as the hub for the Company's executive leadership, corporate functions, merchandising, marketing, and e-commerce operations. Charlotte's central location within Pennfield's Southeast store cluster provides convenient access to a significant portion of the retail portfolio.

A complete state-by-state summary of store locations is set forth in Appendix B to this memorandum.

C. Property Types

The Pennfield retail portfolio encompasses range property types, reflecting the Company's diversified real estate strategy. The property types represented in the portfolio include:

Inline Mall Retail Spaces. Approximately 74 of the 209 retail locations (approximately 35%) are situated in enclosed regional or super-regional shopping malls. These locations typically range from 4,500 to 8,500 square feet and are positioned in lifestyle and sports-oriented sections of the mall tenant mix. Inline mall leases tend to contain the most complex provisions, including percentage rent requirements, co-tenancy clauses, operating covenant requirements, and landlord-favorable change of control restrictions.

Freestanding Retail Locations. Approximately 58 of the 209 retail locations (approximately 28%) are freestanding, standalone store locations. These stores are generally larger format, ranging from 7,000 to 14,000 square feet, and are situated in high-traffic commercial corridors, power centers, or pad sites adjacent to major retail developments. Freestanding locations typically have more straightforward lease structures with fewer co-tenancy and exclusivity complications, though change of control provisions remain common.

Lifestyle Center and Open-Air Shopping Center Locations. Approximately 55 of the 209 retail locations (approximately 26%) are located in lifestyle centers or open-air shopping center developments. These locations typically range from 5,000 to 9,000 square feet. Lease structures for lifestyle center locations fall between the complexity of inline mall leases and freestanding location leases, with co-tenancy provisions being common but generally less onerous than those found in enclosed mall leases.

Outlet Mall Locations. The 22 outlet locations (approximately 11% of the portfolio) are situated in outlet malls operated by major national outlet developers, including Simon Premium Outlets, Tanger Outlets, and similar operators. Outlet store leases tend to have shorter initial terms, outlet-specific operating requirements, and mandatory sales reporting provisions. These leases are discussed in greater detail in Section V below.

Corporate Office Space. The Charlotte, North Carolina corporate headquarters at 4500 Commerce Boulevard, Suite 800, occupies approximately 62,000 rentable square feet of Class A office space. This facility is discussed in greater detail in Section III below.

Distribution and Warehouse Facilities. Pennfield operates four distribution and warehouse facilities supporting its retail operations and e-commerce fulfillment. These facilities are discussed in Section VI below.

III. Corporate Headquarters

Pennfield's corporate headquarters is located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202 (the "HQ Facility"). The following summarizes the key terms of the corporate headquarters lease based on the materials reviewed in the Data Room:

Landlord. The landlord under the headquarters lease is Commerce Boulevard Partners LLC, a Delaware limited liability company, which we understand is an affiliate of Highpoint Capital Real Estate, a Charlotte-based commercial real estate development and management firm.

Premises. The leased premises comprise approximately 62,000 rentable square feet on the eighth floor and a portion of the seventh floor of the Commerce Boulevard Tower, a 14-story Class A office building in the SouthPark submarket of Charlotte. The Company has occupied this space since relocating its headquarters from a smaller facility in Charlotte's Midtown district in 2019.

Lease Commencement and Expiration. The headquarters lease commenced on April 1, 2019 and has a current expiration date of March 31, 2031, providing a remaining term of approximately six years from the date of this memorandum. The initial lease term is 12 years.

Rental Rate. The current annual base rent under the headquarters lease is approximately $31.00 per rentable square foot, or approximately $1,922,000 per annum ($160,167 per month). The lease provides for annual rent escalations of 2.5% per year commencing on the second anniversary of the lease commencement date. Based on the escalation schedule, the current annual base rent for the lease year commencing April 1, 2025 will be approximately $32.59 per square foot, or approximately $2,020,580 per annum. In addition to base rent, Pennfield is responsible for its pro rata share of operating expenses, real estate taxes, and insurance for the building on a modified gross basis, with a base year stop for the 2019 calendar year. The Company's estimated total annual occupancy cost for the HQ Facility, inclusive of base rent and operating expense pass-throughs, is approximately $2.48 million.

Renewal Options. The headquarters lease provides Pennfield with two successive five-year renewal options, which, if both are exercised, would extend the term through March 31, 2041. Renewal option rent is to be determined based on the then-prevailing fair market rental rate for comparable Class A office space in the SouthPark submarket of Charlotte, subject to a floor of 95% of the base rent payable in the final year of the then-expiring term. Notice of exercise of the first renewal option must be provided to the landlord no later than 12 months prior to the expiration of the initial term (i.e., by March 31, 2030).

Change of Control Provision. The headquarters lease contains a change of control provision in Section 14.3 of the lease. The provision defines "change of control" to include any merger, consolidation, or reorganization in which the existing equity holders of the tenant cease to hold a majority of the voting equity interests of the tenant or the surviving entity. The reverse triangular merger structure contemplated by the Transaction, in which Merger Sub will merge with and into Pennfield and Pennfield's existing public shareholders will receive cash consideration in exchange for their shares, will constitute a change of control under this definition. The headquarters lease requires that the tenant provide the landlord with written notice of any change of control not less than 30 days prior to the effective date of such change and obtain the landlord's prior written consent, which consent "shall not be unreasonably withheld, conditioned, or delayed." The landlord does not have a termination or recapture right under this provision, which is favorable to the Transaction. We recommend that the consent solicitation process for the headquarters lease be initiated promptly given the corporate significance of this location and the 30-day notice requirement.

Key Personnel at HQ Facility. The Company's senior executive leadership team, including Catherine Langford (Chief Executive Officer), Derek Simmons (Chief Financial Officer), Maxwell Dunn (Chief Operating Officer), and Patricia Okafor (General Counsel and Corporate Secretary), are based at the HQ Facility, along with the Company's corporate support functions including legal, finance, human resources, merchandising, marketing, and e-commerce operations.

Expansion and Contraction Rights. The headquarters lease grants Pennfield a right of first offer on any additional contiguous space on the seventh floor of the building that becomes available during the lease term, subject to existing tenant renewal rights. The lease does not include a contraction right or early termination option. We note that Pennfield currently utilizes only a portion of the seventh floor (approximately 12,000 square feet of the total seventh-floor area), and the Company may have flexibility to expand within the building if needed post-closing.

IV. Retail Store Leases — Detailed Analysis

A. Lease Terms and Expiration Profile

Typical Lease Terms. The retail store leases across the Pennfield portfolio generally follow a standard structure for specialty retail tenants. Initial lease terms typically range from 10 to 15 years, with the most common initial term being 10 years. Certain newer leases executed since 2020 reflect somewhat shorter initial terms of 7 to 10 years, which is consistent with the broader trend in the retail real estate industry toward shorter lease commitments in the post-pandemic environment. A small number of leases, primarily for freestanding locations in strong-performing markets, have initial terms of 15 years.

Lease Expiration Schedule. The following table summarizes the lease expiration profile across the 207 leased retail locations (including outlet stores) based on the current lease expiration dates reflected in the Data Room materials, assuming no exercise of renewal options:

Concentration Risk — 2026–2028 Window. As the table above illustrates, a notable concentration of lease expirations falls within the 2026–2028 timeframe, with 62 leases (approximately 29.9% of the leased retail portfolio) expiring during this three-year window. The aggregate annual base rent for these 62 locations is approximately $37.2 million. This concentration creates a significant renewal negotiation burden for Pennfield's real estate team in the first three years following the Anticipated Closing Date. We note that many of these leases have renewal options available, which mitigates the risk of involuntary store closures but may require negotiation of renewal rental rates at prevailing market conditions.

Average Remaining Lease Term. Across the 207 leased retail locations, the weighted average remaining lease term (by base rent) is approximately 5.8 years as of the date of this memorandum. The unweighted average remaining term is approximately 5.4 years. These figures are within the range that would be expected for a mature specialty retail portfolio of this size, though we note that the weighted average is modestly shorter than the industry average for investment-grade retail tenants, reflecting the 2026–2028 concentration described above.

Holdover and Month-to-Month Leases. We have identified 6 retail locations currently operating on a holdover or month-to-month basis, where the original lease term has expired and no renewal option has been exercised. Under the applicable holdover provisions, these locations typically operate at 125% to 150% of the base rent applicable during the final year of the expired term. These holdover situations create operational uncertainty and should be addressed in coordination with the Company's real estate team. The 6 holdover locations are identified on the Master Lease Schedule attached as Appendix A. We have included these 6 locations in the 2025 expiration category for purposes of the table above.

B. Renewal Options

Renewal Option Structures. The standard renewal option structure across the Pennfield retail lease portfolio consists of two to three successive five-year renewal options following the expiration of the initial lease term. This structure is consistent with industry norms for specialty retail tenants. The specific renewal option structure varies by lease, with the following general distribution:

• Leases with three five-year renewal options: approximately 48 leases (23%)

• Leases with two five-year renewal options: approximately 121 leases (58%)

• Leases with one five-year renewal option: approximately 26 leases (13%)

• Leases with no renewal options remaining (options exhausted or original lease contained none): approximately 12 leases (6%)

Renewal Options Available vs. Exhausted. Of the 207 leased retail locations, approximately 195 leases (94%) have at least one renewal option remaining and available for exercise. The 12 leases with no renewal options remaining are concentrated among the Company's oldest store locations, which have been in continuous operation for 15 to 25 years. These 12 locations will require new lease negotiations or relocation planning as their current terms expire.

Notice Requirements. The notice requirements for exercising renewal options vary across the portfolio but generally fall within a range of 6 to 12 months prior to the expiration of the then-current term. The most common notice period is 9 months. It is critical that the Sponsor's post-closing asset management team implement a comprehensive lease calendar and tickler system to ensure that renewal option deadlines are not inadvertently missed. We have identified the renewal option exercise deadlines for all leases expiring through December 31, 2026 and have included this information on the Master Lease Schedule in Appendix A.

Near-Term Renewal Deadlines. Given the Anticipated Closing Date of June 30, 2025, we have specifically identified 14 leases where renewal option exercise deadlines fall within the 12 months following the Anticipated Closing Date (i.e., by June 30, 2026). These 14 locations require prompt attention, and the deal team should consider whether any of these renewal decisions should be coordinated with the Company's real estate team prior to closing or reserved for post-closing determination by the Sponsor. Additionally, 3 leases have renewal option exercise deadlines that fall prior to the Anticipated Closing Date (one on April 15, 2025, one on May 1, 2025, and one on June 15, 2025). We recommend that the deal team discuss with the Company whether these renewal options should be exercised prior to closing and, if so, whether the exercise should be coordinated with or approved by the Sponsor.

