Investors Now Open to 5- to 7-Year Sale Leaseback Terms

Sale leaseback deal volume increased in Q2 this year by 93% versus the same period one year ago. On a sequential basis, deal volume was up 17%, according to an analysis by SLB Capital Advisors. 

According to its managing partner, Scott Merkle, declining cap rates, anticipated tax changes and heightened M&A activity, drove the higher deal volume. 

Merkle added, “We anticipate the momentum seen in the first half will continue during the second half of 2021.”

Investors Open to 5- to 7-Year Terms

Robert Poirier, associate director, Stan Johnson Company, agrees. He said investor demand for sale leasebacks has improved significantly over 2020 and should continue to do so throughout 2021 as well as into Q1 2022. 

“Values have surpassed pre-pandemic levels, and in some cases, we’re seeing cap rates more than 100 basis points lower than just 12 months ago,” Poirier tells GlobeSt. “We are also seeing investors become more open to shorter term leaseback periods.”

Poirier said that a year to 18 months ago, the average lease term for an industrial sale leaseback, for example, was 12 years. 

“Today, we’re seeing more investors open to 5- and 7-year terms,” he said. “I’m working on an assignment now that we took to market last year at a 7.20% cap rate. We ended up pulling it off the market temporarily and just brought it back out. We’re receiving offers with cap rates of around 5.75, which is almost a 150-basis point improvement. This example is true testament to current market conditions that, again, I expect will last into early next year.

SRS Sees Longer-Term Leases Negotiated

Matthew Mousavi, Managing Principal with SRS National Net Lease Group, tells GlobeSt that he continues to see a significant amount of sale-leaseback activity in both the industrial and retail property sectors. 

“Investors like the stability of single-tenant assets with new, long-term leases negotiated in conjunction with the closing, and, they like the rent and basis fundamentals that many sale-leaseback offerings provide the investor. 

“As the retail sector for sale-leasebacks has been tight, investors in this asset class have been looking for other opportunities and industrial product is an easy sector for this profile of investor to understand. With that said, we have actually been structuring the industrial leaseback transaction in a similar fashion as we do retail sale-leasebacks which promotes a smoother transaction process. 

“This includes longer leases commonly found within retail of 10-15-20 year terms, absolute net leases, and scheduled increases.”

Over the next 12 months, Mousavi said he expects that sale-leasebacks will continue to be an active and popular transaction for both buyers and sellers, and for the operators themselves. 

“As an increasingly popular financing alternative for operators, sale leasebacks provide for enhanced liquidity the operators can deploy into growing their business, opening new facilities, paying down debt, among other uses for the capital.”

Industrial Segment Represents 53% of Overall Transactions

From a transaction standpoint, SLB Capital Advisors reported that sale leaseback activity increased 17% to 185 transactions in Q2 2021 vs. the previous quarter, reaching $3.6 billion, the second largest transaction count and dollar volume since Q4 2019.

“While we witnessed a return to optimism in the retail segment, Q1 and Q2 this year exhibited continued strength in the industrial segment, representing 53% of overall transactions – industrial sale leasebacks continue to demand attractive pricing even in non-core markets,” according to the report.

Larger notable deals in Q2 include Benderson Development’s acquisition of the Kroger Co.’s retail properties for $487mm and Gaming & Leisure Properties acquisition of two entertainment locations from Bally’s Corporation for $484mm.

Given heightened M&A activity leading into the second half of 2021, SLB Capital Advisors expects sale leaseback activity to follow suit.