Release capital under workshop

Sale-leasebacks have been a financing tool for some time. However, they are steadily gaining popularity with manufacturing companies to raise capital.

Essentially, a sale-leaseback transaction occurs when a manufacturing company sells its property and then leases the same property back to the new owner. This simultaneous sale-leaseback of a facility allows a manufacturing company to unlock capital tied up in real estate.

Manufacturers have leveraged sale-leaseback proceeds in a variety of ways, including funding growth initiatives, purchasing new equipment and installing next-generation production lines. Some companies pay down their debts, which reduces interest costs and improves profitability. Yet other companies have used sale-leaseback proceeds to fund a strategic acquisition.

Many manufacturers own their facilities, making sale-leaseback a convenient financing vehicle. One of the mental hurdles owners can have is the idea of ​​giving up control of a property that is core to the business. However, the long-term leasehold nature of sale-leaseback provides landlords with essentially the same control that they have in an owned installation scenario.

A typical sale-leaseback term is usually 15 years (or longer in some cases), with renewals extending for an additional 20 years (at the option of the lessee), providing effective control for 35-40 years. The owners will continue to operate the facility as if they owned it.

There are two elements to a sale-leaseback transaction – the first being the actual sale of the property and the second being the simultaneous entry into a long-term lease. Many factors are considered in structuring the optimal lease. These include the length of the lease, the base rent, and the percentage and frequency of rent increases. Change of control provisions that do not impede a contemplated future exit from the business are also crucial.

Sale-leaseback in the industrial sector

Testimony to the applicability and usefulness of sale-leaseback transactions for manufacturers is that since sale-leasebacks were tracked, almost half of the transactions take place in the industrial sector. The industrial sector has seen increased sale-leaseback activity over the past two years. In Q1 2022, the industry accounted for 45% of all U.S. sale-leaseback transactions, which is relatively in line with 2021 as a whole (48%) and slightly above 2018-19 levels.

An attractive component of sale-leaseback is the arbitrage opportunity it provides to owners of businesses and commercial real estate. In a nutshell, given the value that sale-leaseback can generate due to the lease structure, manufacturers can sell their real estate at an implied multiple that is often higher than the trading multiple. Owners can then reinvest the proceeds in business assets that have the potential to grow faster and generate higher returns.

The chart below illustrates this trade-off across many industries, but particularly in manufacturing. According to GF Data, the average EBITDA multiple in manufacturing for Q1 22 was 7.4x. Based on a general cap rate range of 6.0% to 8.0%, this implies a multiple on real estate of 12.5x to 16.7x. As owners compare monetization alternatives, they should consider separating real estate from operations to get maximum value.

Does location matter?

Not entirely. A sale-leaseback investor is looking for a secure and steady stream of income from a quality tenant and therefore the main focus is on the health of the underlying business. Location certainly comes into play, however, what drives value is the credit strength of the operator.

Given this dynamic, even properties in tertiary or remote markets where manufacturing facilities are typically located have very attractive valuations. SLB Capital Advisors has entered into sale-leaseback agreements not only in major metropolitan areas and highly desirable industrial markets such as Boston, Chicago and San Diego, but also in markets considered more tertiary such as the Midwest and Southwest. East.

The first quarter of 2022 continued the blistering pace of sale-leasebacks seen in 2021, with 186 discrete deals totaling $8.4 billion, compared to $8.3 billion in the fourth quarter of 2021 and $2.9 billion in first quarter of 2021.

Among real estate categories, industrial properties continued to dominate the number and dollar volume of sale-leaseback transactions. Some of the more notable sale-leaseback deals of the past year include New Mountain Capital’s acquisition of several Rollins properties for $45 million, Broadstone’s acquisition of Ryerson properties for $107 million, and the acquisition by US Realty of the Omnimax facilities for $100 million.

New professional capital pools, an active M&A landscape and a low interest rate environment are just some of the reasons for the upward trend in sale-leaseback activity in 2021.

With the “multiples” applied to industrial real estate reaching historic levels, a sale-leaseback transaction is worth considering. Manufacturing companies in need of financing need look no further and instead consider unlocking the capital that lies beneath the shop floor.

Matt Wrobleski is a partner at SLB Capital Advisors, which advises companies and private equity sponsors on a wide range of sale-leaseback transactions.

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