SALE-LEASEBACK TRANSACTIONS MAY BE ONE OF THE
more promising corners of an otherwise cooling US commercial investment sales market. That’s because such vehicles are
seen as compelling fund-raising options for corporations at a
time when capital is harder to obtain.
“It’s one of the bright spots in the overall real estate market,” says Benjamin Butcher, CEO of Boston-based STAG
Capital Partners. “The opportunities in the sale-leaseback
arena are a reflection of the fact that capital is generally not
available.”
Some investors and brokers are so bullish on the market’s prospects that they predict these deals will continue to account for an
increasing share of overall investment sales volume.
“Sale-leasebacks have certainly ramped up and are continuing to do so as a percentage of overall transactions,” says
Kenneth Rudy, San Diego-based president and COO of Jones
Lang LaSalle Inc.’s capital markets group. With a flight to quality on the part of investors and debt financing much more
stringent today, “only the best deals with the best sponsors can
get done,” he adds. “And that happens to be a lot of corporate
sale-leasebacks.”
“The sale-leaseback with AG Net Lease provided KIK with valuable capital to support its aggressive growth initiatives,” CI
Capital Partners' president, Steve Lefkowitz, said when the deal
was announced.
Jeff Hughes, senior director of Tulsa, OK-based Stan Johnson
Co., also sees the credit crunch as a big reason why the sale-leaseback is increasingly popular today. “If corporate America had a lot
of other good borrowing options, they might pursue them. But
with many of those options being limited, a logical alternative is to
look at the balance sheet and manage it better,” he says. “CEOs will
always have financing needs. They are selling their real estate and
putting the cash into their core businesses, either to expand or to
reduce debt.”
There are other potential benefits as well. It will allow the company to fix its occupancy costs with a long-term lease as a hedge
against inflation. If the corporation sells the property, it no longer
has to deal with the prospect of an uncertain residual value in the
future. Will the asset be worth less in, say, 20 years because it’s now
functionally obsolete? That’s a risk the new property owner, not
the corporate occupier, will take. And in the near term, there’s the
possibility that the property market will head further south and
Brokers and investors predict more sale-leaseback activity in the
near future. The reason? Corporate sellers are motivated by the
ever-deepening credit crunch.
However, that big uptick in volume hasn’t happened yet.
Industrial, office and retail sale-leasebacks valued at $5 million
and greater totaled nearly $12 billion in 2006, a relatively small
slice of the more than $225 billion of overall sales activity for
those three property types, according to data from Real Capital
Analytics Inc. In 2007, approximately $14 billion of sale-leasebacks closed among a total volume of more than $326 billion.
And through August of this year, such deals came in at just $4.8
billion, reflecting a smaller percentage of the more than $61
billion of overall investment sales.
Still, there’s reason for the optimism. The year-old-and-counting credit crunch isn’t just affecting real estate financing. It has impacted the availability and pricing of all kinds of
borrowing for all kinds of corporations, particularly below-investment-grade companies, notes Gordon Whiting, net lease
group founder and senior portfolio manager at New York City-based Angelo, Gordon & Co. He says companies are capital
constrained and are looking for ways to put their owned real
estate to work.
New York City-based CI Capital Partners apparently saw the
value of such a strategy for KIK Custom Products, one of its
portfolio companies. This summer, Angelo, Gordon paid $30.4
million for six manufacturing and distribution properties, totaling slightly more than a million feet, located in California,
Florida, Tennessee, Virginia and Canada. The terms of the
leaseback were not disclosed, but the proceeds were earmarked
to reduce KIK’s indebtedness and to fund new capital projects.
values will decline even more.
“When there is a downturn, real estate owners become concerned about values deflating,” says Hughes. “They start thinking,
‘Did we miss out on the optimum time to sell? Maybe, but let’s sell
the asset while it’s retaining a reasonable amount of value.’ ”
Given the current climate, many brokers and investors are
anticipating deal opportunities and transaction volume will
begin gathering steam in the fourth quarter and into 2009.
“The weaker credits were diving into the sale-leaseback sector
for financing as early as the beginning of 2008,” says Butcher.
“Now the better credits are coming to the market, and you’ll see
that through the remainder this year.”
Whiting, too, believes there will be a marked increase in the
number of sale-leasebacks over the next few quarters.
“Certainly that will be the case in the non-investment-grade
sector,” he adds. “It will be interesting to see how many of
those get done.”
However, the pace of activity may be tempered by the latest
shake-ups in the financial system. The demise of Lehman
Brothers, the Fed’s rescue of Fannie Mae, Freddie Mac and AIG
and the Treasury’s announced intention to purchase as much
as $700 billion of non-performing mortgage-backed securities
hit Wall Street like a typhoon, rattling every corner of the capital markets. For borrowers of any kind, loans are likely to be
more difficult to come by until the financial sector achieves
some measure of stability, and the sale-leaseback arena is not
immune.
