Private Equity
Investor Confidence Returns
This year’s EXPO Real in Munich brought together real estate professionals from over 70 countries, eager to assess the market’s trajectory as we head into 2026. After a turbulent stretch marked by volatile interest rates and macroeconomic headwinds, signs of stabilization have surfaced, bringing optimism to the market. Amid this backdrop, three standout themes emerged: Investment Activity Stabilizing After several years of volatility, investment activity is finally stabilizing. According to Savills, European real estate investment volumes reached €130 billion for Q1-Q3 2025, a 1.5% year-over-year increase. This activity is being driven primarily by improving cap-rate spreads, a narrowing price gap between buyers and sellers and a steadier Eurozone backdrop. With a growing number of sizeable assets and portfolios hitting the market – and investor appetite rebounding – we anticipate an uptick in deal volume as we finish out the year and enter 2026. New Sectors Gaining Steam As Europe’s real estate market steadies amid rate cuts, investors are turning toward new growth sectors. At the forefront are data centers, which have surged in popularity due to the exponential rise of AI and cloud services. New energy infrastructure – including real estate tied to renewables and grid modernization – is also attracting capital, driven by the continent’s aggressive decarbonization goals. Meanwhile, student housing is experiencing a renaissance, buoyed by demographic shifts and urban migration patterns. These sectors not only offer strong fundamentals but also align with broader trends shaping the future. Private Equity Embracing Sale-Leasebacks Private equity firms are continuing to turn to sale-leasebacks as a strategic lever to unlock liquidity. By selling real estate assets owned by portfolio companies and leasing them back, PE sponsors can convert illiquid real estate into cash – fueling acquisitions, funding growth initiatives or deleveraging balance sheets. This approach is particularly effective in post-acquisition scenarios, where rapid access to capital is essential but traditional financing may be costly or restrictive. Sale-leasebacks also offer flexibility in structuring, allowing firms to tailor lease terms to match cash flow realities while avoiding equity dilution or covenant-heavy debt.
How Sale-Leasebacks Help PE Raise Capital in a Tight Market
Funding for growth, refinancing corporate debt, and merger and acquisition activities are top priorities for many private equity firms. A recent PwC report noted that 60% of CEOs plan to make at least one acquisition in the next three years. The report further explains that lower levels of M&A activity during 2023 created “pent-up buyer demand” moving into the current year. However, tapping into capital isn’t always easy when it is locked in assets. “It’s quite inefficient for private equity firms to have capital tied up in real estate assets that aren’t earning for them,” says Tyler Swann, managing director, investments at W. P. Carey. “An alternative is doing a sale-leaseback, which provides a much lower cost of accessing capital than traditional financing methods.” Understanding sale-leasebacks and their advantages can help private equity firms strategically manage growth funding, debt maturities and other capital needs. The advantages of sale-leasebacks With traditional financing strategies such as mortgages, terms are often shorter and exposed to higher market volatility. Accessing capital can also be time-consuming, a challenge for firms that need to move quickly for acquisition deals. That’s not the case with sale-leasebacks, notes Swann. “Sale-leasebacks are very flexible,” says Swann. “The processing time can be as short as 30 to 45 days between the initial call and the actual funding. It’s not unusual for us to get a call from a private equity firm saying, ‘We’re closing on a business in 30 days; can you be there to close with us as acquisition financing?’ And that’s something we can do.” He explains that capital uses also have very few restrictions, with the most common purposes being acquisition financing, dividend payments, and refinancing maturing debt. Misconceptions about sale-leasebacks As private equity firms consider sale-leasebacks, questions often linger regarding who qualifies for this type of financing. Many believe that because their real estate is in a secondary or tertiary market, or their asset doesn’t have a huge value, they won’t qualify. But according to Swann, that’s not necessarily true. “If you have a specialized manufacturing facility in a small market, you may think it won’t qualify because it’s not a high-quality warehouse in a market like Southern California,” says Swann. “Despite where an asset is located, if it’s profitable and contributing to the bottom line of a business, it could be a great candidate for a sale-leaseback.” As the market progresses through 2024, Swann expects sale-leaseback activity to continue upward, partly due to M&A activity and its flexibility to tap into capital quickly. “Every year, sale-leasebacks become a little more accepted in the private equity community as a source of financing,” says W. P. Carey’s Swann. “Ten or 20 years ago, corporate debt was by far the dominant option, but we continue to see an increase in sale-leaseback deals every year.”
