Many businesses have been hard hit by this pandemic, and as a result shareholders are urging companies to find value wherever possible. For companies in this situation or looking for additional growth capital, this is a good time to consider a sale-leaseback.
In private equity, there's usually an accretive opportunity to sell real estate. Capitalization rates have fallen with lower interest rates, but current cap rates remain favorable for certain properties.
The frequency of leaseback transactions is increasing and hitting investor radars. How does the typical sale-leaseback work? Simply, the property is sold and the seller becomes the new tenant. The proceeds of the sale can then be used to strengthen the sellers balance sheet and to increase shareholder value.
It has become a mainstream equity-generating strategy, and while more and more private equity firms seem to be pursuing sale and leasebacks, there are many companies who have not taken advantage of the opportunity and leave money on the table. A recent survey found 80% of respondents said they had never entered a sale leaseback transaction indicating ample supply for this real estate strategy.
Sale-leaseback deals helps businesses pay off debt, fund growth, and make acquisitions, while buyers gain control of valuable property. More broadly, the pandemic has prompted investors to shift to higher-quality assets. There is a flight to safety, and the market is ripe for sale-leasebacks.
COVID-19 has largely shifted corporate priorities; twelve months ago, most investment grade companies were focused on growth priorities. However today, shareholders have rewarded those who raised capital and increased liquidity. With COVID, stronger companies have the opportunity to further strengthen their balance sheets with sale leaseback transactions,
For a growing company or one requiring liquidity, it doesn’t make sense to hold real estate on the balance sheet. A company can find a friendly landlord who buys the property and then rents it out to them. Companies with real estate assets may look to monetize them to provide capital for operating activities.
A risk outside of releasing control of the property that your business sits upon is that if you run into cash flow problems and can't make the payment, the lease would have to be renegotiated and risk eviction. Additionally, you essentially lose the right to any appreciation.
Additionally, the lease after the transaction is essentially debt and reduces operating flexibility. This is the tradeoff for the capital injection from the sale. Additional strategies for increasing capital are lease renegotiations and refinancing, each having its own unique tradeoffs.
Despite the challenges that leasebacks could pose, more and more companies in the current economic environment are finding that it is a strategy worth pursuing.