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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.”
Charting a Path Forward
The CFO role has evolved over the years, expanding from its traditional financial focus to a broad range of strategic responsibilities. Today's CFOs wear many hats – from financial planning to compliance and risk management and strategic decision-making, among many others. In an environment marked by rapid technology advancements, market volatility and regulatory changes, CFOs play a crucial role in guiding organizations through challenges to build resilience and maintain profitability. In this blog, we delve into CFOs’ top priorities for 2024, drawing from a recent Gartner survey, and explore how leveraging sale-leasebacks can unlock capital to address these priorities. 1. Leading Transformation Efforts Embracing technology and automation remains a top challenge for organizations. Recognizing the crucial role of technology in enhancing business efficiency, compliance and competitiveness, CFOs will focus more on leading digital transformation efforts, both within their departments and across the entire organization. CFOs are integral to driving business transformation, especially in evaluating the best initiatives to adopt and their contribution to the bottom line. As companies scale, continuous implementation of emerging technologies becomes essential for efficient growth management. 2. Evaluating or Improving Financial Strategy Managing the finance function is a core responsibility for CFOs, and is vital for business growth and continuity. With the current economic and market volatility, CFOs will focus more on evaluating and improving the finance function's strategy. A robust financial strategy is essential to meet short and long-term financial goals and ensure positive business outcomes. It offers a better understanding of the company's present financial situation, assesses potential risks, outlines income goals, identifies competencies, investment strategies and funding options necessary to realize those goals. 3. Improving Finance Metrics, Insights and Storytelling Understanding financial metrics and insights is crucial not just for CFOs, but the whole organization. As such, leveraging data visualization can help simplify complex concepts, streamline reporting and foster collaboration across the organization. This can enable companies to tell stories and drive better understanding of their messaging among core audiences, including investors, which can potentially boost valuation. CFOs will prioritize improving finance metrics, insights and storytelling to achieve these and other benefits. 4. Leading Change Management Efforts CFOs will also prioritize leading change management in 2024. Resistance to change among employees is a common challenge often triggered by factors like fear of the unknown, lack of trust in leadership or loss of control. Effective change management is thus vital to organizational success. Strategic leadership promotes consistency, builds employee trust, enhances cost management and enables organizational agility, among other benefits. 5. Optimizing Costs Optimizing costs is yet another area of precedence for CFOs in 2024. Strategic cost management is essential for the realization of organizational goals, especially in volatile times. Possible initiatives include, promoting cost-consciousness across the organization to reduce operating costs, adopting new technology and automation to address inefficiencies, embracing data-driven decision-making and improving vendor management. The Key to Make it All Happen The success of an organization's financial initiatives hinge on the availability of capital. Particularly in an uncertain rate environment, access to liquidity is essential in providing companies with flexibility and growth capital. For companies that own their real estate, sale-leasebacks offer an alternative capital source to support CFOs’ 2024 priorities. These transactions enable companies to access immediate funds while maintaining operational control of their facilities. However, several considerations must be addressed to determine the suitability of a sale-leaseback for a business. First, sale-leasebacks only makes sense if the company owns its real estate. Additionally, a strong credit profile is necessary and a willingness to commit to a long-term lease is essential. The W. P. Carey Solution With all the conditions met, a sale-leaseback is a handy strategy that CFOs can explore to raise the much-needed capital to support the above priorities. At W. P. Carey, we have helped many companies in North America and Europe leverage this financing solution for over 50 years. If you're considering unlocking capital for your operations this year through a sale-leaseback, contact W. P. Carey today!