Renewal Rental Rate Mechanisms. The mechanisms for determining the rental rate during renewal terms vary across the portfolio as follows:

• Fair Market Value (FMV) Resets: Approximately 96 leases (46%) provide for the renewal term rental rate to be set at the then-prevailing fair market rental rate for comparable space in the applicable market. FMV determinations typically involve a negotiation period followed by an appraisal process if the parties cannot agree.

• CPI Escalators: Approximately 52 leases (25%) provide for the renewal term rental rate to be determined by applying a cumulative Consumer Price Index adjustment to the base rent payable during the final year of the expiring term, typically subject to a floor (often 2% per annum cumulative) and a cap (often 4% per annum cumulative).

• Fixed Percentage Increases: Approximately 38 leases (18%) provide for a fixed percentage increase in base rent upon each renewal, typically in the range of 8% to 15% of the rent payable during the final year of the expiring term.

• Negotiated or Unspecified: Approximately 21 leases (10%) provide for the renewal term rental rate to be "mutually agreed" by the parties or are silent on the renewal rental rate mechanism, which may require negotiation or, in certain cases, may be interpreted under applicable state law.

C. Rental Rate Summary

Base Rental Rates. Base rental rates across the Pennfield retail lease portfolio vary significantly depending on property type, geographic market, store size, and the age of the lease. The following summarizes the range and distribution of base rental rates:

• Inline Mall Locations: Base rental rates range from approximately $28.00 to $72.00 per square foot per annum, with a weighted average of approximately $48.50 per square foot. The highest rates are found in Class A malls in major metropolitan markets (e.g., Tysons Corner, VA; King of Prussia, PA; South Coast Plaza, CA), while the lower end of the range corresponds to B-grade malls in secondary markets.

• Freestanding Retail Locations: Base rental rates range from approximately $16.00 to $38.00 per square foot per annum, with a weighted average of approximately $24.75 per square foot. Freestanding locations generally command lower per-square-foot rental rates but involve larger premises, resulting in comparable or higher absolute monthly rent payments.

• Lifestyle Center / Open-Air Locations: Base rental rates range from approximately $24.00 to $56.00 per square foot per annum, with a weighted average of approximately $36.20 per square foot.

• Outlet Locations: Base rental rates range from approximately $18.00 to $42.00 per square foot per annum, with a weighted average of approximately $27.80 per square foot.

The aggregate annual base rent across the 207 leased retail locations is approximately $129.2 million based on the current rent roll.

Percentage Rent Provisions. Percentage rent provisions are common in the Pennfield retail lease portfolio, particularly in inline mall and outlet locations. Approximately 112 leases (54% of the leased retail portfolio) contain percentage rent provisions requiring the tenant to pay a percentage of gross sales in excess of a specified annual sales breakpoint as additional rent. The typical percentage rent rate ranges from 5% to 8% of gross sales in excess of the breakpoint, with breakpoints generally set at or above the level at which base rent represents approximately 6% to 10% of gross sales. Based on FY 2024 store performance data provided in the Data Room, approximately 34 stores exceeded their percentage rent breakpoints during FY 2024, resulting in aggregate percentage rent payments of approximately $4.7 million for the fiscal year.

Common Area Maintenance, Taxes, and Insurance. The lease structures across the portfolio include a mix of triple-net (NNN), modified gross, and full-service gross arrangements, though the overwhelming majority of the retail store leases are structured as either NNN or modified gross:

• Triple-Net (NNN) Leases: Approximately 134 leases (65%) are structured on a triple-net basis, under which Pennfield is responsible for its pro rata share of all common area maintenance costs, real estate taxes, and property insurance, in addition to base rent. This structure is standard for freestanding and many lifestyle center locations.

• Modified Gross Leases: Approximately 63 leases (30%) are structured on a modified gross basis, under which Pennfield pays base rent plus its pro rata share of specified operating expense categories (most commonly real estate taxes and insurance, with CAM charges either included in base rent or subject to a base-year stop). This structure is more common in inline mall locations where the landlord maintains operational control of common areas.

• Full-Service Gross Leases: Approximately 10 leases (5%) are structured on a full-service gross basis with operating expense stops, under which Pennfield pays a single base rent amount that includes most operating expenses, with pass-throughs only for increases in operating expenses above a specified base year.

Aggregate pass-through charges (CAM, taxes, and insurance) across the leased retail portfolio were approximately $48.6 million for FY 2024.

Escalation Provisions. Base rent escalation provisions vary across the portfolio. The most common escalation mechanisms include annual fixed increases (typically 2% to 3% per annum, found in approximately 55% of leases), CPI-based adjustments (typically annual, found in approximately 25% of leases), and periodic fair market value resets (typically every five years, found in approximately 12% of leases). Approximately 8% of leases have flat rental rates with no escalation during the current term.

D. Permitted Use and Exclusivity Provisions

Permitted Use Clauses. The permitted use clauses in Pennfield's retail store leases generally authorize the use of the premises for the retail sale of outdoor, sporting goods, adventure, and lifestyle apparel, footwear, equipment, and related accessories. The precise language of the permitted use clause varies by lease, with some leases incorporating broad language permitting any lawful retail use and others containing more narrowly defined use restrictions that limit the Company to the specific product categories described above. We have not identified any material concerns with permitted use restrictions that would limit Pennfield's ability to operate its stores in the ordinary course of business; however, to the extent the Sponsor contemplates any material changes to the Company's product mix or retail concept post-closing, the permitted use clauses should be reviewed on a location-by-location basis.

Radius Restrictions. Approximately 89 leases (43% of the leased retail portfolio) contain radius restriction provisions that limit Pennfield's ability to open a competing store within a specified radius of the leased premises, typically ranging from 3 to 10 miles depending on the market and property type. Violations of radius restrictions can result in penalties including the inclusion of sales from the competing store in the percentage rent calculation for the restricted location. The Sponsor should be aware of these radius restrictions in connection with any post-closing store expansion plans.

Exclusive Use Provisions. Approximately 62 leases (30% of the leased retail portfolio) contain exclusive use provisions that benefit Pennfield by restricting the landlord from leasing space in the same shopping center or development to tenants engaged in the retail sale of outdoor, sporting goods, or adventure apparel and equipment that would directly compete with Pennfield's business. These exclusivity provisions vary in scope and specificity; some provide broad exclusivity for "outdoor and sporting goods" retail, while others are more narrowly tailored to specific product categories. Exclusivity provisions are most commonly found in inline mall and lifestyle center locations where co-tenant competition is a significant concern.

Restrictive Covenants. A small number of leases (approximately 11) contain restrictive covenants or non-compete provisions imposed by the landlord that restrict Pennfield's operations in ways beyond the standard permitted use clause, such as limitations on e-commerce fulfillment from the premises, restrictions on exterior signage or display, or limitations on the conduct of clearance or liquidation sales. We have flagged these provisions on the Master Lease Schedule in Appendix A for the deal team's reference.

V. Outlet Store Leases

Pennfield operates 22 outlet store locations across the United States, all of which are leased. The outlet locations represent an important component of the Company's multi-channel retail strategy, providing a channel for clearance and excess inventory disposition as well as outlet-exclusive product lines.

Outlet Mall Operators/Landlords. The 22 outlet locations are situated in outlet malls operated by the following major national outlet developers:

• Simon Premium Outlets (a division of Northpoint Industries): 11 locations

• Beaumont Holdings: 7 locations

• Craig Realty Group: 2 locations

• Granite Harbor Enterprises: 1 location

• Other/Independent operators: 1 location

Lease Terms. Outlet store leases in the Pennfield portfolio generally have shorter initial terms than the Company's traditional retail store leases. Initial terms for outlet leases range from 5 to 10 years, with the most common initial term being 7 years. The shorter terms reflect the outlet real estate market's preference for more frequent lease rollover and the ability of outlet operators to adjust tenant mix more dynamically. Renewal options for outlet leases typically consist of one or two successive five-year renewal terms.

Outlet-Specific Provisions. Outlet store leases contain several provisions that are specific to the outlet retail format and differ from the Company's traditional retail store leases:

• Sales Reporting Requirements. All 22 outlet leases require Pennfield to provide monthly or quarterly reports of gross sales to the landlord. These sales reports are used to calculate percentage rent (where applicable), monitor co-tenancy compliance, and support the outlet operator's overall leasing and marketing efforts. Failure to provide timely and accurate sales reports can result in default notices and, in certain leases, an estimate of sales by the landlord that may be unfavorable to the tenant.

• Operating Covenants. Outlet leases typically contain more stringent operating covenants than traditional retail leases, requiring the tenant to remain open and operating during all hours that the outlet mall is open to the public. Approximately 19 of the 22 outlet leases contain continuous operation requirements, which may limit Pennfield's flexibility to reduce operating hours or temporarily close an underperforming outlet location without triggering a lease default.

• Percentage Rent. Percentage rent provisions are universal in the outlet lease portfolio. All 22 outlet leases require percentage rent payments based on gross sales, with breakpoints that are generally lower than those found in the Company's traditional retail leases. Aggregate percentage rent paid on outlet leases was approximately $1.8 million for FY 2024.

• Marketing Fund Contributions. Approximately 18 of the 22 outlet leases require Pennfield to contribute to an outlet center marketing and advertising fund, typically calculated as a percentage of base rent (ranging from 1% to 3%) or as a fixed annual contribution.

Co-Tenancy Provisions. Co-tenancy clauses are prevalent in the outlet lease portfolio and are discussed in detail in Section VIII below. Approximately 17 of the 22 outlet leases contain some form of co-tenancy provision.

Change of Control Provisions. Approximately 14 of the 22 outlet leases (64%) contain change of control provisions. Given the concentration of outlet leases with only two major landlords (Simon Premium Outlets and Tanger), the consent solicitation process for outlet leases may benefit from a consolidated approach through each landlord's national leasing office. This strategy is discussed further in Section VII below.

VI. Distribution and Warehouse Facilities

Pennfield operates four regional distribution and warehouse facilities that support its retail store network and e-commerce fulfillment operations. The following summarizes the key information for each facility based on the Data Room materials:

Facility 1 — Gastonia, North Carolina (Owned)

The Company's primary distribution center is located at 2200 Industrial Park Drive, Gastonia, North Carolina 28052. This facility is approximately 385,000 square feet and serves as the main hub for inventory receipt, storage, and distribution to retail stores across the Southeast and Mid-Atlantic regions. The property is owned in fee simple by Pennfield Distribution, Inc., a wholly owned subsidiary of Pennfield Holdings, Inc. Title to the property is held subject to a first-priority mortgage in favor of Greaves Bancorp as administrative agent under Pennfield's existing senior secured credit facility. An environmental Phase I assessment was conducted on this property in 2021 and did not identify any recognized environmental conditions, as noted in the Data Room. A lien search confirmed the Greaves Capital Markets mortgage and no other liens of record, subject to customary title exceptions.

