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Sail Through Inflationary Headwinds with Net Lease REITs
Experts are sounding the alarm bells regarding an impending recession due to sustained inflation, rising interest rates and conflict in Europe. As a result, some investors are questioning whether their portfolios are resilient enough to weather an economic downturn. For investors seeking a reliable dividend stock to add to their portfolio, one worth considering is a net lease real estate investment trust (REIT). REITs are companies that own or finance different types of properties and net lease specifically refers to the triple-net lease structure, whereby tenants are responsible for paying expenses related to property taxes, insurance and maintenance. Net lease REITs generally own single-tenant properties leased to creditworthy tenants and operate like corporate bonds due to their long-term leases. However, unlike bonds, net lease REITs can grow substantially through a combination of rent increases and external acquisitions, offering both stability and the potential for long-term growth. In today’s volatile market, here are three reasons why investors should consider adding net lease REITs to their portfolio. Stable dividend yields provide long-term income REITs have high and reliable dividend payouts compared to other stocks due to the REIT structure which requires at least 90 percent of taxable income to be distributed to shareholders as dividends. Several REITs have also increased their dividend over time, which has historically outpaced the rate of inflation and provided investors with steadily growing income. Furthermore, REITs can offer long-term capital appreciation through stock price increases, providing investors with total returns comparable, and often higher, than those of other stocks and fixed income investments. This demonstrates that REITs can be an attractive investment option for both income- and growth- focused investors. Contractual rent increases offer hedge against inflation Some net lease REITs provide natural protection against inflation due to contractual rent increases imbedded in their leases. These can be fixed or linked to an inflationary index such as the consumer price index (CPI). CPI-linked rental increases enable REITs, in particular net lease REITs that are not responsible for property management expenses, to directly offset inflation and pass on rising costs to the tenant. Inflation also tends to increase property prices which increases the overall value of a REIT’s portfolio; however, this growth is tempered by a REIT’s increased cost of debt due to rising interest rates. Regardless, these characteristics help protect investor returns against inflationary pressures, adding resiliency to a portfolio. Diversification protects against certain market risks Some net lease REITs offer diversified portfolios of real estate, meaning they invest across a range of property types, geographies and tenant industries. This ensures that no individual tenant, asset type or industry will have an outsized impact on overall performance, insulating investors from individual market risks and offering stability in economic downturns. Net lease REITs also offer diversification compared to other stocks and bonds an investor may own in their portfolio, as real estate is a distinct asset class that has demonstrated low correlation with other sectors of the stock market. In other words, net lease REITs tend to outperform when other assets in a portfolio are struggling, offsetting market volatility. Conclusion When investors are choosing a net lease REIT for their portfolio, it’s important to consider that not all are created equal. Selecting a REIT with an established history and experience performing in all market cycles will ensure investors are protected from adverse impacts, while reaping the benefits of stability and growth over the long term.
Inflation Pumps the Case for Sale-Leasebacks
Money isn't worth as much these days, but it's not getting any cheaper for businesses seeking growth. Facing 40-year-high inflation, the Federal Reserve has gone from 25- to 50- to 75-bp rate increases. Loans may no longer make sense for cash-strapped companies. That said, continued inflation could make a sale-leaseback an attractive alternative, according to Tyler Swann, managing director at W. P. Carey. "A sale-leaseback allows you to lock in your cost of capital for a very long term," says Swann. "If you take the view that interest rates are going to continue to rise, locking in that cost of capital today could be very valuable for you." A sale-leaseback is when a business sells its real estate for cash and leases it back on a long-term basis from the seller. Often, the buyer-landlord is a REIT or other institutional investor that is equipped to make the most out of a real-estate asset. The seller-lessee company, meanwhile, benefits by being able to invest the value of the asset into the business. Swann makes the general case for sale-leasebacks more succinctly: If you're not in the business of real estate, why be in the business of real estate? "It is almost always the case that an owner of a business can earn more on reinvesting money in their business than they can on having that money locked up in real estate," says Swann. "It's more capital-efficient to have that building owned by investors who want to take that risk specifically." This two-way street of capital efficiency is heightened in the inflationary context because of how a business's needs differ from those of an investor. "Because of the Fed's aggressive stance on raising rates, short-term rates are probably going to rise pretty meaningfully in the next six to 12 months," says Swann. "But because the investments that we're making are such long-term investments, we're locking in our returns and borrowing costs for a very long period of time. So we're most focused on what long-term interest rates look like." When considering a sale-leaseback, Swann recommends that would-be seller-lessees consider the property's capitalization rate against such factors as the proposed lease term and rental-increase schedule -- as well as against the market as a whole. In an inflationary environment, this latter juxtaposition can be striking. "If you look at the broader debt markets, particularly high-yield debt markets, they're in very bad shape right now. Interest rates for high-yield debt have skyrocketed recently," says Swann. "And that has made sale-leaseback financing, [where cap rates have] not risen nearly as much, a much more attractive option on a relative basis."
