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Sale-Leaseback Is Quickest Path to Debt Restructuring, Panel Says

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Sale-leaseback deals are offering property owners a stable, long-term solution to restructuring their debt when the lending window for refinancing mortgages has been slammed shut.

Increasingly, sellers are flocking to long-term net lease deals as the first step to cure their balance sheets, using the proceeds from the sale-leaseback to jump-start their debt restructuring, according to a panel of experts at the GlobeSt. Net Lease Spring 2023 conference in NYC this week.

“Sale-leasebacks are uniquely positioned to recapitalize existing mortgage yields,” said Bryan Huber, director of SAB Capital’s Sale-Leaseback Group.

For companies that still want to do deals but find the current cost of debt prohibitive, sale-leasebacks offer a less expensive, alternative form of borrowing that can close faster, the experts said. Sale-leasebacks deals also don’t require back-end balloon payments that often come with traditional financing.

Ross Prindle, global head of Kroll’s Real Estate Advisory Group, said buyers are using their resources, including financing and cash deals, to make sale-leaseback transactions more attractive to sellers by making it less expensive to execute the deals.

“The winners will be [the buyers] who do the best underwriting,” Prindle said.

 

“Eight is the new six in cap rates,” said David Grazioli, president of US Realty Advisors. “The cost to capitalize these rates is making a 20-year deal with 3% bumps look a lot better.”

According to Grazioli, an increasing number of sellers are opting for sale-leaseback deals because they have an urgent need to rehabilitate their cash flow and can’t wait for cap rates to compress again.

However, several experts on our panel warned that buyers must take care to make sure sellers actually are creditworthy before they ink sale-leaseback deals, which are extending to terms as long as 25 years in the current environment.

During Tuesday morning’s State of the Industry roundup session, Gary Baumann, CEO of NJ-based ARCTRUST Properties said the current credit climate is creating opportunities for sale-leaseback transactions.

“Where the credit climate is creating an advantage for all of us now is that it’s opening the window for the sale-leaseback market, larger than it’s been for a long time,” Baumann said. “Because of what’s happening with the banks, we’re seeing opportunities to acquire net leases that weren’t there before.”

On the opening night of our annual Spring Net Lease conference, W. P. Carey announced the largest sale-leaseback transaction in the NYC-based company’s 50-year history, a $468M sale-leaseback of a portfolio of four pharmaceutical R&D and manufacturing campuses in the Greater Toronto Area (GTA).

The portfolio represents the lion’s share of the global operations of Apotex Pharmaceutical Holdings, the largest generic drug manufacturer in Canada.

“This deal would have been a lot tougher to do when there were $200m to $300M CMBS deals available that could close simultaneously,” Gino Sabatini, head of investments at W.P. Carey, said during our sale-leaseback panel discussion.

According to Zachary Pasanen, managing director, investments at W. P. Carey, sellers are flocking to sale-leaseback for a less-expensive cost of capital and extra liquidity during tough times. A sale-leaseback offers a “naturally accretive” alternative funding source, Pasanen told GlobeSt. last month.

Holders of fungible, mission-critical real estate that are willing to sign a long-term lease with market or better rental increases built in can establish an underlying rate that lets them monetize those assets and is inside the going long-term borrowing rate, Pasanen said.

 

Source:  GlobeSt.

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Sale Leaseback Cap Rates Continue To Attract Investors

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While pricing has widened, early indications in 2023 point to a growing return to confidence for the sale leaseback market, according to a market update report from SLB Capital Advisors.

The report cites “strong credits and robust business models achieving successful processes with large interest from investors”, even in non-core markets, particularly industrial.

Due to the current interest rate environment and companies’ overall cost of capital, the SLB cap rates offer a more attractive cost-of-capital solution than ever, according to the report.

“SLB rates remain well inside of many companies’ WACCs and today, in more cases than not inside companies’ current cost of debt financing, making the sale leaseback an incredibly attractive financing alternative,” it stated.

There continues to be an attractive value arbitrage across various industry sectors driven by the delta between business and real estate multiples. The multiple implied by average SLB cap rates (i.e., 6.25% to 8.25%) implies a multiple of over 12x to 16x.

This compares favorably to general middle market transactions which averaged 6.9x LTM EBITDA for 2022. Attractive arbitrage opportunities are generally prevalent across many middle-market sub-sectors, the report said.

 

Source:  GlobeSt.

 

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Sale-Leaseback Market Comes In Hot To End 2022

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The sale-leaseback market continued to shatter records in November despite declining M&A activity and rising interest rates, according to new research from SLB Capital Advisors.

There were 237 discrete transactions in the third quarter nationally, pushing the period to the strongest quarterly performance in deal count since Q4 2019. Dollar volume was down, however, over Q2 figures as no large casino transactions closed.

The Northeast led sale-leaseback dollar volume with $1.6 billion in deals, while the South had the most number of transactions at 87, followed by the West region with 72. Industrial was a major driver for sale-leaseback activity and accounted for 58% of all such transactions in the quarter.

The majority of all sale-leaseback deals are in the $5 million to $25 million range. However, marquee deals for Q3 included Boston Properties’ acquisition of Biogen’s HQ for $592 million and Oak Street’s acquisition of a QVC/HSN distribution portfolio for $443 million.

SLB analysts say the fourth quarter of 2021 was the ”best pricing environment to date,” with pricing holding strong throughout most of the first part of the year. Cap rates began to widen in Q3 as buyer caution ramped up, however. But “while pricing has widened, strong credits and robust business models are still driving attractive pricing from investors, even in non-core markets, particularly in the industrial real estate sector,” SLB analysts say.

In addition, net lease REITs had a banner quarter, reporting $4.4 billion in acquisitions for Q3 2022, a figure in line with the previous four quarters. Net lease REITs also continued capital formation in Q3 with $1.9 billion in equity offerings.

“Rising interest rates may lead to less competition as levered buyers sit on the sidelines; some analysts expect the REITs to take share over the near term as many maintain a highly favorable cost of capital,” SLB Capital Advisors analysts say.

M&A activity also declined across the quarter, though SLB says “a massive amount of capital” estimated at $800 billion remains available for attractive acquisitions. M&A deal value for Q3 fell by 50% from the peak set in Q4 2021, and “with future earnings of companies discounted at higher rates, there is a significant impact to valuations across sectors,” SLB analysts say.  All told, 4,457 deals closed for a combined value of $490 billion, declines of 19% and 4%, respectively from Q2 to Q3.

 

Source:  GlobeSt.

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