The COVID-19 pandemic has forced commercial real estate owners to explore every possible avenue to raise funds, and one of the more popular transactional methods to secure capital in recent months has proven to be sale-leasebacks.
Jeff Berryhill, principal of Stonemont Financial Group, says that companies that have traditionally owned their real estate are turning to sale-leasebacks because it mimics many aspects of ownership, such as long-term control of the asset.
“During recessionary times or periods of extreme capital markets volatility, a sale-leaseback can appear more attractive to companies that historically owned real estate,” says Berryhill. “However, leasing real estate has always been appealing to both large and small companies, and strong and weak credit profiles.”
Jeff Berryhill, Stonemont Financial Group
According to research from Real Capital Analytics (RCA), sale-leaseback deals accounted for 5 percent of all investment sales in the U.S. industrial, office and retail transactions in the second quarter. For the previous three quarters, sale-leasebacks accounted for 2 percent of investment sales in those sectors for deals $2.5 million and greater.
Recent sale-leaseback deals include Jervey Eye Group selling and leasing back a portfolio of medical office facilities in Upstate South Carolina; Crash Champions selling a portfolio of auto body shops in metro Chicago; Alliance Packaging selling and leasing back a portion of an industrial building near Seattle; and Restoration Hardware selling and leasing back a three-level store and showroom in Edina, Minn.
Stonemont Financial, a private equity investment firm based in Atlanta, has closed on two sale-leasebacks in the past nine months. The properties consist of five truck maintenance and container storage facilities that are leased to two trucking and logistics firms.
REBusinessOnline caught up with Berryhill to discuss the ins and outs of sale-leasebacks and what to expect in the months to come for this transaction method. The following is an edited interview:
REBusinessOnline: How competitive is the sale-leaseback market on the buy side?
Berryhill: Competition for buyers has increased significantly throughout this economic cycle. From an institutional perspective, single-tenant properties with long-term, triple-net leases have increased in popularity given the attractive risk-adjusted returns relative to other asset classes.
REBO: When looking at potential sale-leaseback transactions, what are some of the elements you as a buyer/landlord are looking for from the tenant as far as its creditworthiness is concerned?
Berryhill: Our criteria simply depends on the type of real estate, where it is located and how useful the property would be to another company if the tenant decided to walk away. As a landlord, it is very important for us to have a relationship with our tenants and really understand their business. This allows us to evaluate the company beyond their financial statements. More importantly, it creates an environment where we can work with our client to navigate any headwinds and serve as their long-term partner for any future real estate needs.
REBO: With such a drastic fall-off in terms of investment sales in general, is it difficult to determine value when it comes to pricing?
Berryhill: In general, the level of difficulty depends on the property type and market under consideration. Industrial real estate has been the clear beneficiary during the pandemic, and that should continue for the foreseeable future. We are still operating in a world of uncertainty and most companies are taking their time with any long-term changes to their real estate footprint. Until we get past the election and receive more encouraging news around COVID-19, activity in the office and retail sectors will continue facing headwinds.
REBO: Generally speaking, how long are the leases that are being executed in sale-leaseback deals?
Berryhill: Lease terms are typically between 15 to 20 years and longer, including any renewal options. Shorter term leases are also available and more common for assets located in strong real estate markets.
REBO: Looking out into 2021, do you expect your firm to close on more of these opportunities?
Berryhill: We plan to see and close more of these types of transactions within the next year. Depending on the industry, companies will continue looking to raise funds for either defensive or opportunistic purposes. The impact of COVID-19 forced a lot of companies to ask themselves, “which assets are not generating an appropriate return to the business and where should this company be investing capital?”
— Interview by John Nelson