"All other things being equal, in tough or uncertain economic times, wewould expect to see an up-tick in sale-leaseback transactions," he says. "It can be a logical, win-win deal between an investor, who wants to own properties and have monthly cash flow, and a corporation, which would prefer having cash on hand to owning real estate. That improves the company's financial condition while, at the same time, allows them to concentrate on their core business and not worry about owning real estate, where they have no particular expertise."
For instance, if Bear Stearns had had an inkling of its coming woes in January – or even if it had just decided that the market environment was becoming too inhospitable – it could have sold its marquee skyscraper headquarters, valued at $1.4 billion, to give itself a cash cushion. To be sure, this property is burdened with the equivalent of $570 million in debt, according to accounts, and ultimately it is unlikely such as sale would have stopped the run in confidence in the bank that happened in March. But with some cash on hand, it might have been able to gain some leverage in the negotiations, holding out for a better price than the $236 million acquisition price – or at least been able to later somewhat assuage the outrage of its employees and shareholders with the pre-emptive move.
"If Bear Stearns had started looking to close a sales-leaseback transaction in January, given the demand for trophy assets in New York, it could have closed a month later," Tony Casalena, managing director in Sperry Van Ness RealSite Commercial Grouptells GlobeSt.com. Whether or not such a move would have been too little, too late, he cannot say.
Thus lies the rub to these transactions. For a company worried about an upcoming rough patch, this strategy should have been put in place several months ago.
"Smart companies have been positioning to give themselves that kind of flexibility for several months or years," Eric Bowles, VP, CoreNet Global, an Atlanta-based professional association of corporate real estate and workplace executives, tells GlobeSt.com.
He points to banks such as Bank of American and Wachovia, which routinely sell off bank branches to such firms as American Capital Realty in order to maintain lean operations. Indeed ACR recently acquired a $100 million portfolio from Wachovia for that reason (http://www.globest.com/news/1115_1115/philadelphia/169096-1.html)."I think most firms that own real estate of significant value have had some discussion about this already," Bowles says. A shaky economy, he says, is likely "accelerating these thoughts to action even if it is not absolutely necessary. The worst time to do a transaction like this is when you have to."
Gordon J. Whiting, founder and senior portfolio manager for Angelo, Gordon's net lease real estate strategy, is already seeing clear signs that more firms are putting up assets for sale-leaseback consideration. Its sale-leaseback pipeline right now is $750 million – twice as big as it was last year, he tells GlobeSt.com. "There has been a huge up-tick in interest and calls," he says.
Sale leaseback investors, though, are hampered by the same considerations as the rest of the commercial real estate market: the lack of debt available for these transactions. "It is the ones that are all cash buyers or can finance in equity that will see a tremendous pick-up in business," he predicts. Angelo, Gordon's current investment fund, which closed in January 2007, has about $500 to $600 million of investment dollars allocated to these deals. The fund, which is two-thirds levered, is about 40% depleted. Whiting says he expects to have it fully invested by the end of the year. "We didn't plan it this way, but the timing simply couldn't be better for us."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