Benefits of Green Leasing for Net Lease REITs
The real estate industry continues to face increased scrutiny regarding climate-related disclosures from many different stakeholders, including investors and regulatory agencies. As the SEC finalizes its proposed rules around these disclosures, the net lease industry is grappling with how to collect and report on climate-related data given the majority of a net lease REIT’s carbon emissions are Scope 3, or indirect. Without any direct control over the operations of their properties, net lease REITs have the added challenge of establishing access to their tenants’ utility data in order to understand the power consumption and potential sustainability opportunities at their properties. One effective approach to improving sustainability and disclosure quality for net lease REITs is through green leasing, in which green clauses are incorporated into leases that encourage landlords and tenants to collaborate on energy efficient and sustainable practices by aligning financial incentives and sustainability goals. Here are three of the most significant benefits of green leasing for net lease REITs: Increases data transparency to help identify a greater number of sustainability opportunities Collecting sustainability-related data has historically been difficult for net lease REITs due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property. However, by implementing a green clause in their leases, landlords can require tenants to disclose electricity, water consumption, waste management and other energy usage data at their properties. This enables net lease REITs to easily collect data and benchmark the energy usage of their portfolio to better identify inefficient buildings and target attractive sustainability opportunities within their portfolio. Incentivizes landlords to invest in green building upgrades There are a number of ways green leasing can support the implementation of projects that reduce a property’s carbon footprint. For example, green leases can include a clause that give landlords the ability to install on-site renewable energy such as solar panels at their properties so long as they can sell power back to the tenant at the same retail electricity rates as the tenant pays a utility company. Furthermore, green leases often include cost-recovery clauses for energy efficiency upgrades which helps solve the “split-incentive problem” – where landlords pay 100% of the capital expense for energy upgrades while only tenants receive the monetary benefits attributed to the decrease in energy consumption. Through a cost-recovery clause, landlords can amortize and recover capital costs for energy efficiency improvements, increasing incentives to pursue these types of projects while still benefiting the tenant through cost savings. Fosters greater tenant-landlord sustainability partnerships Perhaps the biggest benefit of green leasing is the improvement in tenant engagement. Green leases are designed to benefit both tenants and landlords, providing incentive for both parties to partner on sustainability projects including renewable energy opportunities, building energy retrofits and green building certifications. In order to implement a green lease, landlords and tenants must engage in an ongoing dialogue and align on sustainability goals, objectives and opportunities, ultimately strengthening the relationship, enabling tenants to achieve their own sustainability goals and improving the likelihood of tenant renewals. Conclusion Green leasing is a great tool to enable both landlords and tenants to reduce the adverse effect that real estate has on climate change. Particularly for the net lease industry, green leasing can help improve energy data collection, enhance the environmental performance of leased properties and align financial incentives so all parties benefit. It’s a win-win-win for everyone involved – landlords, tenants and most importantly, the environment.
