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Top 3 Financial Strategies for CFOs to Fund Business
Inflation is currently at 8.2% year to year, way above its 2% benchmark. The Fed has increased interest rates three times in a row to try and keep inflation under control, with promises of further interest rate increases to achieve a terminal target of 4.6% in 2023. Higher interest rates have a direct impact on your funding efforts. Increasing rates reduces spending power, causing stock prices to fall almost immediately while increasing the cost of debt. In an ideal world, you would be able to make all the money you need by simply selling goods and services. But the general business strategy is that you need money to make money, which means getting external funding. Finding affordable funding can be a difficult strategic decision for any chief financial officer, especially in the current economy. While equity and debt are major sources of business funding, a sale-leaseback is a good option to consider when you are looking for more affordable financing. Here's a closer look at the pros and cons of debt, equity and sale-leasebacks and why a sale-leaseback may be the best financial strategy for your company in the prevailing economy. Public markets capital raise (equity and debt) One of the ways to raise funds is through debt or equity financing. With debt financing, you issue corporate bonds to the public and pay back the full loan amount plus interest upon maturity of the bond. Corporate bonds attract a higher rate of interest than government bonds because of the perceived higher risk, meaning more costs for you. Equity financing involves selling company shares in the stock market and paying the equity holders a dividend or return should the stock value appreciate. Your obligation to pay earnings to equity holders will depend on the types of shares held. Preferential shareholders receive payments first, while common shareholders get paid after creditors and preferred shareholders. Pros You can raise large sums of money from the public. Interest rates paid are typically lower than bank interest rates. Stock issuance does not require you to pay investors. Payments are based on business performance. Interest on debt financing is tax deductible but there are limitations. Cons The current rising interest rates have caused a general fall in share prices, making equity funding a less ideal way to raise funds. Equity raises dilute stocks since each shareholder owns a small piece of the company. The current economic slowdown makes it harder for businesses to get debt financing. Even when you do, the cost of debt is high and you have to pay lenders regardless of the performance of your business. While you do not have to repay equity, shareholders are entitled to a share of a company's earnings. Dividends paid to investors are not tax-deductible like in debt financing. Investors are a huge part of your company's decision-making. Outside funding can cause tension between your company and investors. Loans A loan can be handy when you need working capital or funds for short-term needs, especially when you are running a high-growth business. In this case, you can borrow money privately, for instance, from a bank. Pros The market has a variety of lenders you can chose from. Interest on debt financing is tax-deductible but there are limitations. Private borrowing can help boost your credit score. Cons Interest rates are rising, making it difficult to find a good rate for your loan. Banks are increasing their lending restrictions. Refinancing a loan can be more expensive as interest rates keep rising. You have to repay lenders even when your company isn't doing well, which can result in bankruptcy or litigation. Debt and equity finance can be risky. Failure to repay public debt or a loan can result in default or bankruptcy which affects corporate credit scores. Equity financing also has its downsides since you miss out on tax benefits and also risk ownership dissolution since new and old investors expect a share of corporate profits. These cons are a great reason why sale-leasebacks are the more attractive option. Sale-leaseback What is a sale-leaseback? A sale-leaseback, also called a sale-and-leaseback, is an agreement between you and an investor where you sell your real estate for 100% of the value of your property and simultaneously enter into a long-term lease for the same property. A sale-leaseback is not classified as debt or equity but as a hybrid debt product. You can access much-needed capital when you sell your real estate within a sale-leaseback agreement without increasing your debt. A sale-leaseback is the best financing option when you have cash invested in your property or land that you could use to better your cash flow or invest in profitable business projects while maintaining operational control of your asset. A sale-leaseback is one of the best financial strategies for CFOs to fund business as it can improve your financial statements. By enabling you to pay down debt and improve cash flows, sale-leasebacks can improve your company’s balance sheet health. Pros Rental payments from a sale-leaseback qualify for tax deductions. You transfer the volatility risks of owning your real estate to the new owner. The agreement involves a long-term lease at your agreed-upon rental rate, providing stability for the future. Sale-leasebacks generally fetch a lower rate in the current environment when compared to debt financing. You get a long-term capital partner who can fund future expansions, renovations and build-to-suits to help grow your business. If you're not in the business of owning real estate, you can unlock 100% of cash in illiquid real estate at market value and reinvest it in profitable areas of business. You can maintain operational control of your real estate after selling it. A sale-leaseback gives you immediate access to capital to reinvest in your core business operations compared to a loan or equity financing which may take some time. Cons If you've never done a sale-leaseback, you may not even know how to start. W. P. Carey can help. We specialize in acquiring real estate and creating custom sale-leaseback structures to meet your unique needs. You need to own your real estate assets to pursue a sale-leaseback, so this type of financing may not be possible for some businesses. We're here to help with your sale-leaseback needs If you are looking for more cash flow for your business, you could take the traditional route with capital raising or a loan or go for a sale-leaseback. A sale-leaseback may be the more attractive strategy to secure the financial flexibility you need to pursue your strategic business goals. Learn more about sale-leasebacks and how other companies use them as a powerful capital solution to fund business growth. Think a sale-leaseback is right for your company? Contact our team!
