Betty Xiong: What’s Driving Deals in the Sale-Leaseback Market?

Monday, December 28, 2015

What’s Driving Deals in the Sale-Leaseback Market?

Corporations that own their properties have a good reason for cheer this holiday season: They are sitting on potentially vast sources of growth capital, depending on the quality of their real estate assets.

Activity on sale-leaseback deals has posted a steady upswing almost every year since 2010. Total deal volume for 2015 could reach $12 billion, matching the spectacular production that the market saw in 2013, according to a joint estimate from research firm Real Capital Analytics (RCA) and net lease specialist Stan Johnson Co.

The market took a brief breather from red-hot growth in 2014, when deal volume reached $10 billion, but that still surpassed the market’s previous production peak in 2007, when about $8 billion in sale-leaseback transactions were completed.

All of the conditions to support a healthy and active sale-leaseback market are firmly in place, including compressed cap rates, strong demand from institutional and high-net worth investors, and the drive, on the part of property owners, to convert a portion of their companies’ value into usable cash.

After churning out so much capital in 2015, will sale-leaseback dealmakers be able to post another healthy year in 2016? Market observers have a positive outlook as long as companies continue to use sale-leaseback proceeds to support growth.

The many engines driving sale-leaseback activity

In these times of ample liquidity, it is tempting to think that sale-leaseback deals are being done simply because the money is available. Companies can apply the funds in other, more productive ways, however. Firms can use the funds to expand their lines of business, invest in new equipment or even maximize returns after a merger or acquisition, according to the Stan Johnson Co.

The financial terms underpinning sale-leaseback deals also make them look attractive when compared with refinancing using traditional lending sources. Banks typically limit loan-to-value (LTV) on financing agreements to 80 percent, but sale-leasebacks allow a company to access the full amount of a property’s value. Also, underwriting standards have become tighter at banks and other traditional lending sources, according to Andrew Ackerman, managing director in the Atlanta office of Sands Investment Group, a company that specializes in the net lease market.

“A lot of our clients have said their banks are starting to become more stringent in their underwriting,” Ackerman says. “The banks are saying, ‘We think the [lending] market is getting a little overheated like it did in 2008, 2009 and 2010.’”

Read entire article in National Real Estate Investor.