Facility 2 — Reno, Nevada (Leased)

The Company operates a Western regional distribution center at 5400 Logistics Way, Reno, Nevada 89506. This facility is approximately 210,000 square feet and supports distribution to retail stores in California, Oregon, Washington, Colorado, and other Western states. The facility is leased from Reno Industrial Partners LLC pursuant to a lease dated September 1, 2018, with an initial term of 12 years expiring on August 31, 2030. Annual base rent is approximately $8.50 per square foot ($1,785,000 per annum), with annual escalations of 2.5%. The lease provides for one five-year renewal option at fair market value. The lease contains a change of control notice provision (notice only, no consent required).

Facility 3 — Dallas-Fort Worth, Texas (Leased)

The Company operates a Southern and Central regional distribution center at 8100 Commerce Parkway, Fort Worth, Texas 76177. This facility is approximately 175,000 square feet and supports distribution to retail stores in Texas, the Gulf states, and the Midwest. The facility is leased from Alliance Gateway Industrial LP pursuant to a lease dated March 15, 2020, with an initial term of 10 years expiring on March 14, 2030. Annual base rent is approximately $7.75 per square foot ($1,356,250 per annum), with annual escalations of 3.0%. The lease provides for two successive five-year renewal options at 95% of fair market value (subject to a floor equal to the rent in the final year of the prior term). The lease contains a change of control provision requiring landlord consent, which consent shall not be unreasonably withheld.

Facility 4 — Lehigh Valley, Pennsylvania (Owned)

The Company operates a Northeast regional distribution center and e-commerce fulfillment center at 1450 Distribution Boulevard, Easton, Pennsylvania 18045. This facility is approximately 260,000 square feet and was constructed in 2017 to support the Company's growing e-commerce operations as well as retail store distribution in the Northeast and Mid-Atlantic regions. The property is owned in fee simple by Pennfield Distribution, Inc. Title is held subject to a first-priority mortgage in favor of Greaves Bancorp under the same senior secured credit facility. The Easton facility is also subject to a local tax abatement agreement with Forks Township, Northampton County, which provides for a phased-in real estate tax assessment through 2027. A Phase I environmental assessment conducted in 2017 prior to construction did not identify any recognized environmental conditions.

Proximity to Logistics Corridors. Each of the four distribution facilities is strategically located along major logistics corridors and interstate highway networks:

• Gastonia, NC: Interstate 85 corridor, proximate to Charlotte and the Southeast distribution network

• Reno, NV: Interstate 80 corridor, serving the Western U.S. with proximity to the California and Pacific Northwest markets

• Fort Worth, TX: Alliance Texas logistics hub along Interstate 35W, serving the Southern and Central U.S.

• Easton, PA: Lehigh Valley logistics corridor along Interstates 78 and 22, proximate to the New York metropolitan area and the Northeast distribution network

Environmental Considerations. The distribution and warehouse facilities present the most significant environmental diligence considerations within the Pennfield real estate portfolio due to the nature of warehouse and logistics operations (including fuel storage, vehicle maintenance, and potential historical industrial use of certain sites). A separate Environmental Diligence Summary memorandum is being prepared and is anticipated to be circulated on or about March 26, 2025. That memorandum will address Phase I and Phase II environmental assessment results, known or suspected contamination issues, compliance with applicable environmental regulations, and any environmental remediation obligations.

VII. Change of Control Provisions

This section addresses the change of control provisions found in the Pennfield lease portfolio. This is a critical issue for the Transaction, as the Merger will constitute a change of control under numerous lease agreements, and the failure to obtain required consents could give rise to landlord remedies, including in certain cases lease termination or recapture rights.

Transaction Structure and Change of Control. The Transaction is structured as a reverse triangular merger in which Merger Sub will merge with and into Pennfield, with Pennfield surviving as the surviving corporation. Following the Merger, 100% of Pennfield's outstanding common stock will be owned by HPE Fund IV, and Pennfield's existing public shareholders will have received cash consideration. While the reverse triangular merger structure preserves the identity of the tenant entity (Pennfield and its subsidiaries remain the named tenants under the leases), the change in the ultimate equity ownership of Pennfield from dispersed public shareholders to HPE Fund IV constitutes a change of control under the definitions found in most of the leases reviewed. The typical change of control definition captures any transaction in which the existing controlling equity holders of the tenant (or, in some cases, any person or group acquiring a majority interest) undergo a change, regardless of whether the tenant entity itself is assigned or transferred. Accordingly, the fact that Pennfield survives as the named tenant does not, by itself, avoid the triggering of change of control provisions.

Categorization of Change of Control Provisions. We have categorized the change of control provisions found across the lease portfolio into the following five categories:

1. Consent Required. Leases that explicitly require the landlord's prior written consent before a change of control of the tenant may be effectuated. The reverse triangular merger resulting in Pennfield becoming a wholly owned subsidiary of HPE Fund IV triggers the consent requirement under these leases. The failure to obtain consent prior to the change of control typically constitutes an event of default under the lease, entitling the landlord to exercise its remedies, which may include lease termination.

2. Notice Only. Leases that require the tenant to provide written notice to the landlord of a change of control but do not require the landlord's consent. Under these leases, Pennfield must notify the landlord of the Merger either prior to or within a specified period following the closing, but the landlord has no approval right and cannot block the transaction.

3. No Restriction. Leases that are silent on the issue of change of control or that contain express carve-outs exempting mergers, consolidations, or acquisitions from the change of control provisions. Certain leases also contain carve-outs for transfers to affiliates or in connection with a sale of all or substantially all of the assets of the tenant, which may or may not apply to the Merger depending on the specific language of the carve-out.

4. Termination Right. Leases that grant the landlord an affirmative right to terminate the lease upon the occurrence of a change of control. These provisions are the most adverse to the Transaction, as they give the landlord the unilateral ability to reclaim the premises. In some cases, the landlord's termination right is conditioned on the failure of the new controlling party to meet specified financial or creditworthiness standards; in other cases, the termination right is unconditional.

5. Recapture Right. Leases that grant the landlord a right to recapture the premises (i.e., to terminate the lease and retake possession of the leased space) upon the occurrence of a change of control. Recapture rights are functionally similar to termination rights but are typically framed as the landlord's election to step into the shoes of the tenant or to re-let the premises to a third party. Certain recapture provisions require the landlord to exercise the recapture right within a specified period (often 30 to 60 days) after receiving notice of the change of control, failing which the right lapses.

Quantitative Summary. The following table summarizes the categorization of change of control provisions across the 209 leased retail locations (including outlet stores), the headquarters lease, and the 2 leased distribution facilities (212 leases total):

In aggregate, approximately 118 leases (55.7% of the portfolio) contain some form of change of control provision (consent required, termination right, or recapture right, excluding notice-only leases and leases with no restriction). Including notice-only leases, the total number of leases with any change of control-related provision is approximately 142 (67.0% of the portfolio). An additional 24 leases contain ambiguous language that may or may not constitute a change of control provision depending on the interpretation of the applicable lease terms under governing state law; our analysis of these leases is ongoing.

High-Priority Consent Locations. We have identified a subset of leases that represent the highest priority for the consent solicitation process based on a combination of (a) the nature of the change of control provision (termination right or recapture right), (b) the annual rent commitment, and (c) the revenue contribution of the location. We recommend that the deal team focus particular attention on the following categories:

• Leases with Termination Rights (11 locations): These 11 leases grant the landlord the most powerful remedy — the ability to terminate the lease outright upon a change of control. The aggregate annual base rent at these locations is approximately $8.3 million, and these locations generated estimated aggregate revenue of approximately $73.5 million in FY 2024. The loss of any of these locations could have a material impact on the Company's operations and financial performance.

• Leases with Recapture Rights (5 locations): These 5 leases present a risk similar to the termination right category, with an aggregate annual base rent of approximately $3.9 million and estimated FY 2024 revenue of approximately $31.2 million.

• High-Revenue Consent Required Locations (top 20 by revenue): Among the 78 leases requiring landlord consent, we have identified the top 20 locations by FY 2024 revenue. These 20 locations represent approximately $27.8 million in annual base rent and approximately $198 million in FY 2024 revenue. While the risk at these locations is technically limited to a default (rather than a landlord-initiated termination), the potential consequences of an uncured default — including landlord-initiated termination proceedings — make it important to obtain consent at these locations prior to closing.

Landlord Consent Fees. Approximately 18 of the 78 consent-required leases provide that the landlord is entitled to receive a consent processing fee or administrative fee in connection with the review and approval of a change of control. These fees typically range from $2,500 to $15,000 per lease, with an aggregate estimated cost of approximately $125,000 to $175,000. In addition, 4 leases contain profit-sharing or "transfer premium" provisions that entitle the landlord to receive a percentage (typically 25% to 50%) of any profit or consideration received by the tenant in connection with a change of control or assignment. The applicability of these profit-sharing provisions to a change of control in the merger context (as opposed to a direct lease assignment) is a question of lease interpretation and governing state law, and we are evaluating these provisions on a lease-by-lease basis.

Consent Solicitation Strategy. We recommend the following approach to the landlord consent solicitation process:

1. Pre-Closing Outreach. The Company should commence landlord outreach at least 60 to 90 days prior to the Anticipated Closing Date (i.e., by early to mid-April 2025) for all leases requiring consent or for which a termination or recapture right exists. The outreach should be coordinated through Pennfield's real estate team under the direction of Patricia Okafor (General Counsel) with the assistance of outside counsel.

2. Form of Consent Letter. Calderwood & Harkness LLP should prepare a standardized form of landlord consent letter that can be customized for each lease. The consent letter should include a brief description of the Merger, confirmation that the surviving entity (Pennfield) will continue as the tenant, and an acknowledgment that the Merger does not constitute an assignment of the lease. The consent letter should also include a request for a confirmation that the landlord waives any termination, recapture, or other remedial right arising from the change of control.

3. Prioritization. The consent solicitation should be prioritized as follows: (a) leases with termination or recapture rights, (b) high-revenue consent-required locations, (c) headquarters and distribution facility leases, and (d) all remaining consent-required leases.

4. Fallback Provisions. For leases where consent is not obtained prior to closing, the Agreement and Plan of Merger should include appropriate provisions allocating the risk between HPE Fund IV and the Pennfield shareholders. We discuss this further below.

Interaction with the Agreement and Plan of Merger. The closing conditions in the Agreement and Plan of Merger (the "Merger Agreement") should address the lease consent issue. Based on preliminary discussions with the deal team, we understand that the Merger Agreement is expected to include a closing condition requiring receipt of consents under "material" third-party agreements, the definition of which is currently under negotiation. We recommend that the following approach be considered:

• The Merger Agreement should include a schedule identifying specific leases for which consent is a condition to closing (the "Required Consent Leases"). At a minimum, this schedule should include the 11 leases with termination rights and the 5 leases with recapture rights, as well as the headquarters lease.