Expectations for MIPIM 2024
MIPIM, the world's largest real estate conference, will get underway in Cannes next month with over 20,000 delegates expected to attend. As in years past, many will be looking for the conference to bring some clarity on what the real estate industry should be looking out for in the year ahead. While the industry outlook remains murky, investors entered 2024 with a sense of optimism. Here are the biggest questions delegates will be looking to answer at MIPIM 2024. Have Eurozone interest rates reached their peak? The market consensus is generally that the European Central Bank (ECB) has completed or is nearing the end of its rate hiking cycle. However, much to the disappointment of the market, the ECB did not give an indication on when rates would be cut. As a result, a continued upward pressure on yields and downward pressure on real estate valuations is expected through 2024. On a positive note, interest rates reaching their plateau should help jump start the investment market. Greater predictability will contribute to value discovery, cap rate stabilization and tightening bid-ask spreads. This will result in greater transaction activity and hopefully many discussions around prospective deals at MIPIM! What's the outlook for the European sale-leaseback market? Given borrowing costs are expected to remain high in 2024, sale-leasebacks will continue to be an attractive solution for companies to unlock the value of otherwise illiquid real estate assets. Furthermore, with a large share of speculative-grade debt expected to mature in 2025 and 2026, more companies will likely leverage sale-leasebacks for additional proceeds to get refinancing done. Sale-leasebacks offer permanent, long-term capital with no refinancing risk or balloon payments, which remains a very attractive alternative for companies in need of extra cash. In addition, M&A activity is expected to increase in 2024, with private equity firms sitting on over $2.5 trillion in dry powder. Typically when M&A activity increases, there is an uptick in sale-leaseback opportunities, as private equity firms are increasingly leveraging sale-leaseback financing as part of the capital stack for new acquisitions. How can the real estate industry make ESG commitments a reality? The rollout of the EU’s Corporate Sustainability Reporting Directive (CSRD) has put increased pressure on real estate companies to both implement and report on their ESG initiatives. As a result, companies are developing strategic plans to create and maintain sustainable real estate portfolios while also preparing to meet upcoming compliance standards. The challenge the real estate industry faces today is turning commitments into reality. One of the most important steps companies can take is creating more efficient and automated processes for the procurement and management of ESG data. The use of business intelligence and building technology significantly enhances the data collection process, allowing companies to evaluate potential building improvements, review opportunities to reduce emissions and meet future reporting requirements. MIPIM offers a valuable platform for the industry to discuss new ideas and possible solutions related to ESG.
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.
What to Expect When Selling to W. P. Carey
W. P. Carey is a leading global real estate investment company, specializing in the acquisition of operationally critical, single-tenant properties in Europe and North America. With over 50 years of experience and a portfolio of over a thousand properties in 25 countries, W. P. Carey has an established track record of enabling companies to unlock the value of their real estate. We develop creative deal structures tailored to the unique needs of each seller and have the ability to structure complex, multi-asset, multi-jurisdictional deals. Whether you are interested in a sale-leaseback, build-to-suit or the sale of an existing net-leased property, we will work with you to understand your objectives and maximize the proceeds to reinvest in your business. We pride ourselves on a fast and efficient deal process, completed at a pace that meets the seller’s timing requirements. With the ability to close all equity and in as little as 30 days, W. P. Carey welcomes the opportunity to work with you. 1. Origination W. P. Carey works with the seller and its advisors to shape the scope of the transaction. During this initial phase, W. P. Carey seeks to understand your business needs and real estate portfolio and offers suggestions on the optimal structure based on your unique situation and goals. 2. Offer Using the insights gathered during the origination process, W. P. Carey presents a custom letter of intent outlining the key framework of the proposed transaction. We work together to refine the terms until both parties are in agreement. 3. Approval Following signature of the letter of intent, W. P. Carey presents the transaction to its investment committee and completes its underwriting process. The preparation and negotiation of the transaction documents takes place seamlessly in parallel. 4. Closing All documents are signed and funds are transferred to the seller. As an all-equity buyer, W. P. Carey does not need to obtain mortgage financing to fund its acquisition, providing fast execution and high closing certainty. Interested in selling your real estate to W. P. Carey? Contact us