Looking into the Crystal Ball
2023 was undoubtedly a challenging year for the net lease sector. High inflation, rising interest rates and other economic uncertainty caused a notable decrease in overall transaction volume, sparking apprehension about the trajectory of the industry. However, there have been some signs of renewed life in the market. Most experts believe we have hit the interest rate peak and expect cuts to be made in 2024. In addition, dealmakers generally anticipate that the M&A environment will improve given the market has stabilized, which could bring more investment opportunities to the market. While no one has a perfect crystal ball about what the future will hold, there are certainly reasons for optimism in 2024. Here are three net lease market predictions for the year ahead. Boost in net lease deal volume fueled by projected interest rate cuts The U.S. Federal Reserve indicated in its latest summary of economic projections that three cuts may be coming in the year ahead. The cuts are expected to be slow and gradual and will be dependent on the state of the economy, but investors reliant on third-party debt are hoping for a much-needed reduction in borrowing costs to remain competitive. The signaling of rate cuts is positive news for the market as it means interest rates have most likely reached their peak. This should help the market stabilize therefore narrowing the bid-ask spread between buyers and sellers, leading to a more active deal environment in 2024. In addition, many investors who have stood on the sidelines in anticipation that there will be more favorable opportunities down the road are likely to start jumping back into the market in 2024 and new entrants are expected to join in. Uptick in private equity sale-leasebacks as M&A surges The dealmaking environment in 2024 is already off to a better start than 2023. Inflation has declined, interest rates have likely reached their peak and private credit has become more widely available for more kinds of deals, while traditional credit markets are starting to improve. Private equity firms are also sitting on an unprecedented amount of dry powder – $2.59 trillion – with mounting pressures to deploy that capital into new investments. As a result, M&A activity is expected to increase in 2024. Along with an uptick in dealmaking, savvy private equity firms are expected to continue looking for alternative strategies for growth given lingering economic and geopolitical uncertainties. One effective strategy is through the sale-leaseback of their portfolio company real estate, which allows private equity firms to unlock immediate capital to redeploy into other initiatives, such as new acquisitions or portfolio company growth. Typically, when M&A activity surges, sale-leaseback opportunities follow, so more private equity-backed real estate deals will likely emerge in 2024. Pandemic office trends remain while industrial holds steady More than three years since the start of the pandemic, the real estate industry has finally accepted that the office sector will not return to the way it was before – and hybrid- and- remote work models are here to stay. As a result, offices have lost much of their appeal for investors, with transactions declining more than twice as much as any other property sector in 2023. W. P. Carey announced its strategic plan to exit office last year, through the spin-off of 59 office properties into Net Lease Office Properties and an office sale program to dispose of the remaining on-balance sheet assets. This trend is expected to continue into 2024 and some office investors will likely start to look for alternative uses for office assets – such as residential or industrial. Industrial, on the other hand, will continue to perform well into 2024, as re-shoring and nearshoring provide a boost to the sector. While the asset class is showing some signs of softening post-pandemic as the need for robust inventory decreases, the long-term outlook remains positive. Moody’s Analytics CRE forecasts that annual rent growth for warehouse and distribution properties will track at approximately 5-6% per year over the next 10 years, suggesting that the sector has moved on from its huge boom into a steadier state of growth.
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!
