Opportunities Abound in Sale-Leaseback Market

By Matt Wrobleski, Associate Director, Stan Johnson Co.: Sale-leasebacks can create tremendous value for both buyers and sellers—as long as they're structured properly.

Matt WrobleskiWhile overall sale-leaseback transaction volume was down in the first half of 2016 compared to 2015, we continue to see meaningful activity in the sale-leaseback market. Last year was a very active year, with total sale-leaseback volume exceeding $9 billion, which represented roughly 15 percent of the total net lease market. The first half of 2016 saw sale-leaseback volume of just under $3 billion. Assuming the second half of 2016 stays on pace and follows historical trends, we anticipate sales volume to reach between $6 billion and $7 billion this year. Much of the decline from 2015 can be attributed to volatility in the overall macroeconomic environment, such as domestic monetary policy uncertainty, the divisive U.S. presidential election cycle, the Brexit referendum and continued economic malaise across the E.U., among other issues. These factors, coupled with historically low cap rates, have resulted in widening bid-ask spreads.

Despite the slowdown, we continue to see opportunities in the sale-leaseback space as companies like Stan Johnson Co. help other firms and private equity groups evaluate whether a sale-leaseback makes sense for their specific situation. For example, we are in the process of advising a client that recently decided to sell their family-owned business that included a portfolio of office, manufacturing and warehouse facilities. We were able to evaluate the real estate and determine the value attributed to the real estate as part of the acquisition was significantly undervalued. As a result, we helped the client carve out the real estate, lease the properties back to the acquirer under long-term net leases and monetize the properties in a separate transaction. This approach will result in a roughly 25 percent increase in proceeds for the client. Because the new tenant is a smaller, private credit, it also provides an attractive yield to net lease investors.

There are several motivating factors and benefits related to sale-leasebacks. Some include:

  • Raising capital to re-invest. Sale-leasebacks provide the capital needed to further a company’s overall objectives in its core business. They can also provide a source of acquisition funding for companies and private equity groups.
  • Improving financial health and flexibility. Proceeds from a sale-leaseback can be used to pay down existing debt or fund stock buybacks, which in turn can boost investment returns and improve balance-sheet metrics. Sale-leasebacks also provide more capital and flexibility than traditional real estate financing by offering 100 percent of the real estate value (rather than the typical 60 to 80 percent loan-to-value) with no restrictive debt covenants.
  • Preparing for a sale or restructuring. As illustrated above, monetizing real estate via a sale-leaseback separate from a business sale enables a company to maximize its returns and proceeds.
  • Reducing property ownership risk while continuing to occupy the property. Transferring ownership through a sale-leaseback limits the risk associated with real estate, including the risk of property casualty, functional obsolescence and unknown residual value.

Because of these benefits, sale-leasebacks can create tremendous value for both sellers and buyers if properly evaluated and structured.