All-equity Buyer
'Still Bullish' on Net Lease Retail Despite Economic Uncertainty
Despite some economic ebbs and flows as of late, certain sectors of net lease retail, particularly those more immune to tariff concerns such as service-based businesses, remain attractive to investors who are ready to deploy capital, W. P. Carey’s Michael Fitzgerald told GlobeSt at ICSC Las Vegas last week. In this video, you'll hear: How Fitzgerald remains bullish on net lease retail amid the changing landscape over the last year; Why sale-leasebacks continue to be a popular deal type, and which types of retailers should consider them; and What sectors are seeing and will see strong demand from investors in 2025. Watch now An interview with Michael Fitzgerald, W. P. Carey, and Holly Amaya, GlobeSt.com.
The Future of Net Lease Retail
Retail investors in 2025 face shifting market conditions, including tariff concerns, interest rate volatility, higher construction costs, and increased institutional competition. According to Michael Fitzgerald, executive director and head of US retail investments at W. P. Carey, these forces will continue to influence retail investments in the months ahead. “You have many factors pushing cap rates in different directions, with new entrants and fresh capital coming into the market,” says Fitzgerald. “That increased demand naturally drives rates down. But at the same time, rising 10-year interest rates and investors trying to protect their spread are pushing cap rates up. In the end, we’ve actually seen some stability since this time last year.” Still, in the current conditions, investors are reassessing how they evaluate risk, structure leases, and identify long-term value. Pressure Points Grow Rising construction and financing costs as well as the increasing cost of imported goods have become pressure points across the sector. According to Fitzgerald, those costs translate to higher rents, especially for new sale-leaseback deals. Even with those increases, Fitzgerald emphasizes that the need to ensure profitability still holds up at the store level. “We need to make sure the metrics still make sense,” he says. Additionally, inflation has made flat leases a tough sell for investors. “It’s fair to say the age of flat leases is over,” adds Fitzgerald. “Outside of grocery, there’s really not much appetite for retail leases with flat escalations.” Sale-leaseback Opportunities Remain Despite these headwinds, the retail sale-leaseback market has continued to see growth because the structure has basic advantages over other forms of financing. Sale-leasebacks offer long-term capital with no refinancing risk and typically without the restrictive debt covenants or balloon payments of traditional debt. As a result, companies that need capital and have a real estate footprint will continue to tap this form of financing despite overall higher cap rates. According to Fitzgerald, the best candidates for sale-leasebacks are growing retailers in healthy retail segments. This includes companies that provide discount non-discretionary products and services, convenience stores, service-based segments and fitness. How Disciplined Investors Move Forward When evaluating retail assets, Fitzgerald emphasizes the EBITDAR-to-rent ratio as a key metric. “It’s the single most important metric for understanding whether a retail location is a good long-term investment. Locations with a history of consistent profit will tend to stay open and can support a fair amount of rent.” Beyond that, Fitzgerald highlights that W. P. Carey also looks at the rent relative to market and the cost basis of the property relative to its construction cost or replacement cost. The corporate credit profile also plays a major role. Fitzgerald emphasizes he often looks for companies with strong credit, market leadership, conservative capitalization, solid management, a proven track record of success, and a conservative approach to growth. “W. P. Carey has a strong history of smart credit underwriting, and in some cases, our deep understanding of credit allows us to pursue investment ideas others will not.” Despite changing market conditions, Fitzgerald believes disciplined investors still have room to thrive. For instance, he points to W. P. Carey’s access to capital, as well as their overall balance sheet strength. “We are differentiated by our large balance sheet that allows us to make all-cash offers at large scale without any financing contingencies. This enables us to consistently offer certainty of close, which is often the most important factor sellers point to when choosing a sale-leaseback partner.”
