Sale-leasebacks are making a comeback. After a drop in volume as a result of the pandemic, the financing tool in which a company sells its property to then lease it has seen renewed interest in the current capital environment. And it’s for good reason, says Gordon J. Whiting, managing director and head of net lease real estate at Angelo Gordon, as it offers strong benefits for all the parties surrounding a deal.
First, Whiting says, a sale-leaseback can let the seller unlock significant cash value while maintaining control and use of the property. “They have assets where their cash has been trapped for a long time and it’s hard for them to access the full value of that,” Whiting says. “They can go out and get a mortgage on the property, but they’re likely to get 60% to 75% loan-to-value.”
When the mortgage matures, there’s likely a large bullet payment due. A sale-leaseback requires rent that a company can immediately expense, and there is no payment at the end of the lease. The seller can also typically negotiate tenancy for a 20-year period with 20 years or more of extensions, to ensure access to critical facilities.
“A Bond with Upside” for the Buyer
The investor-buyer gets an income stream from the property. “A sale-leaseback is effectively a bond, but I look at it as a bond with an upside, because you typically have rental increases in these leases,” Whiting says. “If the assets are critical to ongoing operations, then the tenants are very sticky, and if the group doing the sale-leaseback did its underwriting at the right basis and rent-per-square-foot, that will provide additional downside protection to the investment.” There are also the tax benefits of depreciation on high cash-flow assets. “Obviously, they should check with their tax advisor, but they typically get that 20% pass-through deduction as well.”
Sponsors that own the sellers aren’t technically part of the transaction. However, they often also have good reasons to support a sale-leaseback arrangement. “It can be a less expensive way for them to finance the company,” Whiting notes. The funds from the sale replace equity they would otherwise have to supply. And combining a sale-leaseback with an acquisition of a portfolio company means only one set of transfer costs.
Whiting does suggest that the sponsor pay close attention to the sale-leaseback buyer. “Look at their access to capital and try to identify somebody who can be a long-term partner as the sponsor builds out the portfolio of companies they’re acquiring.”