Leveraging corporate finance to unlock real estate capital
Economies and markets have grappled with a succession of enormous challenges in the wake of the pandemic. Healthcare and geopolitical crises have cascaded into the fiscal, financial, supply chain and monetary realms, with inflation rearing its head and interest rates rising in its wake. Rising interest rates will, in our view, cause commercial real estate values to correct significantly over a two-year timeframe. Some investors are taking to the side-lines in this period, subduing overall activity. Others are seeking opportunities. Many of these opportunities will emerge among corporates seeking to monetize their property assets in order to release capital. This will be for both defensive purposes (for instance, to service or pay down debt), or to explore new growth opportunities of their own. Written by Colliers Corporate Capital Solutions and featuring contributed content from Christopher Mertlitz, Head of European Investments at W. P. Carey, this 24-page whitepaper seeks to educate the reader on the macro-outlook of the global real estate pricing reset and evaluates a range of lesser-known capital-raising options for corporates to consider as traditional lenders grow more risk averse and bond issuance looks less attractive. Given the current market dynamics, sale-leaseback strategies appear to be emerging as the preferred solution for many corporates, particularly sub investment-grade organizations seeking to strengthen balance sheets. Find out why in this latest report.
Optimism Amidst Uncertainty: Key Takeaways from EXPO Real
Earlier this month, Europe’s largest real estate trade show EXPO Real returned in Munich. Nearly 40,000 attendees gathered to network and discuss trends, innovation and opportunities in the real estate market. Traditionally, EXPO is a place “where deals get done” but given the current challenges in the macroeconomic environment attendees were more focused on understanding where the market is heading into 2023. Here were three of the most prominent topics discussed. Rising interest rates With the European Central Bank announcing its third consecutive rate hike this month, interest rates were the main topic of discussion at EXPO Real. Largely, attendees were focused on how assets should be priced to reflect rising rates, with the consensus that we’ll continue to see cap rates rise and property prices fall into next year. However, a big challenge that attendees are facing is how to bridge the gap between seller expectations and the pricing buyers will need to generate adequate returns. To compound the issue, inflation remains at record highs in Europe which means more interest rate increases are certainly on the horizon. This will create an even more challenging environment for real estate investors that require third-party debt financing to close transactions, making all-equity buyers better positioned to execute on deals. Logistics still dominant Despite the macroeconomic doom and gloom, the current market still has room for certain sectors to thrive. Logistics remains the darling of the real estate world, with Europe seeing record logistics investment volumes in the first half of 2022. 20% of all real estate investment in Europe is in the logistics sector, suggesting there is still a very strong investor appetite for the asset class. The sector continues to benefit from tailwinds amplified by COVID such as the rise of e-commerce, which continues to drive occupier demand for logistics and warehouse space. Record-low inventory and high demand have meant the logistics sector has been slower to see cap rate increases than others; however, many are seeing a re-pricing period take place which is critical for investors looking to close transactions. Sale-leasebacks gaining prominence as bank lending becomes more restrictive Amidst all the uncertainty at EXPO Real, there was still an undercurrent of optimism among attendees. Historically, we’ve seen more sale-leaseback opportunities come to market in challenging economic environments as a result of companies seeking ways to shore up capital to support ongoing business operations and growth. With banks becoming more restrictive with lending, alternative forms of capital such as sale-leasebacks provide an immediate opportunity to plug the financing gap for companies. And with interest rates likely to continue rising into 2023, now is a great time to pursue a sale-leaseback and lock in an attractive rental rate for the long-term.