The Benefits of LED Lighting for Commercial Real Estate Tenants
As environmental concerns become prominent in today’s market and green initiatives drive corporate decisions for investors and consumers, businesses are focused on reducing their carbon footprint. Commercial real estate is one of the largest contributors of greenhouse gas emissions today due to the fuel-generated electricity each asset requires. A misconception about green initiatives is that completing sustainability projects is a complicated process which require extensive capital investment from tenants. However, there are many cost-efficient ways to significantly reduce the carbon footprint of commercial buildings. One solution that can make a substantial difference is the installation of efficient LED lighting systems. The simple upgrade from outdated lighting systems to LED can provide the tenant with operational savings, optimized lighting performance and reduction of its carbon footprint. What makes LED lighting more efficient than other lighting? LED lights use a process called electroluminescence to operate at a far greater efficiency than traditional lighting technologies. LEDs are 80% to 90% more energy-efficient, shine at a cooler temperature and do not contain the environmentally hazardous materials that incandescent lights do. Not to mention, LEDs last longer than any traditional commercial lighting solution. Incandescent lights create illumination by heating a small wire filament. They get extremely hot, losing most of their energy to heat. Halogen and fluorescent lights are more efficient than incandescent bulbs yet costly to obtain. Let's dive deeper into the many benefits of LED lighting, including their long lifespan, financial savings and reduced environmental impact. 1) Long Lifespan LEDs should last for almost 14 years in a building which uses lighting for approximately 10 hours each day. In contrast, the longest lasting fluorescent bulbs will last for about 4 years. This improved lifespan reduces the amount of maintenance work needed to maintain adequate light in a workspace. The average incandescent bulb lasts approximately 1,000 hours without power surges or manufacturing flaws, whereas commercial installations of halogen or fluorescent lighting may last between 2,000 hours to 15,000 hours. The average LED bulb is rated for 50,000 hours of use, multiplying the lifespan of the longest-lasting fluorescent bulbs. 2) Financial Savings LEDs are also the most energy-efficient of commercial lighting options. By switching to LEDs, tenants could see as much as 90% improvement in their overall energy savings, which translate directly into financial savings. Between the savings on monthly utility bills and reduction in maintenance costs, LED lights can bring impactful reductions to a tenant’s operating expenses. 3) Reduced Environmental Impact Due to their low energy consumption, LEDs contribute the least amount of carbon dioxide into the atmosphere of all lighting sources. For example, use of a simple incandescent bulb results in 4,500 pounds of CO2 annually, while LED bulbs contribute only 451 pounds of CO2 per year. LED lights also give off very little heat compared to other types of lighting. Therefore, switching to LEDs can help reduce a building’s temperature and limit the power load on its mechanical systems. LEDs are safe to handle and install which eliminates the risks of burns and potential bulb explosions. Start Enjoying the Benefits of LED Lighting with W. P. Carey Installing LED lighting is one of the best solutions for companies looking to improve the sustainability of their buildings. Those leasing commercial space may be able to leverage their relationship with the landlord to explore LED installations. W. P. Carey is a leading real estate investor with a portfolio of over 1,400 properties and recently launched a suite of sustainability offerings for tenants, including LED lighting installations. With no upfront cost to tenants, W. P. Carey will manage the design, development and implementation of LED upgrades at its portfolio properties. A more sustainable and energy-efficient commercial property is a win-win for both the tenant and the building owner. By embracing opportunities such as LED lighting installations, tenants can save money, reduce carbon emissions and fulfill their sustainability goals. Check out a recent case study featuring an LED lighting transformation or contact W. P. Carey today to learn more!
Where Will Net Lease Go in 2024?
