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September 07, 2021

White-Hot Real-Estate Market Fuels Sale-Leaseback Deals

Private-equity firms are among the organizations putting ever bigger amounts of capital into this type of transaction

WSJ Pro Private Equity, By Luis Garcia

Mercer Foods LLC owned its headquarters and factory in Modesto, Calif., for 23 years. In February, the freeze-dried food company sold the real estate to LCN Capital Partners for $40 million—and immediately leased it back.

Mercer is one of a growing number of companies turning to sale-leaseback deals as a means of raising capital in a booming market for commercial and industrial space, real-estate executives and advisers said. Companies are finding willing buyers in real estate-focused funds, flush with cash and armed with cheap debt, according to the executives.

“From a seller standpoint, this is actually the singular best moment to execute a sale leaseback that we’ve experienced in our careers,” said Scott Merkle, managing partner at New York-based SLB Capital Advisors, which specializes in sale leasebacks.

Overall, the U.S. recorded 340 sale-leaseback transactions worth $6.5 billion during this year’s first half, according to data from SLB Capital. That’s a 42% increase from the 240 transactions closed in the same period of last year, while deal value rose 10%, SLB Capital’s data showed.

Despite a sharp rise in the prices of certain office buildings and factories, interest rates that remain near historic lows enable buyers to borrow cheaply enough to keep returns healthy, said Ed LaPuma, co-founder and managing partner of LCN Capital. In February, the firm closed two sale-leaseback funds with a total of $1.35 billion in commitments.

“The market for properties is not inexpensive,” Mr. LaPuma said. But some investments are attractive “on a relative basis, given where interest rates are.” he said.

“It’s definitely a seller’s market,” said Teddy Kaplan, a managing director at New Mountain Capital who leads the private-equity firm’s net-lease strategy. “But I’m happy to be a buyer in this market.”

New Mountain Capital invested $287 million across at least six sale-leaseback deals during the first six months of this year.

New Mountain and LCN aren’t alone. Last week, KKR & Co. said it was launching a new sale-leaseback strategy to invest more than $3 billion.

Buyers looking for sale-leaseback deals often target private equity-backed companies, as an increased number of buyout shops are embracing these acquisitions to finance transactions or bolster the balance sheets of companies they back, industry executives said.

“Private-equity firms, in order to be competitive in bidding processes, must put as much emphasis on balance-sheet optimization as they ever have,” Mr. Kaplan said. “The sale leaseback is increasingly one thing that needs to occur for the deal to work.”

In one recent sale leaseback, New Mountain bought factories in California and Tennessee from Techmer PM LLC, which remains a tenant in both, less than a year after SK Capital Partners acquired a majority stake in the Clinton, Tenn.-based polymer-additive maker.

The transaction made “financial sense” for SK Capital because the sale was at a higher multiple than the firm paid for Techmer, said Jonathan Borell, an SK Capital managing director.

But the sale leaseback wasn’t a precondition for the Techmer deal, he noted.

“We would have done the transaction either way,” Mr. Borell said.