Three Ways Supply Chain Disruptions are Impacting the Commercial Real Estate Market
The emergence of the coronavirus in early 2020 caused a drastic slowdown in supply chains across the globe. Labor shortages, fluctuating consumer demand, disruptions in shipping lanes, COVID-19 restrictions as well as general economic uncertainty caused major disturbances in the flow of goods. The war in Ukraine further compounded these issues by cutting off the supply of critical raw materials and ratcheting up energy costs. These disruptions have caused several challenges and opportunities for commercial real estate as the industry focuses on restoring the reliability of the global supply chain. Here are three of the most significant impacts: Rising demand for warehouse space During the pandemic, many companies struggled to restock in-demand products driven by a steep increase in online orders amid global lockdowns. Once lockdown restrictions loosened, this led to an “inventory bullwhip effect” as companies over-purchased merchandise to avoid future inventory shortages. Sustained supply-chain bottlenecks led retailers to continue over-purchasing—shifting from “just-in-time” inventory management to a “just-in-case” model in an effort to keep more inventory onsite. As a result, the demand for warehouse space skyrocketed. The impact of this rising demand is significant. On one hand, warehouse sellers can get a significant premium for their property if they pursue a sale-leaseback of their real estate. However, companies looking to acquire or rent warehouse space might have a difficult time as vacancies are at record lows—for U.S. industrial properties it’s just 4.1%. Supply chain disruptions causing delays in construction materials also increase the build time for new warehouses, meaning many companies are left waiting several years for the space they need to accommodate today’s surging retail inventories. From an investor perspective, rising demand often translates to low cap rates for well-located warehouses despite inflationary pressures and rising interest rates. However, the shortage in available space also enhances the criticality of these properties to tenants, making them less likely to vacate at the end of the lease term. Re-shoring supply chains Supply chain disruptions highlighted the risk of off-shore operations for many manufacturers. As a result, many manufacturers are making the decision to re-shore their production facilities to protect against such disruptions in the future. In fact, in 2021, a record 1,800 companies re-shored their production operations in the U.S. Companies looking to re-shore production are choosing locations with a high availability of land for development, a large pool of skilled labor and well-developed transportation infrastructure including railways and ports. This has led to an increase in development in the Midwest and South due to both regions’ access to rail infrastructure and seaports respectively. While re-shoring has contributed to the rising demand for warehouse space, it has also opened up new opportunities for investors as companies look to rent existing warehouses in tertiary markets that may not have historically been attractive, but have access to transportation infrastructure and land available for development. Increased interest in last-mile logistics space With limited warehouse space available, companies are having to get creative with their distribution strategies. One such method is through last-mile warehouses, which facilitate the movement of goods in the supply chain to the final destination. These warehouses are typically located close to the consumer and therefore decrease supply-chain costs while minimizing delivery time. As a result, warehouses situated near major highways and bridges that lead into metropolitan hubs are becoming highly in-demand for companies looking to make their distribution network more nimble. This presents an opportunity for investors who own these types of facilities to capitalize on demand and secure high-quality tenants on long-term leases.