Tips for Ensuring a Successful Sale-Leaseback
A “great tool in really uncertain times,” the sale-leaseback can give immediate access to capital and minimize debt market exposure during uneasy economic periods. But for many looking to utilize it, the uncertainty of whether or not a deal will be successful can be a barrier to fully exploring it. Jason Patterson, SVP, investments at W. P. Carey, starts by recommending thorough planning and transparency and careful selection of the buyer and future landlord. “Especially with interest rates being volatile, knowing that your counter-party—the buyer—is experienced and well-capitalized is increasingly important, and will ensure that they show up at the closing table to complete the deal that you bargained for,” he says. Pre-Deal Prep Work Preparation and due diligence are always key in real estate investing, and it’s no different with sale-leasebacks. The seller/future tenant must figure out in advance its economic needs and preferences, including the term, rent level and rent escalators that make sense for the business. “Doing the pre-vetting process upfront on the big economic terms is key,” Patterson says. “Knowing the tenant has thought about and committed to the term and all the key economic points in a lease upfront makes a big difference and prevents the derailing of the process later on when a group might realize they can only do a 15-year lease versus a 20-year one.” Being timely and transparent about potential property issues is also critical to keeping the sale-leaseback deal on track. Whether environmental concerns, title complications or a problem with an old survey, issues will come out during the due diligence process so address them early on. Partnership Essentials: Real Estate to Relationship To enjoy the immediate access to capital, full market-value realization, preservation of operational control and other sale-leaseback benefits, corporate real estate sellers and private equity sponsors must do the deal. That means they must find the right buyer. “The biggest criteria in determining the best sale-leaseback partner is really access to capital and high certainty to close,” Patterson says. “That means finding a buyer who isn’t relying on a third-party financing source and doesn’t employ buying contingencies.” And the finish line isn’t the closing table. A buyer that is experienced in the market and a responsive, reliable landlord over the ensuing long-term lease is invaluable. “Make sure you’re choosing the right party for a long-term relationship,” says Patterson. “It’s great peace of mind knowing you have a landlord you can turn to in situations for flexibility or additional capital.” A strong partnership born of a sale-leaseback emphasizes the relationship versus a mere transaction. One of the resulting benefits for tenants is the ability to do more “bespoke-type” agreements, according to Patterson. Perhaps there’s an existing vendor the business wants to maintain ties with or the tenant has a big project underway on site; the long-term landlord can provide a flexible structure to accommodate. W. P. Carey’s sale-leaseback business has the capital to fund future tenant expansions, build-to-suits, building renovations, energy retrofits and more after the initial deal has been completed.
Keeping Up with Industrial in a ‘Wildcard’ Year
Uncertainty around interest rates, slowed transactional volumes, and a future of unknowns has left investors in the industrial sector watching trends closely. “This year has been a bit of a wildcard,” says Jason Patterson, senior vice president of investments at W. P. Carey. “People constantly speculate about what the future holds regarding interest rates, and we also saw a bit of softening on the lease demand side at the end of 2023.” As uncertainty persists, understanding a few key trends can help the industrial sector track what’s next as it moves closer to a new normal. Cost of Capital Challenges Persist As 2024 began, forecasts predicted multiple interest rate cuts; however, the Fed has held rates unchanged to date. Recently, it adjusted the previous forecast from three expected rate cuts in 2024 to one, against the backdrop of persistent inflationary concerns. Volatility around rates has also led to investor hesitancy in making long-term commitments, further impacting transaction volumes. “There is also a long and continuous trend toward e-commerce,” says Patterson. “In the near term, there has been a bit of volatility due to overbuilding in certain markets, and there is a bit more vacancy that needs to be absorbed. These shorter blips are relative to what seems to be a long-term trend toward higher value in industrial real estate.” Despite ongoing challenges, opportunities still exist for the industrial market, and understanding some existing tailwinds can help investors capitalize on these. Shift to Onshoring Onshoring is a continued tailwind for the industrial sector, especially on the manufacturing side according to Patterson. “It seems there is bipartisan agreement around a movement to onshore, as sentiments trend toward increased American manufacturing.” Upticks in high-tech chip manufacturing and transitioning the auto fleet to electric are also drivers of long-term industrial demand, says Patterson. While electric cars accounted for only 2% of vehicles in 2018, that number jumped to roughly 18% of all vehicles sold in 2023. A push toward more sustainable vehicle technologies could further drive long-term industrial demand, but Patterson cautions that continued growth could depend on the outcome of the election. Strategic Positioning and Access to Capital When operating in a market with many unknowns, a good place to start is focusing on what’s within your control, suggests Patterson. “Factors such as interest rates are out of the hands of most folks,” says Patterson. “We focus on sticking to our competitive advantage, which is underwriting sub-investment-grade long-term lease opportunities.” Agility is also key, as is working with partners who can support the market’s need for increased flexibility. According to Patterson, “This is a time when having a reputation for strong performance and access to capital is very valuable. At W. P. Carey, we are well positioned to execute with significant liquidity and capital, enabling us to be nimble in the current environment.”
