Sale-leasebacks: what a difference a year makes.
One exception that proved the rule in early 2009 was the sale-leaseback financing of The New York Times Company's Manhattan headquarters last March which was distinguished both by its $225 million size, as well as the timing within which the deal was sourced and closed. At the time there were a limited number of potential buyers for a deal that size and fewer still who could meet the timing end closing requirements that allowed The New York Times to pay off short- term debt with a longer-term financing.
The picture today is quite different in that the general easing in the debt and equity markets has brought more investors back into the game. In addition, the sale-leaseback as a long-term income generating investment has appeal for investors who are looking for steady income and less exposure to short-term market volatility. From the standpoint of corporations and other owners of long-term net leased property, there is less fear of dealing in the type of "distressed" environment we experienced in 2009 and more opportunity for achieving fair value for their assets. Yet despite what is viewed as a year-over-year improvement, the sale-leaseback market is markedly different from the height of the credit bubble in 2006, 2007 end early 2008.
One factor missing from today's market is the group of 1031 investors, who prior to the economic downturn were selling real estate assets and then buying single-tenant nee leased assets to defer the tax hit while still avoiding operational overhead and management issues. Today's nee lease investors are primarily what we would characterize as more traditional net lease investors, i.e. institutional funds including REITs whose investment objectives are long term income generation and capital preservation.
An area where we are seeing continued increasing activity is in the European markets where sale-leaseback is a newer form of financing and where culturally the sale of corporate assets has traditionally been an indication of financial difficulties rather than an efficient redeployment of capital from hard assets into expansion and working capital for core businesses. CBRE has estimated that around 2.25 trillion [euro] of European real estate assets are still in the hands of corporations. As corporate sale leasebacks are now considered a legitimate source of capital, they are being considered with the same weight as any other source of equity or debt.
In a recent report, Jones Lang LaSalle projected an overall growth in global commercial real estate investment of 35-45 percent in 2010 over 2009. As a large component of this growth, the report cited the re-emergence of sale leasebacks as a major trend within the global real estate sector along with easing credit conditions, the related boost to investor activity, rising capital values in major markets and the REIT sector revival. As further evidence of confidence in the market, the report cited the 2010 RBS $310 million offering backed by 81 properties across the US and noted that Bank of America, JPMorgan Deutsche Bank, Wells Fargo and Goldman Sachs were also planning CMBS issues. (Subsequently JPMorgan announced a $716 million CMBS offering and the Durst Organization announced the $1.3 billion refinancing of The Bank of America Tower, the largest single-asset CMBS financing since 2008.) The report also pointed out that corporate sale-leasebacks, having gone out of style during the economic downturn, had returned because of the significant amount of equity seeking a home in real estate end improved conditions in the commercial mortgage market. Therefore, in assessing their overall financial structures and funding requirements, corporations continue to look at their real estate assets to ensure that their capital is employed as effectively as possible.
Although many economists predict the US recovery is likely to be muted in 2010, transaction activity continues to build--however; at a slower pace than had been anticipated earlier in the year. As a result there will remain a shortage of suitable properties on the market for institutional, private and foreign investors. Given this imbalance between capital available and solid investment opportunities, downward pressure will remain on yield and the trend could somewhat broaden geographically beyond the top markets, reflecting the intensifying search for yield among large multi-asset class investors.
Consequently companies are looking at sale-leaseback as a means to raise capital in a world where financing remains challenging. Likewise owners and developers of commercial properties leased to solid corporate tenants will source construction as well as permanent funding through build to suit financing. With access to capital being a critical factor in creating jobs and stimulating economic growth, growing businesses as well as mature companies will continue to evaluate the pros and cons of sale-leaseback in the context of their total borrowing and balance sheet structure. As a result, companies end corporate property owners with significant real estate assets will continue to source capital via sale leasebacks and investors looking to invest in real estate without taking a huge capital risk will be the likely buyers.
Jason Fox is Managing Director of W. P. Carey & Co. LLC. The company and its affiliates provided funding for The New York Times Company financing discussed in the article.
BY JASON FOX MANAGING DIRECTOR, W. P. CAREY & Co. LLC.
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|Comment:||Sale-leasebacks: what a difference a year makes.|
|Publication:||Real Estate Weekly|
|Date:||Sep 1, 2010|
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