Three Ways CFOs are Leveraging Sale-leasebacks to Prepare for a Recession
The U.S. economy has hit some major roadblocks in recent months. Sustained high inflation, supply chain disruptions and rising interest rates have all signaled to economists that we are either in or on the verge of a possible recession. While there is no universal playbook on how to prepare for a possible recession, for companies that own their real estate, a sale-leaseback is one lesser-known, value-extracting method savvy CFOs should consider. In a sale-leaseback a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease. Proceeds from the sale-leaseback can then be used to bolster a business’ balance sheet and provide the financial flexibility to help navigate a volatile economic environment. Here are three ways CFOs are using sale-leaseback proceeds to grow their businesses and prepare for an uncertain future: Pay down debt and improve credit The last thing businesses want to deal with when a recession hits is mountains of debt to pay down with limited cash flows. By pursuing a sale-leaseback now, companies can unlock capital to reduce leverage and improve their balance sheet health. The reduction in leverage helps improve both a business’ debt / EBITDA ratio in addition to debt / capitalization. As a result, companies will have less debt obligations to worry about and may even improve their credit – leaving them better positioned to weather an economic downturn and secure loans at attractive rates in the future should they need to. Redeploy capital to higher ROI business segments It is almost always the case that businesses can earn more by reinvesting the capital locked up in their real estate (an otherwise illiquid asset) into their core business operations. This makes sale-leasebacks an attractive capital tool for almost any business with owned real estate. Common uses of sale-leaseback capital that can boost a business’ returns include, acquiring new equipment, funding R&D, launching new product lines as well as growing their market share in existing business lines through acquisitions. Improving the efficiency of a business while increasing profits will not only help companies endure a short-term recession, but also position the business for long-term success. Unlock financial flexibility for future growth Sale-leasebacks are a unique financing structure as they give a business the opportunity to convert a non-earning asset into growth capital. Sale-leasebacks also typically have no more restrictive financial covenants than a traditional bank loan – providing CFOs with significant discretion in determining the best use of their company’s cash. In a recessionary environment when companies typically struggle with dwindling cash flows, having the extra capital from a sale-leaseback could offer companies the financial flexibility to take advantage of growth opportunities as they arise, setting them apart from their competitors who may be struggling just to stay afloat. Conclusion For many companies, sale-leasebacks are a cost-effective strategy to unlock capital which can help improve balance sheet health and enable companies to invest in growth, positioning them for longevity and success even amidst an economic downturn. Given the rising rate environment, it’s also advantageous for a company to pursue a sale-leaseback now to lock in an attractive long-term rental rate before interest rates likely rise again in the fall. Ultimately, preparing for a recession comes down to preparation. By making strategic business choices now, CFOs can prepare for an uncertain future.
Benefits of Green Leasing for Net Lease REITs
The real estate industry continues to face increased scrutiny regarding climate-related disclosures from many different stakeholders, including investors and regulatory agencies. As the SEC finalizes its proposed rules around these disclosures, the net lease industry is grappling with how to collect and report on climate-related data given the majority of a net lease REIT’s carbon emissions are Scope 3, or indirect. Without any direct control over the operations of their properties, net lease REITs have the added challenge of establishing access to their tenants’ utility data in order to understand the power consumption and potential sustainability opportunities at their properties. One effective approach to improving sustainability and disclosure quality for net lease REITs is through green leasing, in which green clauses are incorporated into leases that encourage landlords and tenants to collaborate on energy efficient and sustainable practices by aligning financial incentives and sustainability goals. Here are three of the most significant benefits of green leasing for net lease REITs: Increases data transparency to help identify a greater number of sustainability opportunities Collecting sustainability-related data has historically been difficult for net lease REITs due to the triple-net lease structure whereby tenants are responsible for the day-to-day operations of the property. However, by implementing a green clause in their leases, landlords can require tenants to disclose electricity, water consumption, waste management and other energy usage data at their properties. This enables net lease REITs to easily collect data and benchmark the energy usage of their portfolio to better identify inefficient buildings and target attractive sustainability opportunities within their portfolio. Incentivizes landlords to invest in green building upgrades There are a number of ways green leasing can support the implementation of projects that reduce a property’s carbon footprint. For example, green leases can include a clause that give landlords the ability to install on-site renewable energy such as solar panels at their properties so long as they can sell power back to the tenant at the same retail electricity rates as the tenant pays a utility company. Furthermore, green leases often include cost-recovery clauses for energy efficiency upgrades which helps solve the “split-incentive problem” – where landlords pay 100% of the capital expense for energy upgrades while only tenants receive the monetary benefits attributed to the decrease in energy consumption. Through a cost-recovery clause, landlords can amortize and recover capital costs for energy efficiency improvements, increasing incentives to pursue these types of projects while still benefiting the tenant through cost savings. Fosters greater tenant-landlord sustainability partnerships Perhaps the biggest benefit of green leasing is the improvement in tenant engagement. Green leases are designed to benefit both tenants and landlords, providing incentive for both parties to partner on sustainability projects including renewable energy opportunities, building energy retrofits and green building certifications. In order to implement a green lease, landlords and tenants must engage in an ongoing dialogue and align on sustainability goals, objectives and opportunities, ultimately strengthening the relationship, enabling tenants to achieve their own sustainability goals and improving the likelihood of tenant renewals. Conclusion Green leasing is a great tool to enable both landlords and tenants to reduce the adverse effect that real estate has on climate change. Particularly for the net lease industry, green leasing can help improve energy data collection, enhance the environmental performance of leased properties and align financial incentives so all parties benefit. It’s a win-win-win for everyone involved – landlords, tenants and most importantly, the environment.