• For leases requiring consent but not identified as Required Consent Leases, the Merger Agreement should include representations and warranties from Pennfield regarding the accuracy and completeness of the lease portfolio disclosure, the status of landlord relationships, and any known defaults or disputes.

• The indemnification provisions of the Merger Agreement (subject to the negotiated 12% of equity value indemnification cap of $117,600,000) should provide the Sponsor with recourse for losses arising from the failure to obtain lease consents to the extent not otherwise excluded by the terms of the indemnification provisions.

Cross-Reference. A separate, comprehensive Change of Control Analysis memorandum covering all Pennfield agreements with change of control provisions — including the senior secured credit facility, executive employment agreements, equity incentive plans, customer and vendor contracts, and leases — is being prepared by the deal team and is anticipated to be circulated on March 26, 2025. The lease-specific analysis in this memorandum should be read in conjunction with that separate memorandum to obtain a complete picture of the change of control consent landscape for the Transaction.

VIII. Co-Tenancy Clauses

Overview

Co-tenancy provisions are a significant feature of the Pennfield lease portfolio, particularly with respect to inline mall and outlet mall locations. Co-tenancy clauses grant Pennfield certain protective rights — including rent reduction and, in some cases, lease termination rights — in the event that specified anchor tenants or a minimum percentage of co-tenants at a shopping center are not open and operating. These provisions are designed to protect the tenant against the loss of foot traffic and customer draw that results from the departure of key anchors or a decline in overall occupancy at a shopping center.

Given the ongoing restructuring activity in the U.S. retail sector, including recent and anticipated store closures by several major department store and anchor retail chains, co-tenancy provisions in the Pennfield lease portfolio present both a risk (to the extent they reflect underlying weakness in certain retail locations) and an opportunity (to the extent they provide Pennfield with leverage to renegotiate lease terms or exit underperforming locations).

Prevalence in the Portfolio

We have identified co-tenancy provisions in approximately 96 of the 207 leased retail locations (approximately 46% of the leased portfolio). The prevalence of co-tenancy provisions varies significantly by property type:

As the table illustrates, co-tenancy provisions are most prevalent in inline mall locations (82%) and outlet locations (77%), where the success of an individual tenant is most closely tied to the presence and drawing power of anchor tenants and the overall tenant mix of the shopping center.

Types of Co-Tenancy Provisions

The co-tenancy provisions in the Pennfield lease portfolio fall into two primary categories:

Opening Co-Tenancy. Opening co-tenancy provisions establish conditions that must be met before the tenant is required to open for business at a new location. Approximately 28 of the 96 leases with co-tenancy provisions include opening co-tenancy conditions. These typically require that (a) one or more specified anchor tenants be open and operating at the shopping center, and (b) a minimum percentage of the gross leasable area of the shopping center (typically 60% to 75%) be leased and occupied. If the opening co-tenancy conditions are not satisfied by a specified date, the tenant may be entitled to delay its opening, pay reduced rent (often percentage rent only) until the conditions are met, or terminate the lease entirely. Because all of Pennfield's existing stores are currently open and operating, opening co-tenancy provisions are primarily relevant in the context of any new leases that may be executed post-closing but are included here for completeness.

Operating Co-Tenancy. Operating co-tenancy provisions impose ongoing requirements for the continued presence and operation of anchor tenants and/or a minimum level of overall occupancy at the shopping center throughout the lease term. Approximately 91 of the 96 leases with co-tenancy provisions include operating co-tenancy requirements (some leases contain both opening and operating co-tenancy provisions). The typical operating co-tenancy provision requires one or more of the following:

• Named Anchor Requirement: One or more specifically identified anchor tenants (by name) must be open and operating at the shopping center. Common named anchors in the Pennfield portfolio include Macy's, Tarrant Corporation, Aldermere Industries, REI, Target, and major department store chains. If a named anchor closes, the co-tenancy condition fails.

• Substitute Anchor Provision: Certain leases permit the landlord to satisfy the anchor requirement by substituting a replacement tenant of comparable quality and drawing power, typically subject to the tenant's reasonable approval or measured against an objective standard (e.g., a nationally recognized retail chain operating in a minimum number of locations).

• Minimum Occupancy Threshold: The shopping center must maintain a minimum level of occupancy, typically measured as a percentage of gross leasable area ("GLA") that is leased, occupied, and open for business. Minimum occupancy thresholds typically range from 55% to 75% of GLA.

Remedies Available to Pennfield

When an operating co-tenancy condition is not met, the Pennfield lease portfolio provides for the following remedies:

• Reduced Rent (Percentage Rent Only): The most common remedy, found in approximately 72 of the 91 leases with operating co-tenancy provisions, permits Pennfield to pay reduced rent — typically percentage rent based on gross sales only, without any base rent obligation — for the duration of the co-tenancy failure. This remedy provides significant cost savings at underperforming locations where anchor departures have reduced foot traffic.

• Fixed Rent Reduction: Approximately 14 leases provide for a fixed reduction in base rent (typically 25% to 50%) during the period of the co-tenancy failure, rather than a switch to percentage rent only.

• Termination Right: Approximately 38 leases grant Pennfield the right to terminate the lease if the co-tenancy failure continues for a specified period (typically 12 to 24 months) without being cured by the landlord. This termination right is a powerful tool for exiting underperforming locations but must be exercised within a specified notice period or it may lapse.

Current Co-Tenancy Status

Based on our review of the Data Room materials, including store performance reports, Company-prepared co-tenancy tracking schedules, and recent landlord correspondence, we have identified the following categories of current co-tenancy status:

• Active Co-Tenancy Failures (Currently Triggered): We have identified 9 locations where co-tenancy conditions are currently not being met as a result of the closure or departure of a named anchor tenant or a decline in occupancy below the minimum threshold. At 6 of these 9 locations, Pennfield is currently exercising its right to pay reduced rent (percentage rent only or a fixed rent reduction). The aggregate base rent that Pennfield is avoiding or reducing at these 6 locations is approximately $3.1 million per annum. At the remaining 3 locations, the co-tenancy failure has been recently identified, and the Company is in the process of providing notice to the landlord and implementing the applicable remedy.

• At-Risk Locations: We have identified an additional 7 locations where co-tenancy conditions are at material risk of failure based on publicly available information regarding anchor tenant financial distress, announced store closures, or declining occupancy levels. These at-risk locations have aggregate annual base rent of approximately $4.4 million.

• Compliant Locations: The remaining 80 locations with co-tenancy provisions are currently in compliance, and we have not identified any imminent risk of co-tenancy failure based on available information.

Financial Exposure Analysis

The aggregate annual base rent across all 96 locations with co-tenancy provisions is approximately $62.8 million. The table below summarizes the financial exposure by co-tenancy status:

If all currently at-risk locations experience co-tenancy failures and Pennfield exercises available rent reduction remedies, the Company's aggregate annual rent savings could be approximately $5.6 million. However, this must be weighed against the potential loss of revenue at these locations due to reduced foot traffic and the broader operational implications of op

PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of Calderwood & Harkness LLP attorneys working on the above-referenced matter and our client, Harrowgate Private Equity Fund IV LP. Any unauthorized review, use, disclosure, or distribution of this memorandum is strictly prohibited.
MEMORANDUM
TO: Oliver Mackenzie, Responsible Partner, M&A; Ryan Kowalski, Lead Associate, M&A — Calderwood & Harkness LLP
FROM: Megan Chu, Working Associate, M&A — Calderwood & Harkness LLP
DATE: March 25, 2025
RE: Real Estate & Lease Portfolio Summary — Pennfield Holdings, Inc. (Project Summit)
MATTER NO.: 1003-00004
CLIENT: Harrowgate Private Equity Fund IV LP
Right-click to update Table of Contents
I. Executive Summary
The purpose of this memorandum is to summarize the findings of our review of the real estate and lease portfolio of Pennfield Holdings, Inc. ("Pennfield" or the "Company") in connection with the proposed acquisition of Pennfield by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Sponsor") for an aggregate equity purchase price of approximately $980,000,000 (the "Transaction"). The Transaction is structured as a reverse triangular merger in which Pinnacle Merger Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of HPE Fund IV formed for the purpose of consummating the Transaction, will merge with and into Pennfield, with Pennfield surviving as the surviving corporation and becoming a wholly owned subsidiary of HPE Fund IV (the "Merger"). The anticipated closing date for the Transaction is on or about June 30, 2025 (the "Anticipated Closing Date"), subject to satisfaction of customary closing conditions, including regulatory approvals and certain third-party consents as described in this memorandum.
Scope of Review. This memorandum is based upon our review of lease documents, property schedules, rent rolls, landlord correspondence, estoppel certificates, and related real estate materials uploaded to the Project Summit virtual data room hosted on the Thackeray Solutions platform (the "Data Room"), commencing February 10, 2025 and continuing through the date of this memorandum. In preparing this summary, our team reviewed approximately 1,450 individual documents, including original leases, lease amendments, modifications, guarantees, memoranda of lease, subordination, non-disturbance, and attornment agreements ("SNDAs"), and ancillary real estate documentation. We have also relied upon certain schedules and summaries prepared by Pennfield's internal real estate team and provided to us through the Data Room. We have not independently verified the accuracy or completeness of the Company-prepared materials, and this memorandum should be read subject to that caveat.
Portfolio Overview. Pennfield is a specialty retailer focused on outdoor lifestyle, sporting goods, and adventure apparel, operating a total of 209 retail locations (comprising 187 company-owned store locations across 34 states and 22 outlet locations), one corporate headquarters facility located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202, and several distribution and warehouse facilities supporting its retail operations. The Company's brand positioning in the outdoor and adventure lifestyle segment has driven its geographic footprint, with concentrations in the Southeast, Mid-Atlantic, and Western regions of the United States where outdoor recreation and adventure tourism are prevalent.
Key Takeaways. Based upon our review of the materials in the Data Room, we highlight the following key findings for the deal team's attention:
(i) Leased vs. Owned Portfolio. The vast majority of Pennfield's retail locations — both company-owned stores and outlet locations — are leased rather than owned. Of the 209 retail locations, 207 are operated pursuant to lease agreements, with only two freestanding retail properties held in fee simple. The corporate headquarters is also leased. This lease-heavy structure is consistent with standard practice in the specialty retail industry but creates a significant body of third-party agreements that must be analyzed in connection with the Merger.
(ii) Change of Control Provisions. A significant number of leases across the portfolio contain change of control provisions that will be triggered by the Merger. As detailed in Section VII below, we have identified approximately 118 leases (representing approximately 56% of the retail portfolio) that contain some form of change of control provision, ranging from consent requirements to termination and recapture rights. The prevalence and range of these provisions represent one of the most significant real estate diligence issues for the Transaction.
(iii) Co-Tenancy Clause Exposure. Co-tenancy clauses are prevalent in Pennfield's mall and outlet location leases. These provisions grant Pennfield certain rent reduction or lease termination rights if specified anchor tenants or minimum co-tenant occupancy levels at a shopping center are not maintained. Given the ongoing restructuring activity in the retail sector, several locations may currently be at risk of co-tenancy failures or are already operating under reduced rent arrangements as a result of anchor tenant departures. This presents both a risk and a potential opportunity for the Sponsor post-closing.
(iv) Lease Expiration Concentration. While the lease expiration profile is generally staggered, we have identified a concentration of lease expirations and renewal option exercise deadlines in the 2026–2028 timeframe. Approximately 62 leases, representing roughly 30% of the retail portfolio, have expiration dates or critical renewal option exercise deadlines falling within this three-year window. This concentration will require significant attention and resources from Pennfield's real estate team in the near-term post-closing period.
(v) Consent Requirements. Certain landlord consents will be required prior to or at closing as a condition to the Merger. As discussed further in Section VII, we recommend early and proactive engagement with landlords to secure these consents, with particular priority given to high-revenue locations and those where the lease grants the landlord a termination or recapture right upon a change of control.
Financial Context. For the fiscal year ended January 31, 2025 ("FY 2024"), Pennfield reported revenue of approximately $1.62 billion and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $142 million, reflecting an EBITDA margin of approximately 8.8%. The Company employs approximately 8,400 persons across its corporate, retail, and distribution operations. Occupancy costs (including base rent, percentage rent, common area maintenance charges, real estate taxes, and insurance) represent a material component of the Company's operating expense structure, and the lease portfolio is therefore a critical element of both the operational and financial profile of the business being acquired.
This memorandum should be read in conjunction with the separate Change of Control Analysis memorandum (anticipated to be circulated on March 26, 2025), which addresses change of control provisions across all categories of Pennfield's material agreements, including credit agreements, executive employment agreements, equity incentive plans, and leases, and the Environmental Diligence Summary (also anticipated for March 26, 2025).
II. Portfolio Overview
A. Summary of Real Estate Holdings by Category
The table below provides a high-level summary of Pennfield's real estate portfolio as reflected in the Data Room materials reviewed through March 25, 2025:
As the table above illustrates, Pennfield's real estate portfolio is overwhelmingly leased. Virtually all retail locations and outlet stores are operated under lease agreements with third-party landlords. The two owned retail properties consist of freestanding store locations in Bozeman, Montana and Asheville, North Carolina, both of which were acquired by the Company in connection with store build-to-suit arrangements completed in 2014 and 2016, respectively. The corporate headquarters in Charlotte, North Carolina is leased. The four distribution and warehouse facilities include two owned properties and two leased facilities, as described in further detail in Section VI below.
The total annual occupancy cost across the leased portfolio, including base rent, percentage rent, CAM charges, real estate taxes, and insurance pass-throughs, was approximately $186.4 million for FY 2024 based on the Company's internal rent roll and occupancy cost summary provided in the Data Room. This figure represents approximately 11.5% of the Company's FY 2024 revenue.
B. Geographic Distribution
Pennfield's 209 retail locations are distributed across 34 states, reflecting the Company's national footprint with particular concentrations in regions aligned with its outdoor lifestyle brand positioning. The table below identifies the top ten states by number of store locations based on our review of the Data Room materials:
The geographic distribution reflects meaningful regional clustering in the Southeast (North Carolina, Virginia, Georgia, Tennessee, and Florida, collectively representing approximately 29.7% of the portfolio), the West (California, Colorado, Washington, and Oregon, collectively representing approximately 23.9%), and Texas (10.0%). This clustering is consistent with Pennfield's outdoor lifestyle brand focus and its historical store expansion strategy, which has prioritized markets with high concentrations of outdoor recreation activity and favorable demographic profiles for its target consumer.
The Charlotte, North Carolina corporate headquarters serves as the hub for the Company's executive leadership, corporate functions, merchandising, marketing, and e-commerce operations. Charlotte's central location within Pennfield's Southeast store cluster provides convenient access to a significant portion of the retail portfolio.
A complete state-by-state summary of store locations is set forth in Appendix B to this memorandum.
C. Property Types
The Pennfield retail portfolio encompasses range property types, reflecting the Company's diversified real estate strategy. The property types represented in the portfolio include:
Inline Mall Retail Spaces. Approximately 74 of the 209 retail locations (approximately 35%) are situated in enclosed regional or super-regional shopping malls. These locations typically range from 4,500 to 8,500 square feet and are positioned in lifestyle and sports-oriented sections of the mall tenant mix. Inline mall leases tend to contain the most complex provisions, including percentage rent requirements, co-tenancy clauses, operating covenant requirements, and landlord-favorable change of control restrictions.
Freestanding Retail Locations. Approximately 58 of the 209 retail locations (approximately 28%) are freestanding, standalone store locations. These stores are generally larger format, ranging from 7,000 to 14,000 square feet, and are situated in high-traffic commercial corridors, power centers, or pad sites adjacent to major retail developments. Freestanding locations typically have more straightforward lease structures with fewer co-tenancy and exclusivity complications, though change of control provisions remain common.
Lifestyle Center and Open-Air Shopping Center Locations. Approximately 55 of the 209 retail locations (approximately 26%) are located in lifestyle centers or open-air shopping center developments. These locations typically range from 5,000 to 9,000 square feet. Lease structures for lifestyle center locations fall between the complexity of inline mall leases and freestanding location leases, with co-tenancy provisions being common but generally less onerous than those found in enclosed mall leases.
Outlet Mall Locations. The 22 outlet locations (approximately 11% of the portfolio) are situated in outlet malls operated by major national outlet developers, including Simon Premium Outlets, Tanger Outlets, and similar operators. Outlet store leases tend to have shorter initial terms, outlet-specific operating requirements, and mandatory sales reporting provisions. These leases are discussed in greater detail in Section V below.
Corporate Office Space. The Charlotte, North Carolina corporate headquarters at 4500 Commerce Boulevard, Suite 800, occupies approximately 62,000 rentable square feet of Class A office space. This facility is discussed in greater detail in Section III below.
Distribution and Warehouse Facilities. Pennfield operates four distribution and warehouse facilities supporting its retail operations and e-commerce fulfillment. These facilities are discussed in Section VI below.
III. Corporate Headquarters
Pennfield's corporate headquarters is located at 4500 Commerce Boulevard, Suite 800, Charlotte, North Carolina 28202 (the "HQ Facility"). The following summarizes the key terms of the corporate headquarters lease based on the materials reviewed in the Data Room:
Landlord. The landlord under the headquarters lease is Commerce Boulevard Partners LLC, a Delaware limited liability company, which we understand is an affiliate of Highpoint Capital Real Estate, a Charlotte-based commercial real estate development and management firm.
Premises. The leased premises comprise approximately 62,000 rentable square feet on the eighth floor and a portion of the seventh floor of the Commerce Boulevard Tower, a 14-story Class A office building in the SouthPark submarket of Charlotte. The Company has occupied this space since relocating its headquarters from a smaller facility in Charlotte's Midtown district in 2019.
Lease Commencement and Expiration. The headquarters lease commenced on April 1, 2019 and has a current expiration date of March 31, 2031, providing a remaining term of approximately six years from the date of this memorandum. The initial lease term is 12 years.
Rental Rate. The current annual base rent under the headquarters lease is approximately $31.00 per rentable square foot, or approximately $1,922,000 per annum ($160,167 per month). The lease provides for annual rent escalations of 2.5% per year commencing on the second anniversary of the lease commencement date. Based on the escalation schedule, the current annual base rent for the lease year commencing April 1, 2025 will be approximately $32.59 per square foot, or approximately $2,020,580 per annum. In addition to base rent, Pennfield is responsible for its pro rata share of operating expenses, real estate taxes, and insurance for the building on a modified gross basis, with a base year stop for the 2019 calendar year. The Company's estimated total annual occupancy cost for the HQ Facility, inclusive of base rent and operating expense pass-throughs, is approximately $2.48 million.
