In the current uncertain environment, many businesses – in the logistics industry and elsewhere – are looking for sources of capital to bolster their finances. Some are accessing the capital markets; others are turning to banks. A third option to access finance – and one that offers several advantages for firms – is a “sale-and-leaseback” transaction (or sale-leaseback).
Executive Director, W. P. Carey
Under a sale-leaseback, a company sells its real estate to an investor for cash, and simultaneously enters into a long-term lease for the asset. In doing so, the company extracts 100 percent of the property’s value and converts an otherwise illiquid asset into liquid capital, while maintaining full operational control of its premises.
The advantages of a sale-leaseback over other transactions are clear. They are generally a long-term commitment, meaning companies who undertake them can realise high prices for their assets in the current low-yield environment, and also lock in a low rent for years to come. They also retain security of occupation and ideally gain a true long-term partner with the financial strength to fund future expansions and renovations. The liquidity released can be used to support ongoing operations, pay back debt, fund M&A activity or invest in the future. Sellers who reinvest sale-leaseback proceeds into their core businesses essentially benefit from the positive spread between low real estate yields and higher equity returns.
If the benefits of a sale-leaseback are clear, how does a potential seller select a suitable counterparty to transact with? We believe logistics companies should look for three factors when seeking a partner for such a transaction.
•First, experience matters. The investor should have a proven track record within the relevant sector and geography where the transaction will take place. Knowledge of local markets and their potential pitfalls are essential to ensure the full benefits of a sale-leaseback can be achieved. Only an experienced investor brings to the table the necessary skills to understand a business and to create a bespoke sale-leaseback solution depending on the real estate in question and the company’s needs.
•Second, proven ability to close. Within the current market environment, it is paramount for owner-occupiers to seek out true all-equity investors that are not reliant on third-party debt to close a deal. Only a partner that offers high certainty of closing a deal ensures businesses the best possible prospect of completing a deal on time without disappointment.
•Third, think long-term. A sale-leaseback transaction typically involves a company’s most important real estate assets. Consequently, sellers would be prudent to pick an investor that can be a genuine long-term partner and does not buy into a deal for a “quick flip”. A good investor will want to work with the business on an ongoing basis to ensure they have the real estate they need to meet their evolving business objectives. Perhaps the best way to think of it is that such an investor essentially invests in the seller’s business – not just the real estate – for the long run.
In summary, during the current environment of economic uncertainty, sale-leasebacks enable corporate owner-occupiers to extract their property’s full value and to generate liquidity from otherwise illiquid assets at a time when capital markets are constrained, and traditional capital sources may be unavailable or only at unfavourable terms. For logistics companies, there has never been a more appropriate time to weigh up the advantages of such a transaction.
Christopher Mertlitz joined W. P. Carey’s European Investments Team in 2011 and currently serves as Executive Director. Prior to joining the firm, Chris worked in various industry sectors including engineering, energy and information technology in Austria and Germany.
Since joining W. P. Carey, he has been directly involved in the structuring and closing of more than €1.5 billion in sale-leaseback, net lease and build-to-suit investments across Europe, especially in Germany, Austria, the Netherlands and the U.K. He has extensive experience acquiring industrial and specialised retail assets, and particular expertise in financial modelling and complex credit underwriting.
Chris graduated summa cum laude from Oxford University with an MEng in Engineering, Economics and Management where he was also a scholar. He is fluent in German.
W. P. Carey
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