The sale-leaseback transaction, almost inactive in 2020, is back in vogue as investors seek yield in the pandemic-riddled landscape, while cash-strapped tenants seek capital injections.
Often times, parties with these two converging interests find a solution in sale-leaseback transactions, or in transactions where companies sell properties to commercial real estate investors and then lease the same spaces as tenants.
“I would say the current environment is incredibly good for sale and leaseback right now,” said Scott Merkle, Managing Partner of SLB Capital Advisors. “I would go so far as to say that the market is really on fire.”
Sale-leaseback activity has resumed in recent months after declining during the coronavirus pandemic. Type of deal bottomed out in Q3 2020, then rose again with data from SLB Capital showing there was $ 3.1 billion in sale-leaseback activity nationwide in the fourth quarter of 2020, compared to just under $ 2 billion in the third quarter and $ 2.7 billion in Q2 2020.
The deal flow has a way to revert to previous peaks for dollars spent – data from SLB Capital shows $ 11.1 billion in sale and leaseback transactions in Q4 2019. But those numbers have been skewed by high prices and large deals at the end of 2019 and into 2021. came out strong for the number of deals.
SLB Capital reported 160 sale and leaseback transactions completed across the country in the first quarter of this year, up from just over 150 in the same quarter of 2020 and around 145 in the first quarter of 2019.
Experts say this is likely just the start of a wave of deals, especially since they can be beneficial to both the buyer and the seller.
Business owners may consider disposals to take debt off their balance sheets in tough economies, in this case, especially if they have been hit hard by the pandemic, said Dallas real estate attorney Camisha Simmons. , Managing Member of Simmons Legal PLLC.
Over the past year, several large DFW retailers, including Tuesday Morning and Havertys, have unloaded commercial real estate in sale and leaseback transactions. In both cases, the companies entered into divestitures after suffering substantial declines in traffic and sales in the early days of the pandemic.
“When a business is going through a liquidity crisis or has cash flow issues, it will often try to restructure its balance sheet to monetize the assets it may have in order to increase its cash flow to use in operations or increase the company’s profits ”. she said.
Businesses are more likely to consider selling and renting their properties in low interest rate environments like today with continued cap rate compression because they can get competitive rates, Nicolas said. Elwood, Edge Realty Partners’ Senior Capital Markets Partner.
It’s all about price and value.
“More and more owners / users [are] bring their independent facility to market to capture price appreciation, “said Henry S. Miller, Director of International Affairs, Angela Chen.” This is an ideal deal for 1031 buyers and stock market investors; generally, they are prepared to pay a small premium for a long-term lease as long as the company is in good financial condition. “
Merkle sees two main drivers of sale-leaseback activity in today’s market: a sharp divergence in a company’s value from the appreciation of its underlying property, and an increase in merger and merger activity. acquisition, which tends to stimulate disposals.
“If you look at the wide range of mid-market firms, there is always a delta between the value of the underlying firm and the actual multiple of real estate, so many firms and private equity firms seek to make assignments-assignments. to capture that value arbitrage, ”Merkle said.
Essentially, investors can get more bang for their buck on these trades than in the middle market sphere. Merkle is also observing the resurgence of net lease REITs, which were on the sidelines in 2020 but are actively deploying capital again, as they are typically major buyers of leaseback assets.
Newmark’s executive general manager Ken Hedrick worked in a team in March that completed a $ 109.4 million sale-leaseback transaction in Hawaii that involved a portfolio of 21 gas stations and convenience stores with assets located throughout the state.
Hedrick saw this type of transaction gain popularity at the end of 2020 and his demand bled until 2021, he said.
“From a tenant’s perspective, the benefits of using a sale-leaseback are to unlock 100% of the value of the real estate through a sale-leaseback transaction rather than carrying the property where they can be mined 70% or 65%, ”Hedrick mentioned.
And with interest rates remaining low and demand for essential single-tenant retail space (like grocery stores and drugstores) and industrial spaces still high, now is the perfect time for tenant-owners. to take advantage of these types of spaces, Hedrick added.
He said there was another benefit to businesses that is sometimes overlooked in these transactions: the business becomes a tenant but often has the ability to set its rents, negotiating prices based on the performance of individual units.
“They can set rents at or below the market while maximizing the value of real estate,” Hedrick said.
Courtesy of Weitzman
Cameron Mai of Weitzman
The sale-leaseback spaces that investors seek the most are core industrial assets and retail concepts, such as drive-thru quick-service restaurants, said Bill Pyle, senior vice president of Edge Realty . These concepts remain solvent and solid, but their owners may also wish to deploy new equity capital.
“The majority of them never close, or they may have closed their dining rooms and turned to delivery and drive-thru only,” Pyle said of the restaurants. “I think they’re trying to capitalize on demand and it’s hard, when you’re an owner and builder of your property and also an operator, to have that kind of capital tied up in one place rather than take it off, sign the lease and sell the real estate to redeploy the capital in opening more locations. “
Small retail tenants can also benefit from sale-leaseback in today’s environment where it is now much more difficult to access traditional lending solutions, said Cameron Mai, partner at Weitzman. And when partnered with an investor who trusts the underlying concept of the tenant, restaurants and retailers can simply cash in on their underlying real estate and continue to operate as a tenant.
“It’s also a risky business because restaurants are currently still uncertain,” Mai said. “There has to be both trust between the investor and the tenant. It’s not like they can bail out any tenant easily. You have to know each other.”
The positives are not just for sellers. Some of the main beneficiaries of disposals are investors who cannot create quality returns in today’s low-interest banking environment and retailers who need cash, Mai said.
“I work with an investor who told me he has money in the bank,” Mai said. “He’s losing money, so basically he asked me to help him look for a building for a restaurant.”
The investor has entered into an agreement where he will own a building leased to a solvent Tex-Mex concept which is considered a quality long-term tenant.
“We are seeing more and more of these concepts rolling out their units, especially those that performed very well during Covid and continued to perform very well, especially with the double drive-thrus additions for these restaurants,” a said Elwood. “You can keep raising the price, lowering the cap rate, or squeezing the cap rate, thereby encouraging more of these operators and groups to continue to sell-sell.”
This is especially true in the retail market, with essential products in high demand and market fundamentals that make selling and renting key spaces extremely valuable. And the success that businesses and investors can find in these transactions may encourage them to seek more sale-leaseback opportunities.
“Divestitures are just a great opportunity to free up your capital and you can invest that money in all aspects of your operation,” Elwood said. “You can pay off existing debt, fund more development, acquire more sites, acquire more existing assets. There is a lot you can do with that. I see there is a continued increase in the price. sale-leaseback. “