Why Consider a Sale-leaseback?
Top motivations behind this financing method in today's environment
By: W. P. Carey Editorial Team
In today’s economic environment cash is king, and businesses both large and small are looking for ways to boost their cash flows. That’s why an increasing number of companies are monetizing their real estate to unlock otherwise illiquid capital through sale-leasebacks. Sale-leasebacks give companies the liquidity needed to address a number of strategic and financial initiatives and are growing in popularity. Here are three of the biggest factors motivating companies to pursue a sale-leaseback now.
Cheaper alternative to debt
When it comes to raising capital, companies typically have a menu of options to choose from including high-yield bonds, bank debt, equity raising or sale-leasebacks. However, some of these methods have been more negatively affected by higher interest rates than others. For instance, bonds and bank debt have both increased by more than 400 basis points since early 2022. On the other hand, cap rates on sale-leasebacks have risen significantly less – about half as much – making sale-leasebacks a more attractive alternative on a relative cost of capital basis. From a purely financial standpoint, this is driving more companies, particularly those with high-quality, mission-critical real estate assets, to leverage sale-leasebacks as one of their primary forms of capital raising.
Capital to reduce leverage
Given recent economic volatility, more companies are seeking to strengthen their overall credit metrics and capitalization to best position themselves for the future. Sale-leasebacks are a great solution for companies looking to reduce leverage, as the proceeds can be used to pay down shorter-term debt or maturing debt that has become significantly more expensive to refinance. The reduction in leverage helps improve both a business’ debt / EBITDA ratio in addition to debt / capitalization, which can improve a company’s overall credit and better position them for the long term.
Company valuations remain significantly lower than early 2022. While this has caused an overall reduction in volume in the M&A market, some businesses are taking advantage of the fact that their acquisition targets may have become cheaper. For companies looking to opportunistically expand through M&A, sale-leasebacks are an excellent tool to add to the capital stack. By pursuing a sale-leaseback concurrently with a new acquisition, the acquirer can reduce their equity check and boosts returns – effectively ‘buying down’ the acquisition multiple. Private equity firms, in particular, are increasingly using this technique for buyouts. Read about W. P. Carey’s recent transaction with SK Capital and Apotex to learn more.
While sale-leasebacks are a great capital tool in high-interest-rate environments, they can be just as useful in less turbulent climates. Freeing up capital from owned real estate – in any stage of the market – is an excellent way to invest in the core competencies of a business and fund internal and external growth objectives. Interested in exploring a sale-leaseback? Contact W. P. Carey today!