The Institutionalization of Net Lease
The net lease market has become a hunting ground for investors looking for low-maintenance assets and long-term, predictable cash flows. The stability of the asset type during times of uncertainty has attracted attention from new investors – with the net lease share of all commercial real estate investment activity rising 14.7% in 2020. While it has historically not been viewed as one of the major food groups in commercial investments, this perception is changing as more capital continues to flow into the market. What's driving new capital? There are several factors that have contributed to the influx of capital in the net lease space, but the biggest factor is the appeal of long-term stability. With reliable cash flows, triple-net structures and generally longer lease terms, net lease investments are far less volatile than other assets and create predictability in a portfolio. While there was wide discrepancy across the net lease sector during COVID, generally net lease portfolios – particularly industrial and those focused on critical real estate – performed extremely well and delivered high rent collections when compared to other asset types. In addition, recent inflation fears have driven investors toward traditionally inflation-resistant asset classes like real estate, and net lease in particular has been popular in that context. What types of institutions have shown the most interest in the sector? There are several factors that have contributed to the influx of capital in the net lease space, but the biggest factor is the appeal of long-term stability. With reliable cash flows, triple-net structures and generally longer lease terms, net lease investments are far less volatile than other assets and create predictability in a portfolio. While there was wide discrepancy across the net lease sector during COVID, generally net lease portfolios – particularly industrial and those focused on critical real estate – performed extremely well and delivered high rent collections when compared to other asset types. In addition, recent inflation fears have driven investors toward traditionally inflation-resistant asset classes like real estate, and net lease in particular has been popular in that context. What does this mean for corporate sellers? Now remains a great time for corporate sellers to monetize real estate. High investor interest and limited supply is driving cap rates down and prices up, meaning sellers can maximize the value of their assets if they pursue a sale-leaseback now. Supply chain issues have highlighted the importance of industrial properties in particular, resulting in further price appreciation for industrial owners. Since there is an expectation that interest rates will rise next year in response to inflation, corporate owners should take advantage of the sellers’ market and pursue a sale-leaseback sooner rather than later to lock in today’s low rates on a long-term basis. Conclusion Although new entrants entering the net lease space are forcing cap rates down, the overall impact on the market is a net positive. Greater investor interest is also driving down cost of capital accordingly, meaning investors can still accretively do deals at lower cap rates since debt is relatively cheap. In addition, increased visibility of the net lease market lends credence to the asset class as a whole and creates more awareness for net lease and sale-leasebacks among corporate sellers – driving overall deal volume higher. From W. P. Carey’s perspective, 2021 has been a record year for deal volume and we have been able to support many companies in unlocking the value of their real estate and redeploying those proceeds into their core businesses…So bring on the competition!
The Appeal of Industrial Sale-leaseback Transactions
Let’s start with the foundation: if you’re unfamiliar with the term sale-leaseback, you should go here. For a more focused explanation relating to industrial properties, let’s turn to Erik Foster, principal with Avison Young and head of the firm’s industrial capital markets practice. “A sale-leaseback is when a user of real estate who owns their premises chooses to monetize that real estate. They stay in [the property], occupy it for a long term and sell it to a third-party owner who becomes the landlord, and the occupier becomes a tenant,” Foster told LoopNet. According to Foster, sale-leaseback transactions for industrial assets have been surging over the past several years, with interest in North American industrial properties emanating from across the world. “It’s truly become a global marketplace,” Foster said. This interest in industrial real estate is neither new nor particularly surprising. As Foster noted, the sector has been experiencing record low vacancies amid historic levels of investment activity. And these factors, which have intensified during the pandemic, have created what Foster described as “a very exuberant investment atmosphere.” And industrial users are increasingly taking note of this enthusiasm. Historically, industrial users have been more apt to own their facilities than their office or retail counterparts. Where most office and retail properties are typically developed with the expectation that multiple tenants will occupy the property, some types of industrial properties are more commonly utilized by a single user. Moreover, industrial properties are often heavily customized to meet the manufacturing or specialized logistical requirements of a particular business. But industrial users are beginning to realize that they may be able to possess their proverbial cake and consume it too. “Industrial users are finding that they can reap the rewards of the sale of their building at record pricing, but still maintain occupancy and the use, so nothing really changes for them,” Foster said. Of course, few things in commercial real estate are without caveats. To gain a better understanding of the industrial sale-leaseback phenomenon, LoopNet spoke with Foster — as well as Gino Sabatini, head of investments and managing director of W. P. Carey — and they walked us through the attributes and challenges of this process for both users and investors. An Opportunity for Industrial Users to Acquire Capital and Flexibility According to Foster, for the industrial user, most of the advantages of a sale-leaseback transaction can be reduced to two concepts: working capital and flexibility. Foster noted that most industrial users that own their property have some kind of financing tied to the building. Perhaps they have a loan that represents 50%, or even 60% or 70% of the building’s appraised value. This loan provides them with operating capital to