Sale-leaseback transactions are back. Proprietary data from SLB Capital Advisors, a real estate advisory firm, found the transaction count for 2022 hit 874, up 11% from a record volume of 789 in 2021.
Strong M&A activity in 2021, buyers’ strong appetite to deploy capital, and the transaction’s attractive cost compared with other forms of capital drove the increase in deals, said Scott Merkle, managing partner of SLB and formerly an investment banker.
Rates on high-yield bonds and other debt have risen more than 400 basis points this year, but for sale-leaseback transactions, rates (measured by the “cap rate”) have widened about 100 to 150 basis points, according to SLB.
Sale-leasebacks offered better stability than debt and equity financing last in 2021, said Merkle.
“While buyers became more cautious, the sale-leaseback market remained open the entire year with a large and diverse number of investors in the market,” Merkle said.
Sale-leasebacks offer companies a way to recover the capital companies spent on property purchases and improvements. The seller continues to occupy and control the property under a long-term lease.
When capital is tight for CFOs, these transactions can be handy. They are used as a vehicle to recapitalize, improve balance sheets, and feed expansion efforts.
The cap rate mentioned above is a measure of the yield of a property. It is calculated by dividing a property’s expected net operating income in the first year by its asset value.
Cap rates tend to have a narrower range than other interest rates, particularly over the short term, according to JP Morgan Chase.
What property owners should know is that a sale-leaseback is not just a property sale. “The investor is making a much more nuanced investment than, say, buying an apartment building,” Merkle told CFO. “They’re really signing up for a long-term rental stream [the previous owner’s lease payments] that’s backed by the credit of the business.”
The investor analyzes and scrutinizes the underlying credit of the business (the seller). So companies with good credit get better deals.
Sale-leasebacks are often done in conjunction with an M&A deal — either concurrently or in the following months. For transaction counts — the way Merkle prefers to measure activity — a record year of M&A activity (2021) can result in a large number of transactions the following year (2022).
Private equity investors “have long recognized the multiple arbitrage and the positive impact of a sale-leaseback in the buyout capital stack,” Merkle said.
The total dollar volume of $31.4B in 2022 also set a record, besting the 2019 dollar volume of sale-leasebacks by 14%.
Quarterly dollar amounts are often lumpy, said Merkle, because a large transaction (over $1 billion) can skew the totals.
There were a number of casino transactions last year, including a $1.7B deal in the fourth quarter: Realty Income’s purchase of Encore Boston Harbor.
The casino industry has come to the realization that the properties “have a better home on the balance sheet of a [real estate investment trust],” since the operating and real estate portions of the business are valued in a different way, Merkle said.
