Is There a Limit to Sale Leaseback Growth?

Realty Income Corporation’s acquisition of VEREIT created a combined company with an enterprise value of approximately $50 billion.

With the deal, Randy Blankstein, president of The Boulder Group, says Realty Income is positioned to be the preferred provider of capital for large sale-leasebacks above $500 million.

But there are questions about how deep the market is for these transactions. While many observers see a large, untapped market for sale-leasebacks, there may be a limit to growth through those transactions.

“The sale-leaseback market can grow if they can just convince everybody to be asset-light and that the real estate isn’t core to their business,” Blankstein says.

Blankstein thinks that if rates were rising, it would be much easier to convince corporations to sell their assets. “Unfortunately, rates have gone down for 20 years in a row and never really creep up,” he says. “Even though we’re up from last year, we’re still near historic lows. Turning real estate into sale-leasebacks has untapped potential, but I’m not sure what’s going to change over the next year.”

Matt Berres, executive managing director at Newmark, says sale-leaseback activity has been down compared to 2020 so far this year. Citing data from Real Capital Analytics, he says Q1 sale-leaseback was approximately $1.28 billion, a 59% decrease from 4th quarter 2020 ($3.15 billion) and a 23% decrease from Q1 2020 ($1.67 billion).

“While we have historically seen struggling companies utilizing sale-leasebacks as a tool for bolstering their balance sheet, today’s buyers are heavily scrutinizing tenant credit and, therefore, property values take a significant hit if the tenant is not rock solid,” Berres says.

Right now, Berres says the transactions occurring involve grocers, drugstores, convenience stores, manufacturing companies and other resilient industries. These sectors have held up through the pandemic and have a positive outlook for the future, he says.

“While rising interest rates and uncertainty around future tax treatment for real estate investors may spur some companies into action to execute their sale-leaseback strategy in the second and third quarters of 2021, it may cause others to ‘wait and see’ what happens over the next few months,” Berres says.

However, Berres notes a significant amount of aggressive capital chasing properties with long-term passive leases. He says those opportunities present an enticing option to the most creditworthy companies considering a sale-leaseback.

Camille Renshaw, CEO and co-founder, has a different perspective. She predicts that 2022 will be the year of the sale-leaseback. Corporate tenants who thrived during the pandemic, like convenience stores and grocery stores, are looking to buy competitors, which could drive more sale-leasebacks, she says.

“Net lease property investors will see the majority of the real estate associated with this corporate merger-and-acquisition activity come to market in the form of sale-leasebacks,” Renshaw says. “Due to the recent surge in net lease buyer activity that has compressed cap rates, strong companies, such as ARKO, are able to maximize their sales proceeds while maintaining relatively low rents, further enhancing their balance sheets.”