In 2023, higher debt costs, a looming $2 trillion-plus wave of corporate debt coming due and other economic uncertainty have clouded the CRE outlook. And while the net lease sector, with its low risk and steady income, has weathered recent economic headwinds better than most, it’s not immune. Execution uncertainty was a central theme in 2023, reports Zachary Pasanen, managing director, investments at W. P. Carey. “With the ramp-up in interest rates, buyers and sellers have struggled to meet at a price that made sense,” he says, noting that a lot of deals after the first quarter had repricing challenges or re-trade concerns. In a competitive market, those who rely on debt financing have been constrained by higher rates. Investors, however, are still seeing cap rate expansion within certain sectors. Shifting Rates & Fundamentals With deals more difficult to come by, investors have re-focused on fundamentals. Pasanen notes that, with industrial, this has meant a refocus on rent growth and the assets “criticality.” There remains good demand for industrial assets, but investors should realize the changing fundamentals of the sector: it is no longer the “darling” product, attracting unlimited cheap capital in pursuit of properties requiring lower capex. Pasanen uses the word “retrenchment” for the asset class as people are getting smarter with rent growth projections following their internal modeling. “With the sector still offering a lot of attractive elements, there is no desire to move out of the sector,” he says. “Unlike office, we view industrial, particularly manufacturing, as profit centers: it’s where the widgets are made. We focus on good, underlying fundamentals but also where there’s criticality in the real estate.” The sudden shift in rates has caused a break in investor expectations, Pasanen says, with one-off, syndicators or family offices still pursuing at compressed numbers. Meanwhile, institutional investors are focusing on tenant credits and cap rates at 8% and higher. Outlook Pasanen notes there’s opportunity in sale-leasebacks for companies looking to raise capital. He says W. P. Carey has a successful history here, taking the time to understand a business to ensure they will be a good investment for the long haul. “No one has a perfect crystal ball, but we try our best and we've got a long history of underwriting credits that are sub-investment grade in nature, and we have a good track record in doing so.” Market expectations are leaning toward interest rate cuts in 2024, an outlook reaffirmed by the Fed’s latest announcement on December 13. Smart investors, however, should prepare for all situations and also have contingency plans for a long pause or even a rate hike if inflation kicks up again. With inflation and increasing interest rates making borrowing more expensive, will CFOs and fund managers continue to strategize on how to recalibrate their business and find that new normal? “I think it will actually be a big year in 2024,” he says. “The rise in interest rates happened quickly so if we have a long pause [on rate movement] the deal environment should become more normalized. When the behavioral element settles in we’ll see more normal investment activity.”
From Risk to Resilience
Today, one thing you can count on is constant change. CFOs are steering companies through the murky waters of uncertainty, tasked with a long list of responsibilities that extend from financial planning to risk mitigation and operational strategy. They're the key players who have to balance near term-decisions with long-term outcomes. This article is all about providing CFOs with actionable insights on how to transition from risk management to resilience building. We'll examine the importance of investing in the right team, the transformative power of innovation and the art of managing cash flow for strategic growth. A special focus will be given to the potential of sale-leasebacks, an often underutilized form of alternative financing that can unlock significant capital. Whether you're a seasoned CFO or new to the role, this guide is the roadmap you need to help you rise above uncertainty and prepare your organization for sustainable growth. Invest in Your Team A strong team is the foundation of a resilient company. The right people bring wide-ranging perspectives that can make a real difference. What does this really mean for CFOs who are charting a course for growth and resilience? The Value of a Multifaceted Team A one-dimensional team just won't cut it in today's fast-paced business world. Companies need to have the right combination of skills and perspectives to navigate the complexities of the modern market. Each member of your team should bring a unique skill set that complements the others. Take Google, for example. The company succeeds because it values new ideas, driven by a diverse team of engineers, data scientists, marketers and even psychologists. This multifaceted approach has been key in Google's ability to stay ahead of the curve. Actionable Tip: Conduct a skills gap analysis to identify what your team is missing. Then, target those areas in your hiring and training efforts. The Importance of Continuous Learning The business landscape is always evolving, and your team should be doing the same thing. Continuous learning opportunities not only help team members get better at their job but also boosts employee morale