How Private Equity Can Leverage Sale-leasebacks
Sale-leasebacks are often used by private equity firms to raise capital to support portfolio company growth. Through a sale-leaseback, private equity firms can unlock otherwise illiquid capital tied up in portfolio company real estate and reinvest the proceeds into its core business. Here’s how private equity firms can leverage sale-leasebacks to generate long-term value: Maximize portfolio company value by reinvesting sale-leaseback capital into its operations Following the completion of a sale-leaseback, private equity firms can immediately invest the proceeds into its portfolio company’s business operations to support long-term growth. These include investments in new facilities, technology, equipment, R&D and human capital. The benefit of pursuing a sale-leaseback instead of other debt alternatives is that PE firms can realize 100% fair market value for the portfolio company real estate. For example, W. P. Carey worked with a middle-market private equity firm on the $19 million sale-leaseback of two industrial facilities leased to a global distributor of plastics. The private equity firm used the transaction proceeds to secure long-term capital to expand portfolio company operations and fund future growth initiatives. Pay down existing debt and provide portfolio companies with balance sheet flexibility Private equity firms can use sale-leasebacks as a method to recapitalize and strengthen the credit metrics of their portfolio companies. Particularly for smaller, non-credit-rated companies that cannot access the capital markets, a sale-leaseback is a great tool to provide balance sheet flexibility and enable portfolio companies to pay down maturing debt and other liabilities. By improving the balance sheet, private equity firms can position a portfolio company for a credit upgrade or even an IPO, maximizing the long-term value of the company. In 2020, W. P. Carey provided a private equity firm $40 million in sale-leaseback financing for a manufacturing facility leased to a global leader in barbecue grills and accessories. Proceeds were used to pay down debt and improve the balance sheet, helping position the company for a positive credit improvement. Shortly after the sale-leaseback, the company completed an IPO raising over $250 million. Compete more effectively for new acquisitions and M&A Sale-leasebacks can be used by private equity firms to help finance add-on acquisitions – where a PE firm acquires a new company and mergers it with an existing portfolio company to generate growth. By carving out real estate from a business during or post-acquisition, private equity firms can unlock substantially higher value for the real estate due to the spread between the lower cash flow multiple paid to acquire the business and the much higher cash flow multiple received from the sale of the real estate itself. As a result, sale-leasebacks are a capital-efficient way to maximize portfolio company growth while also serving as a positive arbitrage opportunity for private equity firms. W. P. Carey worked with a private equity firm on the $29 million sale-leaseback of four industrial facilities leased to a global manufacturer and distributor of vehicle-mounted aerial lifts. Proceeds from the transaction were used to partially fund the manufacturer’s acquisition of a German company in the same industry, enabling them to expand their market share in Europe. Conclusion Sale-leasebacks are a highly attractive capital allocation tool with many strategic and financial benefits for sponsored companies. Real estate financing can be an extremely effective way to fund growth and add value to portfolio companies, particularly in today's high-interest rate environment. In order to maximize proceeds, PE firms considering a portfolio company sale-leaseback should work with an all-equity buyer with experience working with all types of credits. W. P. Carey has partnered with private equity firms and their advisors on these types of transactions since 1973, and has provided over $5.7 billion in capital to PE firms and their portfolio companies. If you’re interested in pursuing a portfolio company sale-leaseback, please contact us at globalinvestments@wpcarey.com.
What to Know When Leveraging Sale-leasebacks to Finance M&A
The global M&A market experienced record activity in 2021, topping $5 trillion for the first time as unprecedented dry powder, a low cost of capital and demand for inorganic growth fueled dealmaking. Savvy corporate acquirers and private equity investors looking to jump in on the action have seized the opportunity to use creative financing options that unlock equity, strengthen balance sheets and free up capital for strategic initiatives and additional transactions. Enter stage right, the sale-leaseback. In 2021, sale-leaseback volume topped $24 billion, up from nearly $13 billion in 2020. For those interested in joining the growing number of investors and acquirers leveraging sale-leaseback financing alternatives to supplement M&A activity, here’s what you need to know. How do you know if a sale-leaseback should be part of an M&A transaction? There are a couple of key considerations in determining whether to pursue a sale-leaseback as part of an M&A strategy. First, identifying whether or not owned real estate is critical to the pro forma business in the long run. A sale-leaseback is a long-term source of financing, so it’s important that the real estate involved is not only critical to the pro forma entity’s operations, but that the company is comfortable with committing to a meaningful lease term. Just as important is understanding the market’s appetite for the specific real estate and rent cash flow in contrast to the entity’s cost of capital. Tenant credit, facility criticality and quality of the real estate are all factors that contribute to how competitive a sale-leaseback strategy might be against more traditional financing strategies in supporting a transaction. How do the current inflation levels and the Fed’s rate hike impact M&A volume and attractiveness of sale-leasebacks? There are certainly some headwinds, with rising rates, the expected tightening of regulation and potential for changes in tax policy all driving a “wait and see” approach for some acquirers. However, activity so far in 2022 is still visible and the recent rate hikes and overall volatility in the debt capital markets make alternatives to traditional debt financing, such as sale-leasebacks, an even more attractive option in funding M&A strategies. What are the advantages of sale-leasebacks compared to more traditional routes of financing? There are quite a few advantages to financing via a sale-leaseback: the avoidance of many traditional debt challenges such as a balloon payment or need to refinance at the end of the term, and in some cases, less stringent financial covenants. In addition, many companies also benefit from the flexibility of extension options and operating lease treatment, all without immediately forgoing control of critical real estate or disrupting day-to-day operations. Depending on the buyer, sellers may also gain a long-term capital partner who can work with them far into the future to ensure their real estate continues to meet their evolving business needs. It’s also important to remember the cost of capital for a real estate investor is often extremely competitive. In some cases, this—coupled with the fact that a real estate investor is better suited for property ownership as it aligns with its core competency—means a real estate investor will buy assets at a higher multiple compared to an M&A target’s valuation, thereby unlocking a value creation opportunity that benefits from the combined operating business and real estate value. In addition, some companies find that by converting illiquid real estate assets into liquid capital at a favorable cost, the pro forma company is able to optimize its cost of capital. Conclusion With optimism that M&A activity will remain strong despite the current market headwinds, I anticipate sale-leaseback activity will continue to soar in 2022, particularly as awareness of this valuable financing strategy among private equity investors and corporate owner-occupiers becomes more prevalent. When working with an experienced real estate investor, sale-leasebacks can be a powerful and reliable tool to finance acquisitions and fuel corporate growth.
