Small businesses face pressure to act on sale-leasebacks

Sale-leaseback transaction volume will continue to accelerate as owners rush to lighten their balance sheets and hedge against the risk of a rising cost of debt before cap rates rise and spreads spread. won’t expand later this year.

The consensus of a panel of experts at GlobeSt’s Net Lease Spring conference was that the avalanche of capital and dry powder from sponsors pouring into the market will continue to squeeze cap rates for another six months.

“The sponsor world has had its best year ever and there is definitely more interest from sponsors (for sale-leasebacks) there. Sponsor activity has increased in the first quarter of this year,” Vincent said. Polce, CBRE’s national co-head of corporate capital markets.

The panel agreed that owners facing “credit deterioration” on companies valued at less than $10 million EBITDA are under the greatest pressure to act now on sale-leasebacks, while companies valued at more than $100 million may decide to stay put and see how much the spreads widen.

“There won’t be any credit deterioration for the $100 million to $1 billion companies, so you won’t see any cap rate expansion for those. When you get EBITDA below $10 million, that’s when we’re going to see credit deterioration,” said Chris Capolongo, Managing Director Angelo Gordon.

Traders are also under pressure to decide whether to buy or sell, and many companies are hesitant as they try to anticipate how quickly market fundamentals will change.

“I don’t see a lot of re-trading, but I’m anticipating it any second,” said Camille Renshaw, CEO of B+E. “There is a lot of discussion about whether it makes more sense to keep it on the balance sheet in the short term while the cost of debt is lower, or to extend it for a period of 20 years.

“We see some corporate teams making a decision, then reconsidering factors like supply chain, changing their minds and backing off,” she added.

According to Polce, it is becoming much more difficult for traders to factor risk into the pricing of new sale-leaseback transactions. “We’re all trying to figure out what happens when the music stops and we’re all stuck with below-market leases,” he said.

Polce said smaller spreads of 25 to 50 basis points are likely to be built into transactions for customers with good credit, with higher spreads for those at the lower end of the credit spectrum. . He also warned sale-leaseback negotiators to factor the quality of the property into their pricing.

“Half of the total 10-year trading return comes from the residual value of the property, so there is a lot of binary risk. It is important to price the quality of real estate (in the transaction),” he said.

Bryan Huber, director of SAB Capital’s sale-leaseback group, said deploying capital “in creative ways” can cushion the impact of rate moves.

“Everyone talks about pricing versus position returns on a nominal basis, but platforms that have a fixed scale of equity can creatively deploy capital and have a cushion to absorb the movements of nominal rates,” he said.

Polce said the widening of spreads on CMBS transactions, which have exploded by up to 100 points due to concerns about the risk associated with these highly leveraged transactions, which force CMBS lenders to make more competitive offers.

“At some point, CMBS lenders will have to compete on spreads,” he said.

Sale-leaseback activity involving lower- and mid-market companies in secondary markets is strong, the panel said, driven by the surge in private equity sponsorships and a growing sense of hedging against market uncertainties. market.

The unprecedented speed of sale-leaseback transactions is also attracting transactions involving properties that have land leases in which the land under the asset has a different owner. Land leases can have exceptionally long terms, ranging from 50 to 99 years.

The panel agreed that a record volume of M&A deals will continue to accelerate the pace of sale-leaseback deals. The global M&A market topped $5 trillion in 2021, with dry powder fueling deals.

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