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Sale-Leasebacks are on the Rise, and Here’s Why

Last year, Bob Evans Farms, the restaurant chain and packaged foods company, needed a creative solution. Facing pressure from an activist investor, the company had to pay down debt and buy back shares. They opted for a sale-leaseback to convert real estate holdings into liquid capital.

In December, the company completed the sale-leaseback transaction that included 145 restaurant properties to Mesirow Financial Holdings for $200 million, the company said in a statement. The company also completed sale-leaseback deals for two manufacturing facilities last year.

“We continue to pursue monetization of our corporate headquarters facility and select restaurant properties,” spokeswoman Angela Payne said in an email.   

Bob Evans represents one of several companies that chose to convert from owners of real estate to tenants as a way to cash in on properties over the past year. The process is called a sale-leaseback and it has been growing in popularity over the past few years.

It works like this: a property owner sells to a buyer and becomes the tenant, agreeing up front to a rental price and term. The seller frees up capital that would have been tied up in illiquid real estate holdings for use on capital improvements, debt reduction, or acquisitions.

 In 2010, the industrial, office, and retail sectors saw about $3.8 billion of sale-leaseback deals, according to Real Capital Analytics. That total has jumped each subsequent year. Last year saw about $11.6 billion worth of sale-leaseback activity. 

The low interest rate environment is helping to drive sale-leaseback activity, said Gerry Levin, head of the Sale-Leaseback Capital group at Mesirow Financial, in an interview with VTS. Also, as more companies complete sale-leaseback deals, others take notice, he said. It also doesn’t hurt that valuations are particularly high, now.

“25 years ago, people viewed real estate more like their home … why would I sell you my office because it’s my home,” Levin said. “More people today realize real estate properties, not all but a good portion, are a depreciating asset and future value may not be greater than current value.” 

Companies also are increasingly looking to monetize their real estate holdings, said Matt Wokasch, vice president of the advisory group at real estate research firm Green Street Advisors. “One of the biggest trends in real estate is companies looking for ways to monetize their real estate holdings, particularly those that own as a consequence of their business, but real estate is not one of their core competencies,” Wokasch said.

Companies have a “menu” of options when they need financing and sale-leasebacks are only one of many. This type of deal may not be right for every owner of commercial real estate.

Levin said Mesirow wants to work with companies who use the sale in a “financial engineering” sense to grow the business. “Companies that are desperate we really wouldn’t do business with.”

However, “I think anybody who owns real estate ought to consider it. I don’t know if everybody should do it, some companies are not growing so why employ more capital when they have nothing to do with it,” Levin said.

Looking forward, activity should remain robust this year for sale-leaseback activity barring a catastrophic reversal, Levin said. 

“I suspect the torrent of companies interested in monetizing their real estate will persist,” Wokasch said. “Unless real estate values recede. That could hamper [activity].”

Billy Fink
Billy Fink
Billy Fink is a former member of the VTS team.
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