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.
When Alternative Strategies Make Sense
The M&A market is busier than ever. As dealmakers compete to close deals that will be profitable down the road, many are looking more carefully at their financing options. To explore this notion, M&A put together a roundtable, which focused on what financing options private equity firms are using, what role sale-leasebacks and other financing tools are playing in today’s market, and how private equity firms are taking advantage of their different options to win deals and create value. Fugazy: How do you characterize the private equity industry today? Bryan Cummings: Capital superabundance. There’s $1 trillion to $1.8 trillion out there looking for a home, depending on the source you look at. As a result, we are seeing tremendous competition in the market for quality assets. There is a lot of creativity being deployed to give investors the opportunity to win these businesses. Capital is not the constraint. We see a lot of processes where you have one outlier bid at the top, who may or may not get there, and then two to five folks within a relatively narrow five to 10 percent band. Sure, you’d like to be that guy at the top, but if you aren’t you’ve got to have an approach that distinguishes you from the competition. Joseph Marger: Historically, in the real estate business, if you were representing a developer or someone who’s vying for the space, there was a smaller universe of people willing to invest in that risk. But now, because of the abundance of capital, there are either family offices who never used to dabble in the space coming in, or hedge funds and highnet- worth individuals who don’t know what else to do with their money to get yield. They are now willing to throw crazy prices at real estate today. Gino Sabatini: If you’re a private equity firm that owns the portfolio company that has real estate on its books that you know will be important to the company long-term and for the next owner, taking advantage of that multiple arbitrage makes a ton of sense. It makes sense to do a sale-leaseback transaction ahead of the sale of the company so you can take the dividend yourself, and then put the lease in place long-term. If it’s a critical asset, a buyer will not see it as a problem. Fugazy: What are some key components of the capital stack for the initial buyout and for add-on acquisitions? Eric Korsten: Building the ideal capital structure is an art and it’s unique to the buyer and the underlying company. Anyone who’s been around a long time has a deep appreciation for getting it right and not having to renegotiate with lenders in a down market. Today you can almost always refinance; likely not a problem. However, the music can stop quickly and you can be the last in the line. As a result, you need to make sure that what you’re doing today likely works for at least the duration of your expected hold period. Fugazy: How do you think about finding the right partners who will work well with you in a downturn? Korsten: Ideally, you have good past experiences with them, although that’s not always going to be the case. There’s a certain amount of gut instinct involved. Properly structuring your credit agreements and all of the ancillary agreements that go along with it is essential. If the covenants, and other restrictive terms, feel really aggressive today, they probably will be even worse when things aren’t going right. Marger: As a lawyer, I would want to counsel someone by noting that even if you don’t have prior experience with that company yourself, you can look at the track record and make some inferences. A company with 40 years of long-term investment history and many years of working with their tenants to see them grow is quite different than a Johnny-come- lately that’s just looking for instant yield because they can’t find it anywhere else. Who knows how they’re going to react in the next down cycle. Korsten: A 40-year history, like you just mentioned, is definitely an important lender selection consideration. Somebody who started lending recently can potentially buy our deal if their terms are materially better than everyone else; but they likely only get one chance to do right by us. Fugazy: How do the capital stacks for deals differ depending on the asset? Korsten: I looked at information provided by GF Data. Going back to 2016, specifically for lower middle-market deals, there’s no clear, conclusive trend that leverage has really gone up or down much during that time. There’s always been about three to four turns of leverage available. Sometimes it’s slightly more and sometimes it’s slightly less. It doesn’t necessarily follow the bigger market trend, which is that available leverage has gone up a lot. Our smaller-end of the market hasn’t changed much, which means there is likely only a reasonable amount of available debt. As a result, we have to make our returns not just from financial engineering but by really growing the business and taking them to the next level. If you’re just counting on higher leverage to generate returns, that’s just not going to consistently do it in the lower middle-market. Cummings: How are debt providers competing for that business? Leverage really isn’t that different between groups, and most folks are in that three and a half, four times range. Rates are what they are and you don’t necessarily want to choose the cheapest guy out there. How do they think about convincing you to work with them? Korsten: We’re often getting one percent per year amortization on debt deals. That makes you say, ‘okay, this company can just basically choose to pay interest only.’ They can always voluntarily choose to pay down debt but today it’s their choice.’ Having that high degree of flexibility makes us feel more comfortable. We’ll often pay a bit more for that flexibility because we want the company to be able to grow and not feel like they have their hands tied generating liquidity and meeting covenants. Sabatini: The stability of the cash flow has a lot to do with the capital stack and what the market will allow you to put together in terms of the capital structure. If you have a very long history of very steady cash flows, both on the leverage side and certainly on the sale-leaseback side, that will allow you to lever up a bit more. With regard to a sale-leaseback, we often look at rent coverage, and the longer the history we have, the better. Even a very levered company, for example, a building products supplier, if they’ve shown the ability to go through a cycle in the last 10 years and maintain their cash-flow generation, that gets us more comfortable that they can handle it, and we’re willing to take a bit more of a risk on the credit side. Korsten: Lender diligence doesn’t seem to be getting too much lighter. Even though the market is a bit frothy, lenders are still trying to take their time on diligence because they know things can be cyclical. Especially if their terms are great, they’re going to make sure they dot their “i”s and cross all of their “t”s. It’s not uncommon in private equity to provide the lender a quality of earnings report in conjunction with an acquisition or refinancing. Often lenders will do their own homework on the quality of earnings report. They don’t just take the report as-is, put it in a folder and move on. They ask real, hard questions. Questions that tell me that they’re really thinking about the “what-if” scenarios. Fugazy: What is the ideal capital stack? Sabatini: I would say the ideal capital stack has changed over time. W. P. Carey was part of one of the first sale-leaseback financed LBOs in 1982 when William Simon bought Gibson Greetings. The sponsors — there were three of them — each put $330,000 into the deal and within two years they each pulled out an estimated $70 million, making it one of the highest return deals of all time. We provided approximately $34 million of capital proceeds to Simon and his partners through a sale-leaseback of Gibson’s corporate real estate totaling three million square feet. By arranging a pre-closing sale of the assets, the investment group was able to secure the balance of the financing required to complete the LBO. That was at a time when private equity shops could do that and generate enormous returns on equity, which has changed. Clearly, it’s a much more competitive business today, but for the last 45 years W. P. Carey has been a cost-efficient part of that initial capital stack in deals where there’s real estate involved. It always makes sense to do a sale-leaseback at essentially a 13 or 14 times multiple if you’re paying six, seven, eight times for the company. That hasn’t changed. Korsten: I’d agree with you, the multiple arbitrage is potentially compelling; unless you’re paying 13 or 14 times for a business. Absent that, you have to look and say ‘okay, we have added considerable rent expense to the business. We are now effectively more levered. The business now really has to perform.’ One bad investment can take a lot of your time and energy so you have to be very thoughtful. Marger: The extra cash that a sale-leaseback provides to the capital stack that a mortgage wouldn’t could be the difference between the success or the failure of the company going forward. And so you say, I’ve got the rent obligation, but now I have the cash to grow the company beyond the rent obligation. Sabatini: That’s the idea. Furthermore, rent payments are fully tax-deductible, so the multiple arbitrage, coupled with the value of the full deductibility of rent payments may in many cases be a critical factor in structuring a successful bid for a new investment or in refinancing an existing portfolio company. The capital can then be put to higher and better use than staying trapped in your real estate and generating eight percent or nine percent. Fugazy: Does it matter whether that sale-leaseback happens before or after a sponsor buys the business? Sabatini: Sale-leasebacks can happen at any point in time with a company. We’re happy to participate on the front-end like we did with Gibson Greetings and in many other LBOs. We can also participate after the fact, which is often easier for the private equity shop because they have time to figure out what the critical assets are going forward and what they want to commit to in a long-term lease. If it’s a very real estate-intensive company, a sale-leaseback is often the best source of financing and consequently, it’s