M&A and Corporate Growth Is Fueling a Surge in Sale-Leaseback Deals

This year, sale-leaseback activity is reaching record levels—and two major trends are fueling the deal velocity. According to Yuriy Chavarha of Pontus Capital, merger and acquisition and corporate growth are the two major factors driving the popularity of sale-leaseback deals.

“One of the main drivers of the sale-leaseback transaction volume this year is increased activity in mergers and acquisitions,” Chavarha, VP and head of acquisitions at the firm, tells GlobeSt.com. “Corporate acquirers and private equity sponsors are increasingly more aware of the benefits that come with this type of financing strategy, which allows them to finance an acquisition of a company that owns its real estate, with less equity and ultimately pursue more transactions.”

Accelerated corporate growth is also pushing many companies to shed real estate assets. “Companies that have corporate-owned real estate can utilize off-balance sheet financing to fund their growth plans,” says Chavarha. “Compressed yields, driven by increased investor demand, have arguably made sale-leaseback financing competitive with more traditional debt instruments.”

Any company experiencing strong growth, no matter the industry, is reevaluating their real estate portfolio. “They are generally looking to free up the value tied to their real estate to pursue M&A, corporate growth or in some instances a recapitalization,” says Chavarha. However, in terms of the property type, Chavarha has seen the most opportunities for industrial, C-store and quick service restaurant assets. “Industrial sector has been extremely active; Investors are viewing this property type as increasingly more resilient,” he adds. “Continued consolidation and growth within the C-Store and QSR sectors have also made these property types very active in sale-leasebacks.”

From the investor perspective, there are a lot of reasons to scoop up sale-leaseback deals, from stable tenancy and cash flow to low interest rates. “The ability to negotiate lease terms directly with the future lessee is appealing to a wide variety of investors. Relatively low interest rates and in some cases, bonus depreciation, combined with a passive nature of the investment structure, continue to give sale-leasebacks investor attention,” says Chavarha.

While both private and public institutional players have been the most actively pursuing sale-leaseback deals, but REITs and private equity firms have also increased allocation to pursue these opportunities.

Although the sale-leaseback opportunities heated up this year, Chavarha expects the momentum to carry into next year. “There are a number of factors that will effect sale-leaseback activity this upcoming year, but given we’re already well into 4Q21, I believe transactional velocity will continue into 2022.