Renewal Options. The headquarters lease provides Pennfield with two successive five-year renewal options, which, if both are exercised, would extend the term through March 31, 2041. Renewal option rent is to be determined based on the then-prevailing fair market rental rate for comparable Class A office space in the SouthPark submarket of Charlotte, subject to a floor of 95% of the base rent payable in the final year of the then-expiring term. Notice of exercise of the first renewal option must be provided to the landlord no later than 12 months prior to the expiration of the initial term (i.e., by March 31, 2030).
Change of Control Provision. The headquarters lease contains a change of control provision in Section 14.3 of the lease. The provision defines "change of control" to include any merger, consolidation, or reorganization in which the existing equity holders of the tenant cease to hold a majority of the voting equity interests of the tenant or the surviving entity. The reverse triangular merger structure contemplated by the Transaction, in which Merger Sub will merge with and into Pennfield and Pennfield's existing public shareholders will receive cash consideration in exchange for their shares, will constitute a change of control under this definition. The headquarters lease requires that the tenant provide the landlord with written notice of any change of control not less than 30 days prior to the effective date of such change and obtain the landlord's prior written consent, which consent "shall not be unreasonably withheld, conditioned, or delayed." The landlord does not have a termination or recapture right under this provision, which is favorable to the Transaction. We recommend that the consent solicitation process for the headquarters lease be initiated promptly given the corporate significance of this location and the 30-day notice requirement.
Key Personnel at HQ Facility. The Company's senior executive leadership team, including Catherine Langford (Chief Executive Officer), Derek Simmons (Chief Financial Officer), Maxwell Dunn (Chief Operating Officer), and Patricia Okafor (General Counsel and Corporate Secretary), are based at the HQ Facility, along with the Company's corporate support functions including legal, finance, human resources, merchandising, marketing, and e-commerce operations.
Expansion and Contraction Rights. The headquarters lease grants Pennfield a right of first offer on any additional contiguous space on the seventh floor of the building that becomes available during the lease term, subject to existing tenant renewal rights. The lease does not include a contraction right or early termination option. We note that Pennfield currently utilizes only a portion of the seventh floor (approximately 12,000 square feet of the total seventh-floor area), and the Company may have flexibility to expand within the building if needed post-closing.
IV. Retail Store Leases — Detailed Analysis
A. Lease Terms and Expiration Profile
Typical Lease Terms. The retail store leases across the Pennfield portfolio generally follow a standard structure for specialty retail tenants. Initial lease terms typically range from 10 to 15 years, with the most common initial term being 10 years. Certain newer leases executed since 2020 reflect somewhat shorter initial terms of 7 to 10 years, which is consistent with the broader trend in the retail real estate industry toward shorter lease commitments in the post-pandemic environment. A small number of leases, primarily for freestanding locations in strong-performing markets, have initial terms of 15 years.
Lease Expiration Schedule. The following table summarizes the lease expiration profile across the 207 leased retail locations (including outlet stores) based on the current lease expiration dates reflected in the Data Room materials, assuming no exercise of renewal options:
Concentration Risk — 2026–2028 Window. As the table above illustrates, a notable concentration of lease expirations falls within the 2026–2028 timeframe, with 62 leases (approximately 29.9% of the leased retail portfolio) expiring during this three-year window. The aggregate annual base rent for these 62 locations is approximately $37.2 million. This concentration creates a significant renewal negotiation burden for Pennfield's real estate team in the first three years following the Anticipated Closing Date. We note that many of these leases have renewal options available, which mitigates the risk of involuntary store closures but may require negotiation of renewal rental rates at prevailing market conditions.
Average Remaining Lease Term. Across the 207 leased retail locations, the weighted average remaining lease term (by base rent) is approximately 5.8 years as of the date of this memorandum. The unweighted average remaining term is approximately 5.4 years. These figures are within the range that would be expected for a mature specialty retail portfolio of this size, though we note that the weighted average is modestly shorter than the industry average for investment-grade retail tenants, reflecting the 2026–2028 concentration described above.
Holdover and Month-to-Month Leases. We have identified 6 retail locations currently operating on a holdover or month-to-month basis, where the original lease term has expired and no renewal option has been exercised. Under the applicable holdover provisions, these locations typically operate at 125% to 150% of the base rent applicable during the final year of the expired term. These holdover situations create operational uncertainty and should be addressed in coordination with the Company's real estate team. The 6 holdover locations are identified on the Master Lease Schedule attached as Appendix A. We have included these 6 locations in the 2025 expiration category for purposes of the table above.
B. Renewal Options
Renewal Option Structures. The standard renewal option structure across the Pennfield retail lease portfolio consists of two to three successive five-year renewal options following the expiration of the initial lease term. This structure is consistent with industry norms for specialty retail tenants. The specific renewal option structure varies by lease, with the following general distribution:
• Leases with three five-year renewal options: approximately 48 leases (23%)
• Leases with two five-year renewal options: approximately 121 leases (58%)
• Leases with one five-year renewal option: approximately 26 leases (13%)
• Leases with no renewal options remaining (options exhausted or original lease contained none): approximately 12 leases (6%)
Renewal Options Available vs. Exhausted. Of the 207 leased retail locations, approximately 195 leases (94%) have at least one renewal option remaining and available for exercise. The 12 leases with no renewal options remaining are concentrated among the Company's oldest store locations, which have been in continuous operation for 15 to 25 years. These 12 locations will require new lease negotiations or relocation planning as their current terms expire.
Notice Requirements. The notice requirements for exercising renewal options vary across the portfolio but generally fall within a range of 6 to 12 months prior to the expiration of the then-current term. The most common notice period is 9 months. It is critical that the Sponsor's post-closing asset management team implement a comprehensive lease calendar and tickler system to ensure that renewal option deadlines are not inadvertently missed. We have identified the renewal option exercise deadlines for all leases expiring through December 31, 2026 and have included this information on the Master Lease Schedule in Appendix A.
Near-Term Renewal Deadlines. Given the Anticipated Closing Date of June 30, 2025, we have specifically identified 14 leases where renewal option exercise deadlines fall within the 12 months following the Anticipated Closing Date (i.e., by June 30, 2026). These 14 locations require prompt attention, and the deal team should consider whether any of these renewal decisions should be coordinated with the Company's real estate team prior to closing or reserved for post-closing determination by the Sponsor. Additionally, 3 leases have renewal option exercise deadlines that fall prior to the Anticipated Closing Date (one on April 15, 2025, one on May 1, 2025, and one on June 15, 2025). We recommend that the deal team discuss with the Company whether these renewal options should be exercised prior to closing and, if so, whether the exercise should be coordinated with or approved by the Sponsor.
Renewal Rental Rate Mechanisms. The mechanisms for determining the rental rate during renewal terms vary across the portfolio as follows:
• Fair Market Value (FMV) Resets: Approximately 96 leases (46%) provide for the renewal term rental rate to be set at the then-prevailing fair market rental rate for comparable space in the applicable market. FMV determinations typically involve a negotiation period followed by an appraisal process if the parties cannot agree.
• CPI Escalators: Approximately 52 leases (25%) provide for the renewal term rental rate to be determined by applying a cumulative Consumer Price Index adjustment to the base rent payable during the final year of the expiring term, typically subject to a floor (often 2% per annum cumulative) and a cap (often 4% per annum cumulative).
• Fixed Percentage Increases: Approximately 38 leases (18%) provide for a fixed percentage increase in base rent upon each renewal, typically in the range of 8% to 15% of the rent payable during the final year of the expiring term.
• Negotiated or Unspecified: Approximately 21 leases (10%) provide for the renewal term rental rate to be "mutually agreed" by the parties or are silent on the renewal rental rate mechanism, which may require negotiation or, in certain cases, may be interpreted under applicable state law.
C. Rental Rate Summary
Base Rental Rates. Base rental rates across the Pennfield retail lease portfolio vary significantly depending on property type, geographic market, store size, and the age of the lease. The following summarizes the range and distribution of base rental rates:
• Inline Mall Locations: Base rental rates range from approximately $28.00 to $72.00 per square foot per annum, with a weighted average of approximately $48.50 per square foot. The highest rates are found in Class A malls in major metropolitan markets (e.g., Tysons Corner, VA; King of Prussia, PA; South Coast Plaza, CA), while the lower end of the range corresponds to B-grade malls in secondary markets.
• Freestanding Retail Locations: Base rental rates range from approximately $16.00 to $38.00 per square foot per annum, with a weighted average of approximately $24.75 per square foot. Freestanding locations generally command lower per-square-foot rental rates but involve larger premises, resulting in comparable or higher absolute monthly rent payments.
• Lifestyle Center / Open-Air Locations: Base rental rates range from approximately $24.00 to $56.00 per square foot per annum, with a weighted average of approximately $36.20 per square foot.
• Outlet Locations: Base rental rates range from approximately $18.00 to $42.00 per square foot per annum, with a weighted average of approximately $27.80 per square foot.
The aggregate annual base rent across the 207 leased retail locations is approximately $129.2 million based on the current rent roll.
Percentage Rent Provisions. Percentage rent provisions are common in the Pennfield retail lease portfolio, particularly in inline mall and outlet locations. Approximately 112 leases (54% of the leased retail portfolio) contain percentage rent provisions requiring the tenant to pay a percentage of gross sales in excess of a specified annual sales breakpoint as additional rent. The typical percentage rent rate ranges from 5% to 8% of gross sales in excess of the breakpoint, with breakpoints generally set at or above the level at which base rent represents approximately 6% to 10% of gross sales. Based on FY 2024 store performance data provided in the Data Room, approximately 34 stores exceeded their percentage rent breakpoints during FY 2024, resulting in aggregate percentage rent payments of approximately $4.7 million for the fiscal year.
Common Area Maintenance, Taxes, and Insurance. The lease structures across the portfolio include a mix of triple-net (NNN), modified gross, and full-service gross arrangements, though the overwhelming majority of the retail store leases are structured as either NNN or modified gross:
• Triple-Net (NNN) Leases: Approximately 134 leases (65%) are structured on a triple-net basis, under which Pennfield is responsible for its pro rata share of all common area maintenance costs, real estate taxes, and property insurance, in addition to base rent. This structure is standard for freestanding and many lifestyle center locations.
• Modified Gross Leases: Approximately 63 leases (30%) are structured on a modified gross basis, under which Pennfield pays base rent plus its pro rata share of specified operating expense categories (most commonly real estate taxes and insurance, with CAM charges either included in base rent or subject to a base-year stop). This structure is more common in inline mall locations where the landlord maintains operational control of common areas.
• Full-Service Gross Leases: Approximately 10 leases (5%) are structured on a full-service gross basis with operating expense stops, under which Pennfield pays a single base rent amount that includes most operating expenses, with pass-throughs only for increases in operating expenses above a specified base year.
Aggregate pass-through charges (CAM, taxes, and insurance) across the leased retail portfolio were approximately $48.6 million for FY 2024.
Escalation Provisions. Base rent escalation provisions vary across the portfolio. The most common escalation mechanisms include annual fixed increases (typically 2% to 3% per annum, found in approximately 55% of leases), CPI-based adjustments (typically annual, found in approximately 25% of leases), and periodic fair market value resets (typically every five years, found in approximately 12% of leases). Approximately 8% of leases have flat rental rates with no escalation during the current term.
D. Permitted Use and Exclusivity Provisions
Permitted Use Clauses. The permitted use clauses in Pennfield's retail store leases generally authorize the use of the premises for the retail sale of outdoor, sporting goods, adventure, and lifestyle apparel, footwear, equipment, and related accessories. The precise language of the permitted use clause varies by lease, with some leases incorporating broad language permitting any lawful retail use and others containing more narrowly defined use restrictions that limit the Company to the specific product categories described above. We have not identified any material concerns with permitted use restrictions that would limit Pennfield's ability to operate its stores in the ordinary course of business; however, to the extent the Sponsor contemplates any material changes to the Company's product mix or retail concept post-closing, the permitted use clauses should be reviewed on a location-by-location basis.