typically done in conjunction with the initial acquisition. In fact, some PE firms may be able to get their lenders to carve the value of the sale-leaseback out of their credit agreement and have it preapproved so we’re ready to go. Korsten: I read an interesting bid letter recently. It was for a consumer services company and they owned all the buildings. Included with the bid letter it said “in your bid please consider that a potential sale-leaseback we expect would produce X millions of dollars in net proceeds”. It was a car wash company. Cummings: Half our deals are with family-owned businesses. We’re finding in certain cases that there’s a benefit to being able to come to them with a conversation around how they can spark a competitive auction by allowing the PE firm to get a little more benefit from a sale-leaseback. Or, we can have a conversation about whether it make sense to do a sale-leaseback on their terms, even if you then sell for a different price point because now you’ve got a rent expense lowering your EBITDA. Sabatini: A sale-leaseback makes the most sense in situations where the asset is critical to the company or the life of the company. A car wash is a perfect example. Korsten: It’s not going anywhere. You can’t operate a car wash business without the car wash building. Sabatini: Manufacturing companies are another good example. If the private equity firm is purchasing a company that has a critical manufacturing facility with unique characteristics, a long-term lease makes sense. Same with companies that have a distribution network that they don’t foresee changing in the near future. Marger: Let’s just hope so. With the pace of disrupters your diligence efforts are even more difficult for the long-term. There was a time when we thought that CDs were going to save the world, and now they barely exist. Uber is another example. We don’t know what it’s going to be in next five years, the world can be dramatically different. Fugazy: How does the pace of change affect you when you’re looking at deals? Sabatini: As part of our underwriting, we evaluate each company’s ability to pay us rent over the long term because we’re entering typically into a 15 or 20-year arrangement. To the extent that we don’t have real estate that’s very fungible and that can be repurposed into a different use, the company’s future business opportunities are extremely important to us. Fugazy: Some private equity firms are holding onto investments longer. How is that impacting the initial financing structure? Cummings: I’d argue there’s something of a bifurcation in the market. You’re certainly seeing both funds exit earlier than they used to, as well as later. Given the strong market you’re seeing folks exit after three to four years or two to three years, simply because the market’s strong. The business has perhaps executed on seven of its 10 strategic goals, and they think waiting two more years to complete the rest of that performance plan is not worth the market risk. In those cases, how do you avoid prepayment penalties and how do you think about building that option into the structure? There are other companies that people are buying and saying ‘I’m going to be able to invest in a slightly lower entry multiple, because I know this will take longer, and the market does too.’ We’re seeing both sides impact structure. Korsten: There’s an unfortunate tendency with some in the private equity investment world to sometimes sell your good companies too soon and hold on to your bad ones. Managers want to feel like they can get themselves paid and by selling a bit early they can do that but that doesn’t mean that it’s the right decision. Funds do have an artificial life span. When somebody makes a commitment to us, eventually they want their money back; that’s natural. For us, if we achieve something really big, we’ll let the next buyer do the next big thing. However, there isn’t always something big to do, in which case you may hold it for longer. But if we buy a company and we are then able to buy our biggest competitor a year or two later, we have created something with more scale and substance. What’s next? We’ll often let somebody else figure that out. Fugazy: How does the sale-leaseback differ from other capital structures including ABL financing? Sabatini: The biggest difference is it’s very long-term. A sale-leaseback is a 15 or 20-year obligation. We don’t have a refinancing risk in a few years. The second biggest difference—and the most important difference—is the amount of proceeds a seller can garner. An ABL deal will give you 50 to 55 percent loan-to-value. With a sale-leaseback the seller gets 100 percent of the fair market value of the asset. The hope is that the money is put to a higher and better use. Private equity investors are looking for 15 to 20 percent annual returns, which real estate by its very nature doesn’t generate. So what makes the most sense is if there’s real estate on the books, pull that money out and redeploy it into what your company does best. Korsten: ABL availability also varies over time. With the sale-leaseback, we have a single transaction and we know the price; it’s done. With ABL, our collateral is constantly moving and so availability is