Monday, March 10, 2008

Sale-leaseback - A Star In This Market?


Sales-leasebacks represent 5% of the all investment sales. But is it going to be a star among deal types this year? It might, according to the Slatin Report:

There’s long been interest in sale-leasebacks, but in light of current market conditions, both sellers and buyers now have even stronger incentives to pursue them. On the seller’s side, monetizing real estate assets can be an effective way to pump up revenues at a time when revenues are relatively weak – which would be now, and even more so if the country actually slides further into recession. Also, many companies are still feeling the hangover from pre-crunch easy-money acquisitions. Selling real estate would be a way to pay some of that debt down at a time when it’s hard to refinance.

As for buyers, sale-leasebacks can represent a solid investment precisely when purveyors of both equity and debt are demanding solidity. Buying a portfolio of Walgreen’s or CVS locations with long-term leaseback provisions, for instance, is in some ways like buying a bond. The return is going to be there, and capital is looking for exactly that kind of safe haven in these skittish times.
Bank branches and medical office buildings appear to be strong sale-leaseback candidates this year:
Since last year, Citibank has been leading the way in the bank branch market subset by selling off some of its real estate; other financial companies are following suit in the face of writedowns and other money-sucking problems as they are forced to buy back bad mortgages. Of course, sale-leaseback investors need to be careful not to buy properties from banks completely crippled by the subprime meltdown. The best sale-leaseback candidates among banks would be those hurting only enough -- such as Citi -- to want to access some of the revenue offered by sale-leasebacks, not to cause an implosion.

Medical office buildings will also continue to command a lot of attention – and fetch good prices – in the sale-leaseback world. Two reasons: first, the healthcare sector of the economy is going to continue being a gold mine, whatever health insurance reforms (if any) might be dreamed up by the next US administration and Congress. Second, doctors and dentists are famously sticky tenants.

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