Radius Restrictions. Approximately 89 leases (43% of the leased retail portfolio) contain radius restriction provisions that limit Pennfield's ability to open a competing store within a specified radius of the leased premises, typically ranging from 3 to 10 miles depending on the market and property type. Violations of radius restrictions can result in penalties including the inclusion of sales from the competing store in the percentage rent calculation for the restricted location. The Sponsor should be aware of these radius restrictions in connection with any post-closing store expansion plans.
Exclusive Use Provisions. Approximately 62 leases (30% of the leased retail portfolio) contain exclusive use provisions that benefit Pennfield by restricting the landlord from leasing space in the same shopping center or development to tenants engaged in the retail sale of outdoor, sporting goods, or adventure apparel and equipment that would directly compete with Pennfield's business. These exclusivity provisions vary in scope and specificity; some provide broad exclusivity for "outdoor and sporting goods" retail, while others are more narrowly tailored to specific product categories. Exclusivity provisions are most commonly found in inline mall and lifestyle center locations where co-tenant competition is a significant concern.
Restrictive Covenants. A small number of leases (approximately 11) contain restrictive covenants or non-compete provisions imposed by the landlord that restrict Pennfield's operations in ways beyond the standard permitted use clause, such as limitations on e-commerce fulfillment from the premises, restrictions on exterior signage or display, or limitations on the conduct of clearance or liquidation sales. We have flagged these provisions on the Master Lease Schedule in Appendix A for the deal team's reference.
V. Outlet Store Leases
Pennfield operates 22 outlet store locations across the United States, all of which are leased. The outlet locations represent an important component of the Company's multi-channel retail strategy, providing a channel for clearance and excess inventory disposition as well as outlet-exclusive product lines.
Outlet Mall Operators/Landlords. The 22 outlet locations are situated in outlet malls operated by the following major national outlet developers:
• Simon Premium Outlets (a division of Northpoint Industries): 11 locations
• Beaumont Holdings: 7 locations
• Craig Realty Group: 2 locations
• Granite Harbor Enterprises: 1 location
• Other/Independent operators: 1 location
Lease Terms. Outlet store leases in the Pennfield portfolio generally have shorter initial terms than the Company's traditional retail store leases. Initial terms for outlet leases range from 5 to 10 years, with the most common initial term being 7 years. The shorter terms reflect the outlet real estate market's preference for more frequent lease rollover and the ability of outlet operators to adjust tenant mix more dynamically. Renewal options for outlet leases typically consist of one or two successive five-year renewal terms.
Outlet-Specific Provisions. Outlet store leases contain several provisions that are specific to the outlet retail format and differ from the Company's traditional retail store leases:
• Sales Reporting Requirements. All 22 outlet leases require Pennfield to provide monthly or quarterly reports of gross sales to the landlord. These sales reports are used to calculate percentage rent (where applicable), monitor co-tenancy compliance, and support the outlet operator's overall leasing and marketing efforts. Failure to provide timely and accurate sales reports can result in default notices and, in certain leases, an estimate of sales by the landlord that may be unfavorable to the tenant.
• Operating Covenants. Outlet leases typically contain more stringent operating covenants than traditional retail leases, requiring the tenant to remain open and operating during all hours that the outlet mall is open to the public. Approximately 19 of the 22 outlet leases contain continuous operation requirements, which may limit Pennfield's flexibility to reduce operating hours or temporarily close an underperforming outlet location without triggering a lease default.
• Percentage Rent. Percentage rent provisions are universal in the outlet lease portfolio. All 22 outlet leases require percentage rent payments based on gross sales, with breakpoints that are generally lower than those found in the Company's traditional retail leases. Aggregate percentage rent paid on outlet leases was approximately $1.8 million for FY 2024.
• Marketing Fund Contributions. Approximately 18 of the 22 outlet leases require Pennfield to contribute to an outlet center marketing and advertising fund, typically calculated as a percentage of base rent (ranging from 1% to 3%) or as a fixed annual contribution.
Co-Tenancy Provisions. Co-tenancy clauses are prevalent in the outlet lease portfolio and are discussed in detail in Section VIII below. Approximately 17 of the 22 outlet leases contain some form of co-tenancy provision.
Change of Control Provisions. Approximately 14 of the 22 outlet leases (64%) contain change of control provisions. Given the concentration of outlet leases with only two major landlords (Simon Premium Outlets and Tanger), the consent solicitation process for outlet leases may benefit from a consolidated approach through each landlord's national leasing office. This strategy is discussed further in Section VII below.
VI. Distribution and Warehouse Facilities
Pennfield operates four regional distribution and warehouse facilities that support its retail store network and e-commerce fulfillment operations. The following summarizes the key information for each facility based on the Data Room materials:
Facility 1 — Gastonia, North Carolina (Owned)
The Company's primary distribution center is located at 2200 Industrial Park Drive, Gastonia, North Carolina 28052. This facility is approximately 385,000 square feet and serves as the main hub for inventory receipt, storage, and distribution to retail stores across the Southeast and Mid-Atlantic regions. The property is owned in fee simple by Pennfield Distribution, Inc., a wholly owned subsidiary of Pennfield Holdings, Inc. Title to the property is held subject to a first-priority mortgage in favor of Greaves Bancorp as administrative agent under Pennfield's existing senior secured credit facility. An environmental Phase I assessment was conducted on this property in 2021 and did not identify any recognized environmental conditions, as noted in the Data Room. A lien search confirmed the Greaves Capital Markets mortgage and no other liens of record, subject to customary title exceptions.
Facility 2 — Reno, Nevada (Leased)
The Company operates a Western regional distribution center at 5400 Logistics Way, Reno, Nevada 89506. This facility is approximately 210,000 square feet and supports distribution to retail stores in California, Oregon, Washington, Colorado, and other Western states. The facility is leased from Reno Industrial Partners LLC pursuant to a lease dated September 1, 2018, with an initial term of 12 years expiring on August 31, 2030. Annual base rent is approximately $8.50 per square foot ($1,785,000 per annum), with annual escalations of 2.5%. The lease provides for one five-year renewal option at fair market value. The lease contains a change of control notice provision (notice only, no consent required).
Facility 3 — Dallas-Fort Worth, Texas (Leased)
The Company operates a Southern and Central regional distribution center at 8100 Commerce Parkway, Fort Worth, Texas 76177. This facility is approximately 175,000 square feet and supports distribution to retail stores in Texas, the Gulf states, and the Midwest. The facility is leased from Alliance Gateway Industrial LP pursuant to a lease dated March 15, 2020, with an initial term of 10 years expiring on March 14, 2030. Annual base rent is approximately $7.75 per square foot ($1,356,250 per annum), with annual escalations of 3.0%. The lease provides for two successive five-year renewal options at 95% of fair market value (subject to a floor equal to the rent in the final year of the prior term). The lease contains a change of control provision requiring landlord consent, which consent shall not be unreasonably withheld.
Facility 4 — Lehigh Valley, Pennsylvania (Owned)
The Company operates a Northeast regional distribution center and e-commerce fulfillment center at 1450 Distribution Boulevard, Easton, Pennsylvania 18045. This facility is approximately 260,000 square feet and was constructed in 2017 to support the Company's growing e-commerce operations as well as retail store distribution in the Northeast and Mid-Atlantic regions. The property is owned in fee simple by Pennfield Distribution, Inc. Title is held subject to a first-priority mortgage in favor of Greaves Bancorp under the same senior secured credit facility. The Easton facility is also subject to a local tax abatement agreement with Forks Township, Northampton County, which provides for a phased-in real estate tax assessment through 2027. A Phase I environmental assessment conducted in 2017 prior to construction did not identify any recognized environmental conditions.
Proximity to Logistics Corridors. Each of the four distribution facilities is strategically located along major logistics corridors and interstate highway networks:
• Gastonia, NC: Interstate 85 corridor, proximate to Charlotte and the Southeast distribution network
• Reno, NV: Interstate 80 corridor, serving the Western U.S. with proximity to the California and Pacific Northwest markets
• Fort Worth, TX: Alliance Texas logistics hub along Interstate 35W, serving the Southern and Central U.S.
• Easton, PA: Lehigh Valley logistics corridor along Interstates 78 and 22, proximate to the New York metropolitan area and the Northeast distribution network
Environmental Considerations. The distribution and warehouse facilities present the most significant environmental diligence considerations within the Pennfield real estate portfolio due to the nature of warehouse and logistics operations (including fuel storage, vehicle maintenance, and potential historical industrial use of certain sites). A separate Environmental Diligence Summary memorandum is being prepared and is anticipated to be circulated on or about March 26, 2025. That memorandum will address Phase I and Phase II environmental assessment results, known or suspected contamination issues, compliance with applicable environmental regulations, and any environmental remediation obligations.
VII. Change of Control Provisions
This section addresses the change of control provisions found in the Pennfield lease portfolio. This is a critical issue for the Transaction, as the Merger will constitute a change of control under numerous lease agreements, and the failure to obtain required consents could give rise to landlord remedies, including in certain cases lease termination or recapture rights.
Transaction Structure and Change of Control. The Transaction is structured as a reverse triangular merger in which Merger Sub will merge with and into Pennfield, with Pennfield surviving as the surviving corporation. Following the Merger, 100% of Pennfield's outstanding common stock will be owned by HPE Fund IV, and Pennfield's existing public shareholders will have received cash consideration. While the reverse triangular merger structure preserves the identity of the tenant entity (Pennfield and its subsidiaries remain the named tenants under the leases), the change in the ultimate equity ownership of Pennfield from dispersed public shareholders to HPE Fund IV constitutes a change of control under the definitions found in most of the leases reviewed. The typical change of control definition captures any transaction in which the existing controlling equity holders of the tenant (or, in some cases, any person or group acquiring a majority interest) undergo a change, regardless of whether the tenant entity itself is assigned or transferred. Accordingly, the fact that Pennfield survives as the named tenant does not, by itself, avoid the triggering of change of control provisions.
Categorization of Change of Control Provisions. We have categorized the change of control provisions found across the lease portfolio into the following five categories:
1. Consent Required. Leases that explicitly require the landlord's prior written consent before a change of control of the tenant may be effectuated. The reverse triangular merger resulting in Pennfield becoming a wholly owned subsidiary of HPE Fund IV triggers the consent requirement under these leases. The failure to obtain consent prior to the change of control typically constitutes an event of default under the lease, entitling the landlord to exercise its remedies, which may include lease termination.
2. Notice Only. Leases that require the tenant to provide written notice to the landlord of a change of control but do not require the landlord's consent. Under these leases, Pennfield must notify the landlord of the Merger either prior to or within a specified period following the closing, but the landlord has no approval right and cannot block the transaction.
3. No Restriction. Leases that are silent on the issue of change of control or that contain express carve-outs exempting mergers, consolidations, or acquisitions from the change of control provisions. Certain leases also contain carve-outs for transfers to affiliates or in connection with a sale of all or substantially all of the assets of the tenant, which may or may not apply to the Merger depending on the specific language of the carve-out.
4. Termination Right. Leases that grant the landlord an affirmative right to terminate the lease upon the occurrence of a change of control. These provisions are the most adverse to the Transaction, as they give the landlord the unilateral ability to reclaim the premises. In some cases, the landlord's termination right is conditioned on the failure of the new controlling party to meet specified financial or creditworthiness standards; in other cases, the termination right is unconditional.
5. Recapture Right. Leases that grant the landlord a right to recapture the premises (i.e., to terminate the lease and retake possession of the leased space) upon the occurrence of a change of control. Recapture rights are functionally similar to termination rights but are typically framed as the landlord's election to step into the shoes of the tenant or to re-let the premises to a third party. Certain recapture provisions require the landlord to exercise the recapture right within a specified period (often 30 to 60 days) after receiving notice of the change of control, failing which the right lapses.
