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
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.
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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.
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.
The Ins and Outs of Sale-leasebacks
What Is a Sale-Leaseback? In a sale-leaseback (or sale and leaseback), a company sells its commercial real estate to an investor for cash and simultaneously enters into a long-term lease with the new property owner. In doing so, the company extracts 100% of the property's value and converts an otherwise illiquid asset into working capital, while maintaining full operational control of the facility. This is a great capital tool for companies not in the business of owning real estate, as their real estate assets represent a significant cash value that could be redeployed into higher-earning segments of their business to support growth. What Are the Benefits? Sale-leasebacks are an attractive capital raising tool for many companies and offer an alternative to traditional bank financing. 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. 100% market value realization of otherwise illiquid assets compared to debt alternatives. Alternative capital source when conventional financing is unavailable or limited. Ability to retain operational control of real estate with no disruption to day-to-day operations. Potential to gain a long-term partner with the capital to fund future expansions, building renovations, energy retrofits and more. Who Qualifies for a Sale-Leaseback? There are several factors that determine whether a sale-leaseback is the right fit for a company. To be eligible, companies must meet the following criteria: Own Their Real Estate The first and most obvious criterion for qualification is that the company owns its real estate or have an option to purchase any existing leased space. Manufacturing facilities, corporate headquarters, retail locations, and other forms of real estate can be potential candidates for a sale-leaseback. Unlocking the value of these locations and redeploying that capital into higher yielding parts of the business is a key driver for companies pursuing sale-leasebacks. Be Willing to Commit to Operating in the Space While the term of the lease in a sale-leaseback can vary, most investors will want a commitment from a future tenant to occupy the space for a 10+ year term. Assets critical to a company’s operations are often good candidates for a sale-leaseback because a company is willing to sign a long-term lease for those locations. This makes it a more attractive investment for sale-leaseback investors as they have more security that the tenant will stay in the facility for the long term. Have a Strong Credit Profile Companies do not need to be investment-grade quality to pursue a sale-leaseback. However, some credit history is typically required so the sale-leaseback investor knows that the business can make rental payments over the course of the lease. Sub-investment-grade businesses are still eligible as long as they have a strong track record of revenue and cashflow from which to judge their creditworthiness; however, they may need to find an investor who has the underwriting capabilities to assess their business. Minimum revenue and profitability requirements will vary based firm to firm, so it’s best to ask about this upfront before engaging with any particular sale-leaseback partner. Qualities to Look for in a Sale-leaseback Investor When considering a sale-leaseback, finding the right buyer is critical in order to ensure a company is maximizing the value of their real estate. Here are some of the key qualities to look for in a sale-leaseback investor. Experience A knowledgeable investor can offer more flexibility and guide sellers through the process, creating customized deal structures to meet all of a company’s unique objectives and avoid potential pitfalls. Additionally, experienced investors can typically navigate all market cycles and offer certainty of close (some in as little as 30 days), ensuring the deal closes in a timeframe that works for the company and their fiscal requirements. An All-Equity Buyer When looking for a sale-leaseback partner, finding an all-equity buyer is important, particularly when dealing with timing constraints. All-equity buyers don't have to worry about third-party debt or financing contingencies, meaning there’s less likelihood of a re-trade in the late stages of negotiation. All-equity buyers can also typically close faster as they do not need to wait on approval from banks or lenders, providing a smoother process overall. A Long-Term Real Estate Holder Finding a long-term investor is vital. Sellers don’t want someone who is simply looking to flip a property for a quick profit. Instead, look for an investor who will remain a committed partner to you over the long run and one that can provide capital for future projects such as expansions, renovations, or energy retrofits. Diverse Knowledge and Experience Different industries, property types and locations require unique expertise to efficiently and effectively partner with sellers to structure a deal that address the needs of all parties. Working with an investor with experience in the company’s specific industry, property type and/or country ensures that all potential risks and opportunities are considered before entering into a sale-leaseback agreement. For example, if you are considering a cross-border, multi-country transaction it’s critical you look for an investor with local teams in those countries who speak the language and understand the local rules. What is a Build-to-Suit? When looking into a sale-leaseback, another term companies may encounter is a build-to-suit. In a build-to-suit, a company funds and manages the construction of a new facility or expansion of an existing one to meet the specifications of a prospective or existing tenant. Upon completion, the company enters into a long-term lease, similar to a sale-leaseback. For companies looking for a brand-new property, this is a great solution that requires no upfront capital. The Main Benefits of Build-to-Suits Include: Development of a custom-built facility in a location of the company’s choice. No upfront capital required, enabling the company to preserve capital for its business. Ability to retain operational control of the facility post construction. Potential to gain a long-term partner with the capital to fund future expansions, building renovations, energy retrofits and more. Conclusion While sale-leasebacks may seem intimidating for companies who have never pursued one, working with an experienced and well-capitalized investor can make the process easy. When working with an investor like W. P. Carey, sellers can ensure they are working with a partner that can understand the unique requirements of their business while having the added option of closing in as little as 30 days and the added advantage of gaining a long-term partner who can support its tenants through 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. In all market conditions, sale-leasebacks are a great financing tool to unlock otherwise illiquid capital that can be reinvested into a company’s business to support future growth. Think a sale-leaseback is right for your company? Contact our team today!