and retention. Actionable Tip: Allocate a portion of your budget for employee development programs. Whether it's workshops, online courses or conferences, make learning a priority. Building a Culture of Resilience A resilient team can adapt to change, bounce back from setbacks and seize new opportunities. It's more than just the luck of the draw. Investing in your team is a deliberate, strategic move that results in growth and resilience. Actionable Tip: Invest in training programs and hire from a diverse talent pool to bring in a variety of skills and perspectives. Create a company culture where failure is seen as a learning opportunity. Encourage open communication to address challenges head-on. Embrace Innovation Innovation isn't just about thinking up the next big trend. It's about optimizing your current processes to be more efficient. Digitalization is a key player here. But how do CFOs use automation and technology to pursue operational excellence and business growth? The Digital Transformation Journey A digital transformation is a strategic overhaul of business activities, processes and models to fully take advantage of the changes and opportunities that digital technologies have to offer. General Electric (GE) underwent a massive digital transformation to evolve from an industrial company into a digital-industrial company. The process involved implementing new technologies but also rethinking their entire business model. Actionable Tip: Start by auditing your current tech stack. Identify outdated systems that are slowing things down and look for modern solutions that can streamline operations. Data-Driven Decision Making The ability to make informed decisions is a big competitive advantage. Data analytics tools can provide insights into customer behavior, market trends and operational efficiencies. That wealth of information provides many opportunities to take your operations to the next level. Actionable Tip: Invest in data analytics tools that can provide actionable insights. Train your team to interpret and use this data effectively. Automation Automation can take over repetitive tasks, freeing up your team to focus on more strategic initiatives. For CFOs who need to manage resources efficiently, the time saved is invaluable. Actionable Tip: Identify bottlenecks in your current processes and give some thought to how digital tools can eliminate them. Look for tasks that can be automated to save time and resources. Embracing innovation is a necessity for CFOs aiming for efficiency and growth. And remember, innovation isn't a one-time event but an ongoing process. Keep your eye on new technologies and be ready to adapt. Manage Cash Flow Managing cash flow can be quite a juggling act. You need cash for day-to-day operations, but also to invest in growth. This is where sale-leasebacks come into play as a form of alternative financing. But let's take a closer look at the nuances of cash flow management, especially for CFOs who are trying to steer the financial ship through both calm and choppy waters. The Liquidity Conundrum Liquidity is like oxygen for a business. Without it, your operations can grind to a halt. But hoarding money isn't the answer either because idle cash doesn't generate returns. Actionable Tip: Maintain a cash reserve covering at least three to six months of operating expenses. This gives you a safety net while allowing you to invest in growth. Creative Financing Investing in growth is important, but it's easier said than done, especially when liquidity is tight. Creative financing options like sale-leasebacks can be a lifesaver. What is a sale-leaseback? A sale-leaseback is when a company sells its property to an investor for cash and simultaneously enters into a long-term lease. This frees up capital tied in real estate, which can then be redirected toward growth initiatives. It’s also permanent capital that never has to be repaid so there is no future refinancing risk. For example, a retail chain could use a sale-leaseback strategy to free up capital and then turn around and invest in expanding its online presence. Actionable Tip: If you own valuable real estate, consider a sale-leaseback as a way to unlock permanent capital with no refinancing risk, while maintaining operational control of your building(s). The Role of Financial Forecasting Accurate financial forecasting can be a huge advantage. It helps you anticipate cash flow needs, making it easier to plan for investments and contingencies. It's another highly useful way CFOs can ensure financial stability and growth. Sale-leaseback arrangements also typically involve set lease payments over a period of many years (anywhere from 10-30 years). This predictability in cash outflows can make it easier to forecast future expenses. Actionable Tip: Invest in financial forecasting tools and, if possible, bring in experts who can help you make the most of them. Additional Strategies for CFOs Navigating the financial landscape requires more than just a good compass. It requires a multi-pronged strategy. In addition to investing in teams, embracing innovation and managing cash flow, there are other tactics CFOs can use to build resilience and drive growth. Scenario Planning Always have a Plan B and even a Plan C. The more prepared you are for different scenarios, the more resilient your company will be. During the COVID-19 pandemic, companies that had robust