reinvest into the business — for the purchase of equipment or materials, for instance. Through a sale-leaseback transaction, a user can derive 100% of the value of their property, and reallocate that capital to other aspects of their business. Depending on the company’s accounting structure, this could vastly improve their balance sheet. “You can pay down debt, you can reinvest into your business,” Foster said. Meanwhile, the company in question retains use of the asset. The user “gets a ton of capital out of the real estate and continues to use [the real estate] the way they always have,” Foster added. The industrial user also enhances their flexibility in the process, trading their real estate asset for “a leasehold obligation. It’s not an illiquid asset,” Foster said. Between record-setting industrial investment activity and equally historic low interest rates, this can seem like the ideal moment for industrial users to relinquish ownership of their facilities. “W.P. Carey, and most other sale-leaseback and net-lease buyers, operate on a spread over interest rates,” Sabatini said. This means that as interest rates potentially rise in the near(ish) future, cap rates could climb alongside them. Currently, Sabatini said that cap rates range from 4% to 7%, depending on the location and nature of the facility (more on that in a moment). Foster said that he was even “hearing about sub-3% cap rates on the coasts.” All of these factors may make an industrial sale-leaseback transaction seem like a “best of both worlds” scenario for the user, but it’s not quite that simple. For one thing, as most industrial users are typically real estate novices, they need to make sure they carefully consider all potential suitors. “The user needs to make sure that they don’t talk to the first person that knocks on the door,” Foster said. According to Foster, taking the property through a traditional investment sales process generally garners terms that are more beneficial to the user — both for the sale and the subsequent lease. “When we go out and we make a market for assets like this, we’re amazed at how the terms continue to become better as we work through the process. Foster mentioned that it’s also important to find the right investor match for each particular industrial user. “Sometimes this is their only location and its critical to the [tenant/seller], so having an owner who doesn’t have any forethought or care about the user is an issue too, so you’ve just got to find the right match.” Industrial users also need to be comfortable with the control they’re surrendering by entering into a sale-leaseback transaction. For users that are accustomed to having sole authority over their premises, that adjustment could potentially be challenging. And, as frenetic as the industrial sales market is at the moment, there are reasons to believe that prices could continue to rise. “With the shortages in the commodities markets and the difficulty in getting steel and lumber and other materials, there’s a bit of a governor on the amount of development that can happen. So, the supply of assets is also muted, which is continuing to drive scarcity pricing,” Foster said. Ultimately, the viability of a sale-leaseback transaction for an industrial user will come down to that particular company’s priorities and whether they value working capital and flexibility over control and security. For investors, the calculus is a bit more fraught with risk, but potentially equally rewarding. Conducting Due Diligence on an Industrial Sale-Leaseback Opportunity It’s probably fair to say that W.P. Carey has more experience in industrial sale-leasebacks than any other property owner; after all, that’s been the firm’s primary focus since it was founded in 1973. As Sabatini described it, “Sale-leasebacks of industrial buildings for sub-investment grade companies is really our bread and butter.” When LoopNet asked what made these investments so appealing to W.P. Carey, Sabatini explained, “The facilities are often very critical to the company that is doing the sale-leaseback, and that’s very important for us; because we’re a long-term holder and we want to own something that the company is planning on using for a long period of time.” In an ideal scenario, Carey [Note: have requested that they change to Sabatini] said that W.P. Carey’s investment thesis is relatively simple. “We’re making a bet alongside the equity investors in that company that the company is going to be successful for a long period of time. If we’re correct, then we’ll collect rent for a 15- or 20-year primary lease term for starters, and potentially [execute] renewals as well.” But what happens if they're wrong? According to Sabatini, that depends largely on the market and asset in question. A highly customized property, one that will be challenging to adapt for a new tenant — such as a food or biotech manufacturing facility — represents a greater risk than a relatively generic property, like a last-mile fulfillment center. That risk expands in smaller markets and is somewhat ameliorated in larger markets. In terms of how Sabatini approaches the due diligence process, he said that the first portion of his methodology involves elements that are fairly consistent across any real estate asset class or deal type. He advised that prospective investors commission an environmental phase I study (and a phase II study if the initial report reveals any areas for concern); have an engineer walk the property to appraise its structural integrity; and review the property survey and title. “Make sure you’re purchasing a clean piece of real estate,” Sabatini said. After that, you need to undertake what Sabatini says is often the more challenging facet of the process: reviewing the company who will first sell you the property and then become your tenant. Sabatini likens this phase of due diligence to the process credit organizations like Moody’s undertake when they’re rating companies. “You try to understand the industry, the company’s position within it, as well as any threats to either the company or the industry,” he said. “You really need to dig into the credit and understand why the building is important to the company, and what the company’s financial prospects are in the short-term, the medium-term and the long-term.” Sabatini also said that it’s important to carefully review the company’s balance sheet. Specifically, you should assess their attitude towards leverage and how they have fared during downturns. As this process illustrates, in many respects a sale-leaseback transaction isn’t a simple real estate deal; it’s more analogous to the creation of a (hopefully) long-term, mutually beneficial partnership.