Inflation Pumps the Case for Sale-Leasebacks
Money isn't worth as much these days, but it's not getting any cheaper for businesses seeking growth. Facing 40-year-high inflation, the Federal Reserve has gone from 25- to 50- to 75-bp rate increases. Loans may no longer make sense for cash-strapped companies. That said, continued inflation could make a sale-leaseback an attractive alternative, according to Tyler Swann, managing director at W. P. Carey. "A sale-leaseback allows you to lock in your cost of capital for a very long term," says Swann. "If you take the view that interest rates are going to continue to rise, locking in that cost of capital today could be very valuable for you." A sale-leaseback is when a business sells its real estate for cash and leases it back on a long-term basis from the seller. Often, the buyer-landlord is a REIT or other institutional investor that is equipped to make the most out of a real-estate asset. The seller-lessee company, meanwhile, benefits by being able to invest the value of the asset into the business. Swann makes the general case for sale-leasebacks more succinctly: If you're not in the business of real estate, why be in the business of real estate? "It is almost always the case that an owner of a business can earn more on reinvesting money in their business than they can on having that money locked up in real estate," says Swann. "It's more capital-efficient to have that building owned by investors who want to take that risk specifically." This two-way street of capital efficiency is heightened in the inflationary context because of how a business's needs differ from those of an investor. "Because of the Fed's aggressive stance on raising rates, short-term rates are probably going to rise pretty meaningfully in the next six to 12 months," says Swann. "But because the investments that we're making are such long-term investments, we're locking in our returns and borrowing costs for a very long period of time. So we're most focused on what long-term interest rates look like." When considering a sale-leaseback, Swann recommends that would-be seller-lessees consider the property's capitalization rate against such factors as the proposed lease term and rental-increase schedule -- as well as against the market as a whole. In an inflationary environment, this latter juxtaposition can be striking. "If you look at the broader debt markets, particularly high-yield debt markets, they're in very bad shape right now. Interest rates for high-yield debt have skyrocketed recently," says Swann. "And that has made sale-leaseback financing, [where cap rates have] not risen nearly as much, a much more attractive option on a relative basis."
What Makes a Great Place to Work
Company culture is the backbone of any successful organization. According to a recent survey, 83% of respondents rated company culture as important when deciding where to work. When cultivated well, a positive company culture will unite people through a shared set of values, goals, attitudes and practices, and can create a real sense of community and belonging for employees, boosting productivity and decreasing turnover. W. P. Carey was recently certified as a Great Place to Work in 2022 thanks to the positive culture fostered by our team. In fact, 96% of survey participants said it's a great place to work – 39 points higher than the average U.S. company. What are the qualities that make a great company culture and ultimately a Great Place to Work? Learn W. P. Carey’s keys for success below. Cultivate a values-driven workplace In a values-driven workplace, employees find alignment between their personal values and the organization’s values, creating a unified and motivated workforce. At W. P. Carey, our four core values have formed the foundation of our culture: we invest for the long run, our people are critical to our success, we believe in Doing Good While Doing Well®and we value doing what is right. Our culture is nurtured by continually putting those values into action, from everyday business, to volunteer programs, to treating each other with dignity and respect. Management plays a critical role in maintaining a values-driven workplace, as they “walk the walk” and uphold our four core values through their leadership. Develop a collaborative and friendly environment W. P. Carey creates an environment where employees operate as a team. No job is too big or small and all voices matter. To that effect, W. P. Carey maintains an open-door policy – dialogue and discussion is not only welcome but encouraged. Collegial debate is critical to the success of the business. When making decisions, we will always move forward with the best idea, regardless of who brings it to the table. W. P. Carey maintains a relatively flat and lean organizational structure. The company is not focused on hierarchy and employees get to know everyone at every level. This creates a unique opportunity for employees to directly work with and learn from more tenured executives, which enables them to hone their skillset and grow in their role. Prioritize respect A respectful workplace prioritizes fairness, equality and inclusion for all employees. At W. P. Carey, employees understand the impact of their behavior on others and act accordingly, remaining mindful of personal differences and ensuring all opinions are heard. This creates an environment where employees feel valued and are comfortable actively expressing their ideas. W. P. Carey encourages employees to “bring your whole self to work” – meaning the company wants to get to know who you are outside of the office. Employees share their passions, talk about their hobbies and most importantly bring a sense of humor into the workplace. This builds real relationships and creates a supportive and uplifting environment where respectful collaboration is natural. Conclusion Building a strong corporate culture is not a passive activity. Unless you continue to cultivate it, culture won’t grow. It is also dynamic and should change over time to reflect the evolving beliefs and values of the company. Ultimately, investing the time and energy into building a positive culture is well worth the effort. Positive workplace culture boosts motivation and productivity, increases employee satisfaction, attracts new talent and reduces turnover. Perhaps most importantly, it turns a good place to work into a great one.
