Private Equity Firms Turning to Sale-Leasebacks to Finance M&A
Interest in sale-leasebacks is increasing due to the tight capital market environment for corporate borrowers. Sale-leasebacks generate capital for investment, R&D, expansions, or other uses at an attractive cost to property sellers – typically 7-9% cap rates. With this in mind, private equity sponsors and corporate owners recognize the attractiveness of this solution and are increasingly turning to sale-leasebacks to help finance corporate acquisitions.
According to Gordon Whiting, head of?Net Lease Real Estate at Angelo Gordon, his team has seen a strong uptick in firms seeking advice for utilizing sale-leasebacks to finance corporate acquisitions. “Given the current capital market environment, all options are on the table for companies to finance their M&A,” said Whiting. In fact, Whiting indicated that the Angelo Gordon team has recently closed several sale-leasebacks of this nature in North America and Europe.
Looking beyond the cost of capital, the benefits of using a sale-leaseback to finance an acquisition remain the same regardless of the market environment: The seller receives a full valuation of the real estate, their rent is viewed as an operating expense, and they have a long-term lease to meet the needs of their business. However, there are critical considerations for sellers when it comes to selecting a sale-leaseback provider.
Timing, Experience, and Access to Capital
When looking at potential sale-leaseback partners, Whiting says the most important considerations are the purchaser’s access to capital, experience, and history of successfully closing transactions, and the timing of the closing. “We have successfully closed over $5 billion of net lease transactions, closing many transactions in conjunction with corporate M&A, so we know what it takes to execute a deal for our tenants and their sponsors,” Whiting said. Further, he noted, “We take the timing very seriously since our capital is critical to completing the corporate acquisition.”
A sale-leaseback partner with access to capital can also continue to help a sponsor grow its platform with sale-leasebacks for add-on investments. “Once you’ve spent the time to get to know your landlord and you’ve worked through a set of transaction documents, it’s easier to go back to them for new deals,” Whiting said.
A Partner for Future Growth
Beyond the initial closing, Whiting stresses the importance of the relationship with the future landlord and notes that research is key.
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According to Whiting, an important question to consider is: “Are they going to be a good long-term landlord?” A sale-leaseback partner should have an understanding of a company’s business and needs, as well as the knowledge and creativity to work through potentially bespoke arrangements.
Furthermore, a potential purchaser should have a history of investing for the long term, with a portfolio to match, says Whiting. They should have the ability to transact in different environments and provide the proceeds a company needs.
Whiting notes that it is worth checking with other companies that have done similar deals with a given sale-leaseback partner. He says you can generally see who a partner’s past tenants have been and can contact them to get a better understanding of the tenant-landlord relationship. Whiting also suggests researching what additional real estate expertise or services the purchaser can provide, such as an architect, for example.
Looking Ahead
Following these criteria, a sale-leaseback can be an effective tool for sponsors to help capitalize on new M&A opportunities and unlock real estate value in existing assets.
As Whiting puts it, “In an environment where the future remains uncertain, with respect to property values and cost of capital, it’s better to be proactive and do something before you are facing a critical need.”
Courtesy: Erik Sherman?