What’s Behind Food Production’s Interest in Sale-leasebacks
The food production sector has been a significant source of recent deal flow for W. P. Carey – in 2020 we completed five investments in the sector totaling $210 million. In part, this is due to the overall stability of the industry. Even amid a global pandemic, food is essential, and most food companies have continued to perform well – particularly those with a diversified customer base. As a result, many food production companies are seeking capital to keep up with demand and discovering the opportunities a sale-leaseback presents – the ability to quickly unlock the capital tied up in their commercial real estate to reinvest into their core business. In a sale-leaseback, a company sells its real estate to an investor like W. P. Carey for cash and simultaneously enters into a long-term lease, while maintaining full operational control of the facility. For food production companies, a sale-leaseback can be a critical tool to increase cash flows and support long-term growth. Here’s how: Lock in low rates with a long-term lease and recapitalize balance sheet The COVID-19 pandemic forced many companies to take a hard look at their balance sheets and find opportunities to recapitalize and add working capital. For food production companies that aren’t in the business of owning real estate, those real estate assets can be a significant weight on their balance sheets. A sale-leaseback, particularly in the current low rate environment, can enable them to monetize these assets at a cost that creates a positive arbitrage, given what the capital can earn when those proceeds are invested in their core business. In October, we completed a $34 million sale-leaseback with a food production company in the Midwest where proceeds were used both to pay down debt and add working capital to the balance sheet. In addition, while interest rates currently remain at historic lows, they are expected to rise in the years to come. By pursuing a sale-leaseback and signing a long-term lease now, companies can lock in attractive rental rates for 15 to 30 years. Unlock capital to support new acquisitions and future growth Food production has remained one of the most resilient sectors during the pandemic, with some companies even benefiting from the trends that have emerged – including a greater demand for e-commerce and at-home grocery deliveries. To capitalize on these trends, food production companies are looking to shore up capital for new acquisitions that will support their future growth. Sale-leasebacks are a great method to supply companies with this dry powder, enabling them to act quickly on opportunities and take advantage of the market. Proceeds can also be used for other growth initiatives, including investments in new technology or equipment that will help increase efficiency, improve delivery capabilities and help meet growing demand. Earlier this year, we completed a $75 million sale-leaseback of two packing, production and distribution facilities in California with a leading grower-packer of seasonal, high-value summer fruit in which the proceeds were used to help fund growth initiatives for the company. Secure a long-term capital partner If companies choose the right buyer in a sale-leaseback, not only can they unlock immediate capital, but they can also secure a long-term partner to support ongoing growth and real estate needs. These can be add-on acquisitions, build-to-suits of new facilities or expansions of existing facilities. Particularly as demand for e-commerce is expected to increase, having a long-term capital partner can be a critical component to a company’s growth strategy and give them an edge against competitors. We completed several projects with our existing tenants in the food production sector last year to help support their growth. In June, we completed a $75 million build-to-suit of a brand-new, state-of-the-art food production facility in San Antonio, Texas with our existing tenant, Cuisine Solutions, the largest manufacturer of sous vide food. The facility enabled Cuisine to address growing demand and expanding operations. In addition, we completed a warehouse expansion in an accelerated timeframe in Portugal with our tenant, Sonae MC, a leading Portuguese food retailer, to help them meet rapidly growing demand as a result of the pandemic. In closing As food production companies continue to recognize post-pandemic opportunities for growth and enhanced profitability, demand for attractively priced sale-leaseback capital as a long-term source of funding will increase. The liquidity provided by a sale-leaseback can support a range of corporate initiatives, including balance sheet recapitalization, paying down debt and shoring up working capital for future growth. Thoughtful lease structuring along with timely execution are crucial factors requiring an established sale-leaseback partner with recognized experience, relationships and reputation. In addition, it’s critical to find a partner with a long-term outlook to help fund both current and future needs. At W. P. Carey, we’re a long-term investor and endeavor to support our tenants throughout the duration of their leases so they have the capital and real estate they need to remain successful. If our tenants do well, we do well – it’s a symbiotic relationship.
