Real estate assets often sit on the balance sheets of businesses and private equity portfolio companies as substantial, yet non-revenue generating assets. While valuable, these assets can tie up significant capital that might otherwise be employed more effectively.
Understanding Real Estate Sale & Leasebacks
A Real Estate Sale & Leaseback transaction involves selling owned real estate to an investor and then leasing it back on a long-term basis. This process converts illiquid, non-revenue generating real estate assets into liquid capital, which can then be redeployed to drive strategic initiatives. The company retains operational control of the property while freeing up the capital that was previously tied up in the real estate.
While a Real Estate Sale & Leaseback is most actionable when the real estate is already owned, many businesses, including private equity portfolio companies we work with, lease their real estate but have a purchase option embedded in the lease agreement. In these cases, we can look to “exercise” the purchase option in the lease agreement, while simultaneously executing a sale & leaseback at a higher price than the option price, generating meaningful spread for the tenant.
For example:
- Operio Group: A manufacturing client of ours had a purchase option in their lease agreement of 5.33M. With Ascension´s guidance, Operio Group exercised the purchase option and concurrently orchestrated a sale & leaseback transaction at a price just north of 11M. This 5.7M spread, provided significant capital for Operio Group to pay down expensive mezzanine debt they had taken on as part of a recent acquisition.
Benefits of Sale & Leaseback Transactions
- Recapitalizing the Balance Sheet: By converting real estate into cash, companies can significantly improve their liquidity position. This influx of capital can strengthen the balance sheet, making the company more financially flexible and robust.
- Reinvestment into Internal Projects: The liquid capital obtained from SLB transactions can be reinvested into high-return internal projects. Whether it's upgrading technology, expanding production capabilities, or investing in research and development, companies can allocate funds to areas that drive growth and innovation.
- Dividend Distribution to LPs: For private equity firms, SLB transactions can provide a mechanism to distribute dividends to limited partners (LPs). By converting a non-revenue generating asset into cash, private equity firms can offer attractive returns to their investors without having to sell equity stakes or other valuable assets.
- Increasing Working Capital: Enhanced liquidity through SLB transactions means more working capital. This increased working capital can support day-to-day operations, smooth out cash flow fluctuations, and enable the company to seize new business opportunities swiftly.
- Reducing Debt Structure: Companies burdened with significant debt can use proceeds from SLB transactions to pay down existing liabilities. This can lower interest expenses, improve credit ratings, and enhance the overall financial health of the company.
- Funding Inorganic Growth and M&A Initiatives: SLB transactions can also provide the necessary capital for mergers and acquisitions (M&A). By unlocking the value tied up in real estate, companies can fund strategic acquisitions, enabling inorganic growth and expansion into new markets.
Strategic Considerations
While SLB transactions offer numerous benefits, companies must approach them strategically:
- Lease Terms: Negotiating favourable lease terms is crucial. The leaseback agreement should ensure long-term operational stability without imposing onerous financial commitments.
- Market Conditions: Timing the market is essential. Companies should consider market conditions and real estate valuations to maximize the proceeds from the sale.
- Tax Implications: SLB transactions can have tax implications. Consulting with tax advisors to understand the impact and optimize the transaction structure is important.
- Future Flexibility: Companies should assess their future real estate needs and ensure that the SLB arrangement provides enough flexibility for potential growth or changes in operations.
Conclusion
Real Estate Sale & Leaseback transactions offer a powerful means to restructure the balance sheets of businesses and private equity portfolio companies. By unlocking the value of non-revenue generating real estate, these transactions provide capital that can be reinvested into strategic initiatives, enhancing operational efficiency, supporting growth, and delivering returns to investors. As companies navigate an increasingly dynamic business environment, SLB transactions can be a key tool in their financial toolkit, enabling them to leverage their real estate assets for greater strategic advantage. At Ascension Advisory, we specialise in the art of real estate sale & leasebacks - both as it pertains to live M&A transactions, and existing owned real estate in the portfolio.