contingency plans were more nimble and able to better adapt to the new environment, ie. moving to remote work or finding new suppliers. Actionable Tip: Use financial tools to test out the impact of different business scenarios. This helps you prepare for unexpected issues, so you can make faster, smarter choices. Debt Management Look for ways to reduce or retire debt. This will improve your balance sheet, boost your credit metrics and increase cash flow. Sale-leasebacks can be another useful tool in this regard, enabling companies to unlock attractive capital to pay off debt coming due. Another benefit of a sale-leaseback is there is no refinancing risk or back-end balloon payments. Actionable Tip: Review your debt profile regularly and consider sale-leasebacks as a way to strengthen your balance sheet and avoid expensive debt refinancing. Transparency Keep the lines of communication open with all stakeholders. Transparency builds trust, which is invaluable in times of uncertainty. Actionable Tip: Use multiple channels like email updates, town halls or even social media to keep stakeholders informed. Transparency is about being honest when challenges arise. Final Thoughts: The Road to Resilience Resilience is about building a business that can withstand the shocks and disruptions that come its way and emerge stronger and even more competitive. For CFOs, this means wearing many hats — from being a strategic advisor and risk manager to an innovator and financial steward. Remember that resilience is a journey, not a destination. It requires continuing effort, strategic planning and the right set of financial tools. Sale-leasebacks are one such tool that every chief financial officer should have in their arsenal, offering a practical solution to one of the most pressing challenges: balancing liquidity and growth. Ready to unlock new growth opportunities for your business? Contact W. P. Carey today to explore whether or not a sale-leaseback makes sense for you!
A Focus on the Future
The mood at this year’s EXPO Real was understandably somber. Investment volumes across Europe are down significantly and uncertainty around the future of interest rates prevails. While typically a platform to get deals done, attendees this year were more focused on getting a better understanding of the market and discussing challenges, solutions and opportunities for the year ahead – neatly summed in the slogan “survive to ’25.” Here were three of the most prominent topics discussed. Interest rates hinder transaction volume Just a few weeks prior to EXPO, the European Central Bank raised interest rates to a record high. ECB officials believe that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution” to reducing inflation, although did not rule out further increases. The uncertainty surrounding where rates will peak – and when they will potentially decrease – has created turmoil in the investment market, with Search -global commercial real estate transaction volume down 54% year-over-year as of the end of the second quarter. Most attendees at EXPO largely echoed that rates will likely not start to decrease in the near future, meaning the financing environment through the end of the year and into 2024 will remain challenging. This high interest rate environment is most challenging for asset-level borrowers, as lending for individual properties is increasingly difficult to secure. With no rate cuts in sight, the consensus was that deal volume will be muted into 2024 as both buyers and sellers adjust to the new real estate cycle and pricing expectations. New development stalling due to insolvencies Another topic of conversation was the increasing number of developers, particularly in the German market, that have filed for insolvency due to rising interest rates and construction costs. Big names such as Gerch and Development Partner have gone under, with more project development casualties expected to follow in the coming weeks as lenders look to get out. A recent Development Monitor survey shows that 40% of all development projects in the country are running at least a quarter or more behind schedule, with the number of new developments being started also down 50% from last year. Though these development challenges have largely impacted the residential market so far, we expect it will trickle into commercial real estate, adding to the long list of struggles the German market is facing. Sale-leasebacks in the spotlight A beacon of hope in the real estate market is that the sale-leaseback model remains an attractive financing option for corporates looking to unlock immediate capital. Cap rates on sale-leasebacks have increased less than interest rates on bank loans, making them a more attractive financing option for companies on a cost-of-capital basis. In this environment, the influx of cash from a sale-leasebacks can be incredibly valuable for companies, supporting debt restructuring, strengthening their balance sheet and providing capital for operating expenses and growth investments. W. P. Carey has been operating for 50 years through all real estate cycles, and in our experience, sale-leasebacks are a great tool for corporates in any market environment. While 2024 will certainly have its challenges, we are optimistic about the future and are confident in our ability to continuing working with companies to realize the full value of their real estate assets.