Private Equity and Sale-leasebacks: Choosing the Perfect Partner
Private equity-backed deal volume has hit its lowest point in four years. Unsurprisingly, the biggest factor contributing to this decline is the high cost of debt due to rising interest rates, which has made private equity deals more expensive. As a result of the challenging capital environment, PE firms are turning to sale-leasebacks as part of their financing strategy. In a sale-leaseback, private equity firms can sell their portfolio company real estate to an investor for cash while the company simultaneously enters into a long-term lease. In doing so, the PE firm extracts 100% of the real estate’s value and converts an otherwise illiquid asset into working capital. This is particularly beneficial now, as cap rates on sale-leasebacks have risen significantly less than other forms of debt, making them an attractive funding alternative on a relative cost of capital basis. For PE firms evaluating a sale-leaseback, there are several factors to consider when choosing a partner to ensure the deal gets done quickly, efficiently and meets the needs of all parties. Here are three that are critical in today’s environment: Experience One of the most important qualities to look for in a sale-leaseback partner is experience. Ensuring the investor has a strong history of successfully closing transactions, including private equity-backed transactions, will ensure the process is smooth and well executed. In addition, if the deal involves multiple properties, countries or lease structures it’s important to look for a global investor with the ability to execute on complex, cross-border and multijurisdictional transactions. There are a number of new entrants in the sale-leaseback space, so working with an investor with several decades of experience may help maximize proceeds and make the process easier, particularly for PE firms exploring sale-leasebacks for the first time. Access to capital Another critical quality in a sale-leaseback partner – made more important in today’s environment – is access to capital. All-equity buyers, which are typically publicly traded REITs that access the public equity and debt markets, are better positioned to close on deals given they aren’t reliant on securing third-party debt financing at the time of close. This means they are less likely to re-trade and can offer better certainty of close when it comes to execution. Ability to meet timing constraints Many private equity firms considering sale-leasebacks are looking to do it in conjunction with a portfolio-company acquisition, leveraging the financing as part of the capital stack. This means that finding a sale-leaseback partner that can meet timing constraints is important, given the capital is needed to complete the corporate acquisition. Experienced and well-capitalized investors can typically provide a quicker and more efficient close, and some even have the ability to close in less than 30 days if required. For an example of how PE firms can use sale-leasebacks to help fund an acquisition, read about W. P. Carey’s recent deal with SK Capital and Apotex. Closing thoughts By finding a partner with these characteristics, private equity firms can successfully leverage a sale-leaseback to help capitalize on M&A opportunities and unlock value in portfolio-company real estate assets. W. P. Carey has 50 years of experience and has successfully closed nearly $6 billion in PE-backed deal volume. Contact us today if you’d like to evaluate a sale-leaseback as part of your financing strategy!
