Manufacturing
Is a Sale-leaseback Right for Your Business?
Economic uncertainty and restricted debt markets are leading more corporate occupiers to explore alternative financing options such as sale-leasebacks to secure funds. In a sale-leaseback, a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease thereby unlocking otherwise illiquid capital to redeploy into higher growth segments of its core business. A sale-leaseback is an innovative tool that can be especially advantageous in today’s market where debt financing may be less attractive but is your company and your real estate the right fit? Read on to determine if (and when) a sale-leaseback is right for your business. The Criteria for a Sale-leaseback Own your real estate The key criterion for a sale-leaseback is real estate ownership. One of the primary drivers for a company to undertake a sale-leaseback is to unlock 100% of the real estate’s value while maintaining long-term operational control of the asset. By selling your property and leasing it back, you remove a non-incoming producing, fixed asset (real estate) and unlock liquid capital to reinvest into your business. Own the right type of real estate While the mainstream commercial property sectors of industrial, retail and office are most common in a sale-leaseback transaction, other specialty assets like life sciences and data centers have expanded the pool of investable assets. Make sure it's critical to your operations Investors look for specific value-add characteristics before buying a property. For instance, it’s best if your asset is mission-critical—in other words, an essential revenue driver for your business. Potential investors will also likely consider the property’s condition and age (high-quality, modern assets with sustainable features will be more valuable), location (think proximity to transportation routes) and size. Desired size will depend on the investor and often vary by property type. Retail properties for example tend to be smaller (perhaps around 20,000 square feet), compared to an industrial asset that might be upwards of 250,000 square feet. Additional space to expand the facility is also a plus for investors. However, the criticality of the asset to your operations is often more important than the asset type or size itself. Have a strong underlying credit story (sub-IG credits welcome!) You’ll attract real estate investors if you have a strong underlying credit and revenue history. Due to the long length of leases typically associated with sale-leasebacks, the investor will want to be confident that you can consistently pay rent throughout the lease term. However, this doesn’t mean your company must be investment grade. Many investors can work with sellers that are sub-investment grade so long as the underlying fundamentals of the business are solid. Institutional investors with strong underwriting capabilities will be able to evaluate all credits and assess your financial statements in order to get comfortable with pursuing a sale-leaseback deal. Be willing to sign a long-term lease, but ask the right questions upfront The last criterion for a sale-leaseback is that you must be willing to sign a long-term lease with the investor, typically 10-30 years. Before signing a long-term lease, it’s important to consider some critical factors, including: Space requirements: Evaluate your current and future space requirements to ensure the leased property will accommodate your needs for the duration of the lease. If additional space is needed, it’s possible your sale-leaseback partner will work with you on an expansion or build-to-suit of a brand-new asset. Renewal options: Does the lease come with renewal options? Find out the renewal terms for which the lessor is willing to extend the lease period so that you can continue occupying the property once the initial period for the lease expires. Maintenance and repairs: Know who's responsible for any maintenance and repair needs of the leased commercial property. In a triple-net lease, for instance, the tenant is responsible for all insurance, taxes and maintenance expenses, which also means the tenant maintains full operational control. By considering all the above factors, you can make an informed decision and confidently enter into a long-term lease. When to Consider a Sale-leaseback? While sale-leaseback financing is an excellent alternative to loans and other debt financing, it's not ideal for every company in every circumstance. Here are a few examples of when it makes sense to consider a sale-leaseback for your business. When you need capital for growth Sale-leasebacks are an excellent tool to unlock cash for growth initiatives, particularly for companies with limited access to traditional forms of financing. Proceeds from sale-leasebacks can be channeled to investments in new equipment, technology, personnel or additional facilities. And the best part is that a sale-leaseback enables you to raise capital without losing control of your property. To support M&A If you're considering an M&A transaction, you may need to raise additional capital to fund the purchase of the target company—or to pay down debt following an acquisition—which may be the case for companies and private equity firms alike. Usually, the cost of capital for commercial real estate investors is quite competitive as a real estate investor will acquire your property at market rate, creating an immediate arbitrage between the real estate multiple and the acquired business EBITDA multiple. To strengthen your balance sheet A sale-leaseback can help strengthen your business’ balance sheet by shoring up much-needed cash. You can use the raised capital to pay off existing debt, boost your debt-to-equity ratio or invest in other revenue-driving areas of your business. Remember the composition of your business’ balance sheet determines how lenders, investors and shareholders view your company's risk profile. If you have less debt, your business will be more attractive to these parties. Final thoughts A sale-leaseback transaction is an excellent alternative for companies, especially during periods when traditional sources of financing are limited. When choosing a sale-leaseback partner, consider an experienced, long-term investor who can buy on an all-equity basis and who is willing to work with you throughout your lease (and beyond). W. P. Carey has been a leader in sale-leasebacks since 1973 and is well-positioned to continue helping companies unlock capital even in today’s challenging economic environment. Maximize your real estate and unlock immediate capital by contacting our team today!
From Property to Partnership
At W. P. Carey, underwriting is the cornerstone of our investment strategy. Whether we’re evaluating a mission-critical distribution center, a top-producing grocery store, a well-located data center or a newly developed healthcare facility, our process is grounded in four essential pillars: The creditworthiness of the tenant The criticality of the asset The quality of the real estate The structure and pricing of the transaction Together, these criteria help us identify assets that deliver durable, long-term value to our shareholders. Creditworthiness of the tenant We begin with a deep dive into the tenant’s financial health. Our team evaluates balance sheets, income statements, liquidity levels, leverage ratios and access to capital. We also look beyond the numbers – analyzing the company’s industry position, growth trajectory and ability to withstand economic cycles. As long-term owners, our ideal tenant is one that will remain operational – and ideally continue to grow – for many years to come. Criticality of the asset Not all real estate is created equal. We focus on acquiring assets that are essential to a tenant’s operations – whether that’s a key distribution center, a top-performing retail location or a specialized manufacturing facility. Our goal is to understand how integral the property is to the tenant’s revenue generation, product development and supply chain. Assets that are truly critical are the ones that tenants are most likely to remain in – and invest in – over time. Quality of the real estate In addition to tenant credit and building criticality, we assess the real estate itself. This includes local market analysis, property condition assessments, third-party valuations, replacement cost estimates as well as understanding downside scenarios and re-leasing risk. Our goal is to ensure that the real estate stands on its own as a high-quality, income-generating asset. Transaction structure and pricing We structure each transaction to support both tenant operations and investor expectations. That often means negotiating long-term leases (typically 10-30 years) with built-in rent escalations and appropriate protections if needed – such as security deposits or letters of credit. Our pricing reflects both the fundamentals of the asset and the strength of the tenant, always with the goal of striking the right risk-return balance. A proven approach Throughout our more than 50-year history, this disciplined underwriting approach has enabled us to navigate complexity and build a portfolio of 1,600+ high-quality, operationally critical assets. Regardless of property type, these four pillars remain constant – highlighting that execution rooted in underwriting discipline is what ultimately drives long-term value. Interested in selling your real estate? Contact us today!
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.”