Why SLB is on a Commercial Real Estate Tear

This Amazon warehouse in Ruskin, FL is one of many the e-commerce giant has opened in recent years.

ORLANDO—When Stern Group set out to expand its Mercedes-Benz dealerships across the Netherlands last year, the automotive company turned to an alternative financing strategy that is seeing strong momentum in the commercial real estate industry. The Dutch company sold 10 of its retail and service sites to W.P. Carey , a REIT specializing in corporate sale leaseback financing and single-tenant net lease acquisitions , for $62.9 million. As part of the strategy, Stern immediately leased back the retail portfolio in a 17-year triple-net deal with W. P. Carey. Thanks to the newfound liquidity through the sale leaseback —a form of financing that allows companies to maximize the value of real estate assets—Stern reduced expensive bankrolling and is funding new growth of its Mercedes-Benz dealerships in Europe. “A long-term sale-leaseback was the logical decision to free up illiquid capital tied up in our real estate holdings to fund strategic growth initiatives,” says Henk van der Kwast , CEO of Stern, noting that the sale leaseback-net lease deal allowed him to “advance strategic components” of the company’s business plan. Stern is one of many corporations selling its facilities and entering into long-term net leases with the investors as an alternative for managing and financing the buildings they occupy. The upside—from unlocking the full value of the asset in a cash equivalent, to lease structures that qualify as operating leases so the expense stays off the company’s balance sheet, to optimizing lease payments to keep rents lower—is too appealing for many corporate real estate users to pass up in the current economy. Although sale leasebacks aren’t right for every company, activity has been rising since 2010. In fact, sale leaseback activity jumped from more than $4 billion in 2012 to $12 billion the following year, according to Stan Johnson Company. Transactions dipped to $10 billion in 2014 but the firm estimated sales would hit $12 billion again in 2015. Industry watchers say sale leaseback-to-net lease deals can be challenging but they expect to see more corporations leverage this financing model to extend their financial power in 2016. Even though pricing in terms of cap rates is up 25 basis points on average, Jason Fox, president and head of global investments at W.P. Carey, reports “significant activity” in sale leasebacks in the net lease market. He’s witnessing more value placed on the certainty of a deal closing and execution over pure pricing. “We see this as a function of weakness in the CMBS market as well as less capital flowing into the market from established investors and the volatility and uncertainty of the financial markets in general,” Fox says. “Europe remains at a different point in the cycle with cap rates continuing to compress as US investors are becoming increasingly more comfortable with the risks associated with investing in that region, creating capital inflows. However, given the lower cost of debt, attractive investments with large spreads are still available.” The multimillion-dollar question is: What’s driving the momentum? Paul Domb , vice president of asset management at net lease investment firm United Trust Fund , points to the Federal Reserve and the global monetary policy of holding rates artificially low for such a long period as two key drivers. These factors, he says, have left many institutional and individual investors chasing yield.  “A well-structured sale-leaseback or a net lease has provided the market with an opportunity to structure or buy into an excellent investment alternative,” Domb says. “The quantity of sale leasebacks has risen dramatically, but the quality has also been significantly reduced.” As of February 11, 2016, the 10-year treasury has dipped to 1.66%. According to Joseph Yiu , managing principal of real estate private equity firm Elm Tree Funds, that makes now an opportune time for corporations to enter into long-term sale-leasebacks with lower rents. He also sees proceeds and the concept of reinvestment as catalysts spurring the momentum. “If the corporation decides to own real estate, the asset on their balance sheet is constrained by their lenders loan covenants that limit leverage, and the corporation has to allocate expensive equity that could otherwise be reinvested into their operations,” Yiu says. “Through a sale leaseback, the corporation can unlock equity and get credit for 100% of the asset’s value today at multiples that are accretive to their operations. The value of the asset is determined by the corporation’s credit, location, and type of asset.”