A Bumpy Road Ahead, but Reasons for Optimism: Key Takeaways from MIPIM 2023
Last month, 23,000 CRE professionals traveled to Cannes for MIPIM 2023 – Europe’s largest real estate conference. Attendees soaked in the French Riviera sun on La Croisette as they gathered to discuss today’s real estate market and the potential opportunities and challenges that lie ahead. Shakeups and surprises in the financial markets took center stage, but optimism about the future of the commercial real estate market remained. Here were the three biggest topics that dominated the discussion and our perspective on what it means for the future. Financial market turmoil The conference kicked off amidst the largest banking failure in more than a decade with the collapse of Silicon Valley Bank (SVB), followed by the dramatic fall in the stock price of Credit Suisse and the subsequent announcement that UBS would be acquiring the company. The banking sector turmoil became a hot topic of conversation, with delegates divided over the economic impact of these micro-shocks. Some believed the downfall of SVB and Credit Suisse were not a signal for the entire economy, given SVB operated in a very specific ecosystem and Credit Suisse had faced a number of problems going back several years. Others felt it was eerily similar to the bank failures in 2008 and an indication we are moving into a financial crisis. Laser focus on interest rates For some delegates, the outlook off the back of the banking turmoil remained positive, as many thought the banking crisis would help stave off the Central Bank’s appetite for rate increases in their battle against inflation. Ultimately, this proved to be short-lived given the European Central Bank’s decision to raise interest rates across the Eurozone by 0.5 percentage points on March 16 and the Federal Reserve’s move to raise rates by 0.25 percentage points the following week. Interest rates, and the broader discussion concerning the pace of hikes, were topics already in focus long before MIPIM began. However, during the conference, there emerged a growing consensus that we are entering a new stage of the market with higher interest rates likely staying for the foreseeable future and old pricing levels now a thing of the past. Opportunities still available Where to source attractive investment opportunities was another key topic in Cannes. Similar to years prior, logistics led the way with regard to positive investor sentiment. Attendees agreed the fundamentals for the asset class remain strong, although in some markets many pointed out that logistics cap rates were slow to adjust to rising interest rates. Office, on the other hand, has largely fallen out of favor with investors given work-from-home and hybrid schedules remaining in place for many companies. Our perspective If an economic downturn is on our horizon, W. P. Carey is well positioned to weather the storm given we have a 50-year history of operating in all economic cycles. Our portfolio diversification, disciplined underwriting and lease structuring, and our well-positioned balance sheet, make us one of the safest REITs in terms of downside protection. As an all-equity buyer, W. P. Carey also remains well positioned to execute on deals and offer certainty of close given we aren’t reliant on third-party debt financing. For example, we recently announced a cross-border sale-leaseback of an industrial portfolio in Spain and Italy with Siderforgerossi, a leading manufacturer of specialized forged metal components. The facilities represent a significant portion of the company’s manufacturing footprint and are triple-net leased for a term of 25 years with annual rent increases. Despite the bumpy road ahead, I remain optimistic about the future. Rising interest rates make sale-leasebacks a more attractive financing option for corporates on a relative basis, meaning we’ll likely see an influx in opportunities in 2023. We always say that sale-leasebacks are a good tool in good times, but a great tool in uncertain times, and this sentiment couldn’t ring more true than it does today.
Sale-leaseback 101
What is a sale-leaseback? The concept is simple. For many companies, their real estate represents a significant cash value that could be redeployed to fund their core business operations and growth strategies. Through the “sale and leaseback” model (or sale-leaseback), a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease with the new owner. In doing so, the seller extracts 100% of the property’s value and converts an otherwise illiquid asset into working capital, while maintaining full operational control of the facility. What are the benefits? There are many reasons why a company would consider monetizing its owned real estate. Sale-leasebacks offer companies an alternative to traditional bank financing. This is particularly advantageous during periods of uncertainty—as seen during COVID-19 when conventional financing was limited, especially for sub-investment grade companies. Whether a company is looking to invest in R&D, expand into a new market, fund an M&A transaction or simply de-lever, sale-leasebacks serve as a strategic capital allocation tool to fund both internal and external growth in all market conditions. Key benefits include: Immediate access to capital to reinvest in core business operations and growth initiatives with higher equity returns. We like to say that most businesses are not in the business of owning real estate. A sale-leaseback enables companies to focus on its core competencies, while capitalizing on the value arbitrage between the real estate valuation and the company’s EBITDA multiple. 100% market value realization of otherwise illiquid assets compared to the 65% to 75% of the appraised value that a typical mortgage would garner. Limited financial covenants, unlike some debt instruments, providing the seller with greater control over its operations. Alternative capital source when conventional financing is unavailable or limited. Retainment of operational control with no disruption to day-to-day operations. Potential tax benefits by deducting rental payments rather than being subject to interest limitations for traditional debt as defined by tax laws. Why now? Record level dry power, coupled with today’s low interest rate environment continue to drive investor demand for alternative investments such as real estate, pushing property values to all-time highs. These conditions make now an opportune time for sellers to maximize their proceeds and secure favorably priced, long-term capital via a sale-leaseback before interest rates rise again. In conclusion Key to the success of a sale-leaseback arrangement is finding an experienced and well-capitalized investor who can understand the unique requirements of each seller and structure the lease accordingly. When working with an investor like W. P. Carey, sellers have the added advantage of gaining a long-term partner who can support its tenants through long-term flexibility and additional capital should they wish to pursue follow-on projects such as expansions or energy retrofits as their business and real estate needs evolve.