Quantitative Summary. The following table summarizes the categorization of change of control provisions across the 209 leased retail locations (including outlet stores), the headquarters lease, and the 2 leased distribution facilities (212 leases total):
In aggregate, approximately 118 leases (55.7% of the portfolio) contain some form of change of control provision (consent required, termination right, or recapture right, excluding notice-only leases and leases with no restriction). Including notice-only leases, the total number of leases with any change of control-related provision is approximately 142 (67.0% of the portfolio). An additional 24 leases contain ambiguous language that may or may not constitute a change of control provision depending on the interpretation of the applicable lease terms under governing state law; our analysis of these leases is ongoing.
High-Priority Consent Locations. We have identified a subset of leases that represent the highest priority for the consent solicitation process based on a combination of (a) the nature of the change of control provision (termination right or recapture right), (b) the annual rent commitment, and (c) the revenue contribution of the location. We recommend that the deal team focus particular attention on the following categories:
• Leases with Termination Rights (11 locations): These 11 leases grant the landlord the most powerful remedy — the ability to terminate the lease outright upon a change of control. The aggregate annual base rent at these locations is approximately $8.3 million, and these locations generated estimated aggregate revenue of approximately $73.5 million in FY 2024. The loss of any of these locations could have a material impact on the Company's operations and financial performance.
• Leases with Recapture Rights (5 locations): These 5 leases present a risk similar to the termination right category, with an aggregate annual base rent of approximately $3.9 million and estimated FY 2024 revenue of approximately $31.2 million.
• High-Revenue Consent Required Locations (top 20 by revenue): Among the 78 leases requiring landlord consent, we have identified the top 20 locations by FY 2024 revenue. These 20 locations represent approximately $27.8 million in annual base rent and approximately $198 million in FY 2024 revenue. While the risk at these locations is technically limited to a default (rather than a landlord-initiated termination), the potential consequences of an uncured default — including landlord-initiated termination proceedings — make it important to obtain consent at these locations prior to closing.
Landlord Consent Fees. Approximately 18 of the 78 consent-required leases provide that the landlord is entitled to receive a consent processing fee or administrative fee in connection with the review and approval of a change of control. These fees typically range from $2,500 to $15,000 per lease, with an aggregate estimated cost of approximately $125,000 to $175,000. In addition, 4 leases contain profit-sharing or "transfer premium" provisions that entitle the landlord to receive a percentage (typically 25% to 50%) of any profit or consideration received by the tenant in connection with a change of control or assignment. The applicability of these profit-sharing provisions to a change of control in the merger context (as opposed to a direct lease assignment) is a question of lease interpretation and governing state law, and we are evaluating these provisions on a lease-by-lease basis.
Consent Solicitation Strategy. We recommend the following approach to the landlord consent solicitation process:
1. Pre-Closing Outreach. The Company should commence landlord outreach at least 60 to 90 days prior to the Anticipated Closing Date (i.e., by early to mid-April 2025) for all leases requiring consent or for which a termination or recapture right exists. The outreach should be coordinated through Pennfield's real estate team under the direction of Patricia Okafor (General Counsel) with the assistance of outside counsel.
2. Form of Consent Letter. Calderwood & Harkness LLP should prepare a standardized form of landlord consent letter that can be customized for each lease. The consent letter should include a brief description of the Merger, confirmation that the surviving entity (Pennfield) will continue as the tenant, and an acknowledgment that the Merger does not constitute an assignment of the lease. The consent letter should also include a request for a confirmation that the landlord waives any termination, recapture, or other remedial right arising from the change of control.
3. Prioritization. The consent solicitation should be prioritized as follows: (a) leases with termination or recapture rights, (b) high-revenue consent-required locations, (c) headquarters and distribution facility leases, and (d) all remaining consent-required leases.
4. Fallback Provisions. For leases where consent is not obtained prior to closing, the Agreement and Plan of Merger should include appropriate provisions allocating the risk between HPE Fund IV and the Pennfield shareholders. We discuss this further below.
Interaction with the Agreement and Plan of Merger. The closing conditions in the Agreement and Plan of Merger (the "Merger Agreement") should address the lease consent issue. Based on preliminary discussions with the deal team, we understand that the Merger Agreement is expected to include a closing condition requiring receipt of consents under "material" third-party agreements, the definition of which is currently under negotiation. We recommend that the following approach be considered:
• The Merger Agreement should include a schedule identifying specific leases for which consent is a condition to closing (the "Required Consent Leases"). At a minimum, this schedule should include the 11 leases with termination rights and the 5 leases with recapture rights, as well as the headquarters lease.
• For leases requiring consent but not identified as Required Consent Leases, the Merger Agreement should include representations and warranties from Pennfield regarding the accuracy and completeness of the lease portfolio disclosure, the status of landlord relationships, and any known defaults or disputes.
• The indemnification provisions of the Merger Agreement (subject to the negotiated 12% of equity value indemnification cap of $117,600,000) should provide the Sponsor with recourse for losses arising from the failure to obtain lease consents to the extent not otherwise excluded by the terms of the indemnification provisions.
Cross-Reference. A separate, comprehensive Change of Control Analysis memorandum covering all Pennfield agreements with change of control provisions — including the senior secured credit facility, executive employment agreements, equity incentive plans, customer and vendor contracts, and leases — is being prepared by the deal team and is anticipated to be circulated on March 26, 2025. The lease-specific analysis in this memorandum should be read in conjunction with that separate memorandum to obtain a complete picture of the change of control consent landscape for the Transaction.
VIII. Co-Tenancy Clauses
Overview
Co-tenancy provisions are a significant feature of the Pennfield lease portfolio, particularly with respect to inline mall and outlet mall locations. Co-tenancy clauses grant Pennfield certain protective rights — including rent reduction and, in some cases, lease termination rights — in the event that specified anchor tenants or a minimum percentage of co-tenants at a shopping center are not open and operating. These provisions are designed to protect the tenant against the loss of foot traffic and customer draw that results from the departure of key anchors or a decline in overall occupancy at a shopping center.
Given the ongoing restructuring activity in the U.S. retail sector, including recent and anticipated store closures by several major department store and anchor retail chains, co-tenancy provisions in the Pennfield lease portfolio present both a risk (to the extent they reflect underlying weakness in certain retail locations) and an opportunity (to the extent they provide Pennfield with leverage to renegotiate lease terms or exit underperforming locations).
Prevalence in the Portfolio
We have identified co-tenancy provisions in approximately 96 of the 207 leased retail locations (approximately 46% of the leased portfolio). The prevalence of co-tenancy provisions varies significantly by property type:
As the table illustrates, co-tenancy provisions are most prevalent in inline mall locations (82%) and outlet locations (77%), where the success of an individual tenant is most closely tied to the presence and drawing power of anchor tenants and the overall tenant mix of the shopping center.
Types of Co-Tenancy Provisions
The co-tenancy provisions in the Pennfield lease portfolio fall into two primary categories:
Opening Co-Tenancy. Opening co-tenancy provisions establish conditions that must be met before the tenant is required to open for business at a new location. Approximately 28 of the 96 leases with co-tenancy provisions include opening co-tenancy conditions. These typically require that (a) one or more specified anchor tenants be open and operating at the shopping center, and (b) a minimum percentage of the gross leasable area of the shopping center (typically 60% to 75%) be leased and occupied. If the opening co-tenancy conditions are not satisfied by a specified date, the tenant may be entitled to delay its opening, pay reduced rent (often percentage rent only) until the conditions are met, or terminate the lease entirely. Because all of Pennfield's existing stores are currently open and operating, opening co-tenancy provisions are primarily relevant in the context of any new leases that may be executed post-closing but are included here for completeness.
Operating Co-Tenancy. Operating co-tenancy provisions impose ongoing requirements for the continued presence and operation of anchor tenants and/or a minimum level of overall occupancy at the shopping center throughout the lease term. Approximately 91 of the 96 leases with co-tenancy provisions include operating co-tenancy requirements (some leases contain both opening and operating co-tenancy provisions). The typical operating co-tenancy provision requires one or more of the following:
• Named Anchor Requirement: One or more specifically identified anchor tenants (by name) must be open and operating at the shopping center. Common named anchors in the Pennfield portfolio include Macy's, Tarrant Corporation, Aldermere Industries, REI, Target, and major department store chains. If a named anchor closes, the co-tenancy condition fails.
• Substitute Anchor Provision: Certain leases permit the landlord to satisfy the anchor requirement by substituting a replacement tenant of comparable quality and drawing power, typically subject to the tenant's reasonable approval or measured against an objective standard (e.g., a nationally recognized retail chain operating in a minimum number of locations).
• Minimum Occupancy Threshold: The shopping center must maintain a minimum level of occupancy, typically measured as a percentage of gross leasable area ("GLA") that is leased, occupied, and open for business. Minimum occupancy thresholds typically range from 55% to 75% of GLA.
Remedies Available to Pennfield
When an operating co-tenancy condition is not met, the Pennfield lease portfolio provides for the following remedies:
• Reduced Rent (Percentage Rent Only): The most common remedy, found in approximately 72 of the 91 leases with operating co-tenancy provisions, permits Pennfield to pay reduced rent — typically percentage rent based on gross sales only, without any base rent obligation — for the duration of the co-tenancy failure. This remedy provides significant cost savings at underperforming locations where anchor departures have reduced foot traffic.
• Fixed Rent Reduction: Approximately 14 leases provide for a fixed reduction in base rent (typically 25% to 50%) during the period of the co-tenancy failure, rather than a switch to percentage rent only.
• Termination Right: Approximately 38 leases grant Pennfield the right to terminate the lease if the co-tenancy failure continues for a specified period (typically 12 to 24 months) without being cured by the landlord. This termination right is a powerful tool for exiting underperforming locations but must be exercised within a specified notice period or it may lapse.
Current Co-Tenancy Status
Based on our review of the Data Room materials, including store performance reports, Company-prepared co-tenancy tracking schedules, and recent landlord correspondence, we have identified the following categories of current co-tenancy status:
• Active Co-Tenancy Failures (Currently Triggered): We have identified 9 locations where co-tenancy conditions are currently not being met as a result of the closure or departure of a named anchor tenant or a decline in occupancy below the minimum threshold. At 6 of these 9 locations, Pennfield is currently exercising its right to pay reduced rent (percentage rent only or a fixed rent reduction). The aggregate base rent that Pennfield is avoiding or reducing at these 6 locations is approximately $3.1 million per annum. At the remaining 3 locations, the co-tenancy failure has been recently identified, and the Company is in the process of providing notice to the landlord and implementing the applicable remedy.
• At-Risk Locations: We have identified an additional 7 locations where co-tenancy conditions are at material risk of failure based on publicly available information regarding anchor tenant financial distress, announced store closures, or declining occupancy levels. These at-risk locations have aggregate annual base rent of approximately $4.4 million.
• Compliant Locations: The remaining 80 locations with co-tenancy provisions are currently in compliance, and we have not identified any imminent risk of co-tenancy failure based on available information.
Financial Exposure Analysis
The aggregate annual base rent across all 96 locations with co-tenancy provisions is approximately $62.8 million. The table below summarizes the financial exposure by co-tenancy status:
If all currently at-risk locations experience co-tenancy failures and Pennfield exercises available rent reduction remedies, the Company's aggregate annual rent savings could be approximately $5.6 million. However, this must be weighed against the potential loss of revenue at these locations due to reduced foot traffic and the broader operational implications of op

MEMORANDUM

MATTER NO.: 1003-00004

Record

Parties

Dates

Amounts