As the U.S. economy begins to dig itself out of a deep hole caused by the COVID-19 crisis, many businesses now face the stark reality of a substantially reduced pool of working capital along with credit lines that will likely not thaw out anytime soon. Yet despite those challenges, retailers, logistics firms, and other industrial real estate users are now finding new opportunities in the sale-leaseback arena that are enabling companies to quickly unlock capital and increase cash flow.
Front line: Sale-Leasebacks Allow Companies to Redeploy Capital
Now more than ever, businesses are making decisions to diversify their existing capital sources in order to beef up their reserves for immediate needs such as payroll, operations, and other core business activities. Private equity groups have recently seen a substantial uptick in sale-leaseback inquiries from both new and existing clients, with the majority of deals structured within a triple net lease model that allows sellers to retain possession of facilities vital to operations under a long-term lease. The sale-leaseback is not a new concept to the market nor is it only beneficial in times of economic duress. However, decision-makers should know that rent terms for prospective sellers have probably never been in a more favorable position thanks to record-low interest rates.
Advantages of Sale-Leaseback Transactions
Our firm has been advising a variety of industrial real estate users on potential transactions over the last few months, particularly those in the transportation and logistics space. We recently completed transactions with two companies on industrial service facility assets. These types of assets represent the critical backbone that supports the supply chain industry, and include truck terminals, fleet maintenance, drayage, container, and trailer storage. Conditions have forced these companies to think strategically about their capital and where it can be redeployed to add greater value.
By making informed decisions on capital allocation, companies of all shapes and sizes will be able to position themselves for future growth and success.
When we sit down together with a client and review each category on a line-by-line basis, it quickly becomes apparent that owner-occupied real estate is a significant weight on the balance sheet that’s generating minimal returns at best. On the surface, smart non-real estate operating companies would never commit to a property that’s only producing an annual return of 6 to 7 percent. This makes a sale-leaseback transaction a viable option for any entity that has substantial equity tied up in real estate yet is not in the real estate investment business itself.
In addition to being able to pay down debt, retain operational control, and bolster core business activities, a sale-leaseback transaction also supplies a company with dry powder for acquisitions that align with its long-term growth plans. Simply put, there are businesses that will survive COVID-19 and those that will not. The influx of working capital generated through a sale-leaseback deal gives a leg up to companies that need to move swiftly on fleeting opportunities that often attract multiple competitors. The potential long-term benefits for these fire-sale acquisitions can play a key role in helping to fast-forward overall growth and expansion, another compelling advantage provided by the sale-leaseback model.
Ultimately, we will likely see a sustained increase in sale-leaseback transactions over the next several months given the current pressure points and growing demand for new capital sources. By making informed decisions on capital allocation through an efficient strategy that effectively leverages physical assets, companies of all shapes and sizes will be able to navigate the new normal and position themselves for future growth and success.
Jeff Berryhill, Stonemont Financial Group
Jeff Berryhill is a principal at Stonemont Financial Group and leads the firm’s Net Lease line of business. Jeff has over 18 years of real estate, capital markets, and banking experience. Jeff began his career at SunTrust in Jacksonville and spent several years banking large physician practices. After business school, Jeff joined the Structured Real Estate Group in SunTrust Robinson Humphrey’s Corporate and Investment Banking Division in Atlanta, GA. He spent 11 years in the Structured Real Estate Group, most recently as the managing director of the originations team. During his time with the company, Jeff focused on the origination and structuring of sale/leaseback and build-to-suit transactions with the firm’s corporate and developer clients. Jeff has a Finance degree and an MBA from the University of Florida and is a CFA charter holder.
Courtesy of : Jeff Berryhill, Stonemont Financial Group