Why Food Retailers Should Consider Sale-leasebacks to Support Growth Strategies
As many retailers nationwide are forced to close down and reduce property footprints due to the ongoing coronavirus pandemic, one particular sector is looking to grow – food retail. Driven by changing consumer habits such as eating more at home and the desire to “stock up” on groceries, food retail has seen growing demand in recent months. In fact, a recent survey showed that consumers are spending 37 percent more per grocery trip than they did before the pandemic. In addition, while in-store shopping trips have declined, digital sales continue to boom – with US online grocery sales hitting a record $7.2 billion in June, up 9 percent from May’s $6.6 billion. Despite many food retailers being spared from the financial repercussions of the pandemic, the swift shift towards online shopping has driven savvy retailers to bolster their omnichannel shopping strategies and capitalize on the newfound demand for online delivery. To implement these changes and adapt to growing demand, food retailers will need growth capital for critical projects like investing in their online-ordering capabilities and/or expanding their distribution centers to keep up with online orders. One of the simplest and most effective ways retailers can secure this capital is by leveraging their existing real estate assets and pursuing a sale-leaseback transaction. In a sale-leaseback – or “sale and leaseback” – a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease. In doing so, the company extracts 100 percent of the property’s value and converts otherwise illiquid assets into working capital to grow its business, while also maintaining full operational control of its facilities. One major benefit of a sale-leaseback is that it is generally a long-term commitment, meaning companies can realize high prices for their assets in the current low-yield environment and also lock in low rent for years to come. In addition, companies can gain a long-term capital partner that can fund future expansions and development of new facilities. Because of these benefits, it’s not surprising that several savvy food retailers have already pursued sale-leasebacks as part of their growth strategies on a stand-alone basis or in conjunction with private equity firms and other investors. W. P. Carey is one of the largest diversified net lease real estate investors, with a portfolio comprising over 1,200 properties across both the US and Europe. W. P. Carey has nearly 50 years of experience partnering with creditworthy companies on sale-leasebacks ranging from $5 million - $500 million to help unlock otherwise unused capital tied up in their critical real estate. As consumer habits continue to change due to the pandemic – likely for the long haul – there’s never been a better time for food retailers to undertake a sale-leaseback. Those that do will be able to secure the growth capital they need to expand and meet growing consumer demand and expectations – putting them ahead of the curve and onto the path of long-term success.
Sale-leasebacks Have Become a Critical Tool for PE Firms. Here’s Why.
Growing PE Fund Sizes 2019 first quarter middle market private equity deal activity slowed compared to 2018, with declines in public markets and the government shutdown creating adverse pricing for PE backed IPO exits. Despite decreased deal volume and exit values, fundraising figures remained steady in the quarter, boosting dry powder available for new investments. Strong investor demand led PE firms and sponsors to grow the scale of their funds, with vehicles between $1 billion and $5 billion accounting for over three-quarters of capital raised. In fact, the average PE fund in 2019 has raised 70% more compared to the whole of 2018, demonstrating the substantial increase in fund size, based on data compiled by Pitchbook. Elevated Deal Multiples Multiples on new deals have remained elevated, fueled by the swelling dry powder base. The challenge for PE fund managers is to be competitive on securing new investments while meeting investor return expectations. Consequently, dividend recaps and add-ons have become more common as GPs endeavor to boost returns in the current elevated pricing environment. Increased Deal Sizes and Longer Holding Periods Along with larger funds, deals have grown in size and complexity, and longer holding times for investments are becoming more prevalent. Traditionally PE portfolio companies have been held for three to five years before being exited. Fewer than 50% of middle market exits occur in under five years, with the median holding time currently at 6.8 years. The top 25% of exits are hovering around a decade. As a result, there are increasing numbers of long-dated funds with investment periods extending to 15 years or more. Sale-leasebacks: An Innovative Capital Source to Mitigate Risk and Increase IRR To mitigate the risk of larger deal sizes, higher multiples, longer holding periods and uncertainty around longer-term interest rates, many GPs are turning to sale-leasebacks as a critical component of the capital stack. Because land and buildings tend to sell at higher valuations than the company itself, PE firms can sell a portfolio company real estate asset and rent it back under a long-term lease, thereby capturing a multiple arbitrage and blending down the initial purchase price multiple. Post-acquisition, a sale-leaseback can create liquidity, allowing an earlier return of cash to investors, thereby boosting IRRs. Conclusion In the current environment a sale-leaseback can effectively decrease acquisition multiples and allow PE firms to be more competitive in bidding for new acquisitions. A well-structured sale-leaseback with an experienced capital partner like W. P. Carey provides PE firm portfolio companies with access to an efficient, alternative and flexible source of long-term capital. In addition to helping PE firms achieve targeted investor returns, W. P. Carey works with its tenants on an ongoing basis to support their longer-term operating objectives through follow-on projects including expansions, building upgrades and build-to-suit funding for new facilities. W. P. Carey’s net lease portfolio comprises diverse property types and a range of asset classes in 31 industries and 25 countries, enabling us to work with a wide range of companies.