constantly moving. One has a higher degree of certainty, the other can change significantly as the business’s performance changes. ABL is a riskier form of financing in that regard. Fugazy: Does having a 15-year lease impair the seller’s ability to sell? Korsten: We often consider, would a strategic buyer be less interested in the business because there’s a very long-term lease attached to it? For example, perhaps they wouldn’t be able to combine that facility with their existing facility. It may ultimately reduce our exit options. So, we really have to think, what’s the likely universe of buyers, before we enter into a long-term agreement. Fugazy: How is the sale-leaseback generally structured? Sabatini: Typically we create a new lease when the sale-leaseback is initiated. The company gets the full fair market value of the asset at that time, and they sign a lease committing to the payment of rent for the 15 or 20-year period. As we just mentioned, in particular situations there may be certain things which are important to the company which then get negotiated into the lease. The lease is then put on a shelf and the tenant maintains full operational control of the facilities, while gaining a long-term financial partner and landlord with the capital and expertise to support any future growth needs. Korsten: How often do you see any restrictions on the rest of the capital structure or who you can sell the business to? Sabatini: Some of our best deals are those in which the tenant is sold to a larger entity. As a long-term partner to our tenants, we try our best not to restrict them in this regard. Ultimately, as long as the new tenant can assure us that they’ll continue to pay rent for the duration of the lease, we’re happy to accommodate their changing needs. Marger: It also depends on how far up the chain of the corporate structure that the transfers are taking place. If you’ve done your underwriting under the entire company, and that entire company is being bought by somebody even bigger that could be a positive, not a negative. You’d be very happy to take a look at that. If someone just wants to chop out your company and move to someone with questionable management skills, you’re not going to be as inclined to go along. Korsten: There are a lot of oil and gas companies that have been hitting the market recently. Some of these companies had some pretty rough times, such as in 2016, when their EBITDA may have gone to zero. How would you look at a company like that who owns their real estate if we want to do a long-term sale-leaseback? Sabatini: With a situation like that we would really look more at the asset and try to understand what our alternative would be in a downside scenario. Is it a nice industrial building in Houston that we can repurpose if necessary, or is it an oil service field out in Midland that will have no alternative use? Fugazy: It’s been such a busy time in the market. Are you seeing an uptick in sale-leasebacks today? Cummings: We’re seeing more opportunities to think about, and work with private owners, on things like sale-leasebacks. It’s a more common part of the market today. It’s evolved in its maturity even in the past four or five years, and frankly, our sellers are becoming more sophisticated. They hear things from their friends at the country club and they say, I’ve heard about this sale-leaseback - and they want to know their options. Sabatini: We often get calls from private equity shops that want to buy the former owner out. Likewise, many sellers think they are the only ones who can run the portfolio company, and they don’t want to take a risk that their rent won’t get paid going forward, so they want out. From both sides sometimes having a third-party real estate owner makes sense. Marger: There may be more deals happening, but they’re more diversified across more bidders. The higher you go, obviously you’re going to get less bidders at certain price points. But in the lower-end market I think we’re seeing a lot of activity from family offices who have these long-term triple net portfolios. Fugazy: When you’re acquiring a company and you’re assessing the quality of the business, the company’s longevity, and the purchase price—all the ways you can add value—how important is the capital structure? Cummings: It makes a big difference because ultimately there are a lot of sales to the private equity community and they look very hard at what kind of leverage makes sense. There is no one-size-fits-all in the middle market. As such, finding the right partner, or partners, who can put the pieces together is really important to us. Korsten: We once won an auction for a company that had somewhat lower growth prospects but we saw two great things. One, they owned their own plants and those plants definitely had value in a sale-leaseback. So even though the business was not going to grow really quickly, we could hopefully help achieve our equity returns through a sale-leaseback transaction. Sabatini: Financing is obviously a critical piece of any deal, both at acquisition and almost more importantly going forward. It’s imperative that the owners set up a capital structure which makes sense for that company so it can handle the inevitable ups and downs.