Retail Revitalization: Key Takeaways from ICSC Las Vegas
After a two-year hiatus, ICSC Las Vegas – one of the largest conventions for the retail industry – made its big comeback with over 22,000 attendees getting together to discuss the opportunities and trends in the sector. Retailers, brokers and real estate investors were among the exhibitors on the conference floor, where a number of topics dominated the discussion. Rising rates and inflation, the retail recovery and resurgence of brick-and-mortar were among the biggest themes at the conference. Here’s an overview of each: Financing amid rising interest rates and inflation Inflation continues to rise at its fastest pace in 40 years, with the consumer price index reaching 8.6% for the 12 months ending in May. Interest rates have also been surging, with the Fed raising benchmark rates in its most aggressive hike since 1994. This challenging and volatile economic environment has made it difficult for retailers to secure traditional debt financing at attractive rates. However, one method of financing that has been gaining traction in the retail sector is the sale-leaseback – where a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease. Big names such as 7-Eleven, Sherwin Williams and Mister Car Wash have made sale-leasebacks a core part of their growth strategies due to the ability to quickly unlock otherwise illiquid capital and reinvest those proceeds into their business. Retailers can also lock in a long-term rental rate which is especially advantageous in the current economic landscape while not having to worry about short-term refinancing or restrictive debt covenants. Retail revival Despite the challenging market environment, there was a lot of optimism for the retail sector at ICSC Las Vegas. Virtually all retail property types from grocery to c-stores experienced an increase in leasing activity over the past year – with retail tenants absorbing 91 million square feet of space nationally over the past 12 months. Furthermore, the retail sector is now seeing the lowest levels of bankruptcy filings in the past five years in addition to a steady uptick in foot traffic in physical stores. This is indicative of a larger retail recovery, leaving the sector in its best position since the pandemic began. Resurgence of brick-and-mortar Perhaps the biggest topic of discussion at the conference was the resurgence of brick-and-mortar retail. While many had predicted that e-commerce would be the way of the future, consumers have proved them wrong by returning to physical stores en masse. In 2021, retail sales totaled $5 trillion – with only about 13% of that stemming from e-commerce. Online shopping actually decreased year-over-year, demonstrating that consumers were eager to return to physical stores as the pandemic subsided. This increased demand also spurred many existing retailers to expand their store footprints and some online-only retailers to open physical stores. However, not all segments within retail are created equal, with some property types like movie theaters continuing to struggle while others like restaurants have thrived. Regardless, retailers have continued to adapt to meet the evolving demands of consumers, with omnichannel – a combination of e-commerce and brick-and-mortar – emerging as the prevailing strategy for success. Conclusion Despite a challenging few years for the retail sector, fundamentals continue to improve in 2022 as demand for high-quality retail assets returns and retailers look to cash in on owned real estate to improve balance sheet health and fund future growth. Interest rates, inflation and a rumored recession lingered in the air at this year's ICSC Las Vegas, but attendees were confident that the retail revival is underway.