Corporate Sale-Leaseback Investing: Stable, Strong Returns In A Volatile Market
By Philip F. Blumberg & David Blumberg
Posted: 16th February 2015 09:49
In an environment where major international economies are lagging in growth, and in some cases, as in Europe, contracting, the US continues to be the leading world economy in terms of size, growth, and safety. Such a scenario makes US investments far more attractive to both domestic and international investors seeking stability, growth, and strong dollar denominated returns.
As the US economy continues to grow, the real estate market is poised to strengthen with it.
One long-standing sector gaining increased popularity from high net worth investors, REITs, and non-US investors, are corporate facility investments through transactions known as sale-lease backs.
Sale-lease back transactions allows corporations to use and control essential real estate assets without tying up corporate resources which are better spent on their core business than locked-up in corporate real estate.
Furthermore, sale-lease backs can provide a form of off-balance-sheet financing, allowing corporate owners to sell corporate facilities while simultaneously leasing it back from the new owner, under a pre-negotiated corporate guaranteed long term lease.
Typical sale leaseback are by public companies, often with investment grade ratings, offering well known stand-alone retail store and branch banking locations or corporate headquarters, logistics facilities or research and development facilities.
By unlocking capital that can then be deployed in other ways that better fit its own needs and goals the company is able to focus on prudent expansion. Lease backs allow growing corporations to expand nationally through liquidity in part generated by sale lease backs.
These investments offer a long-term opportunity for investors to receive better than bond returns with tangible collateral through the newly completed corporate property. In other cases, they take the form of sales of existing properties in order to monetise existing corporate held retail or corporate facilities, commonly with 15+ years left on their lease terms, and often with extension options and rent increases built in.
These rent increases, or escalations, ensure that rent growth equals or exceeds inflation such that returns will substantially exceed the principal investment after inflation.
One important characteristic is stability and risk adjusted return through corporate guarantee of these leases, providing a strong investment vehicle for investors seeking a bond-like, but premium return with tangible real estate collateral.
Sale lease backs typically comprise one of four categories: i) Single net lease (Net or N) lease where the tenant is responsible for paying property taxes; ii) Double net lease (Net-Net or NN) where the tenant is responsible for property tax as well as building insurance; iii) Triple net lease (Net-Net-Net or NNN) where the tenant is responsible for all costs associated with operation of the property including property tax, insurance, and maintenance; and iv) Bondable lease where the tenant assumes the financial obligation for any and all expenses, on an absolute basis.
Corporate sale lease backs have long been popular commercial real estate investments. Their “NNN” terms – meaning the tenant is net of real estate taxes, insurance, and maintenance – can be very attractive to potential investors as it eliminates costs associated with operating and maintaining the property.
In today's volatile, but low fixed income yields, sale-lease backs may offer a superior return at lower risk to bond market investments.
And a strong national operator with high credit ratings, for example Walgreens or CVS, provides an attractive opportunity to investors seeking steady, collateralised, guaranteed returns year after year.
Case Study Comparison
As an example, let’s compare a Walgreens bond maturing in 2034 currently paying a coupon of 4.5% annually to a Walgreens store with a similar remaining lease term paying 5.3% of its purchase price per year. Through the use of even modest accretive leverage, investors can see “coupon” payments in the area of 10%- 12%, with most if not all of the cash flow shielded from taxes.
Enhancing attractiveness to investors, the bond-like steady return with real collateral that backs this investment, presents an opportunity particularly in low or deflationary environments to also sell prior to maturity of the lease at a very substantial profit. The purchase market comprises investors seeking to off-set deflationary damaged investments with corporate guaranteed comparatively high yielding investments, with real estate associated growth or upside.
The alternate exit is to run through to maturity of the lease, receiving income representing up to 10-12% yields and either sell or re-lease the building and land.
For similar risks as fixed income bond returns provide, an investor in corporate sale-lease backs receives a premium return over similar bond yields, while owning land and property at the end of lease, compared to lower bond yields with no residual value at maturity.
Access Through Investment Funds
At Blumberg Capital Partners, we take the view that these properties are more akin to a real estate asset enhanced bond. Our firm is launching two corporate facilities funds this year to take advantage of the recent proliferation of investment grade bondable sale-lease backs that has hit the market.
Each fund will target separate investors:
- US investors seeking better fixed income returns than government or investment grade bonds can provide, while carrying limited risks usually associated with corporate bonds but enhanced by property rather than paper collateral.
- International, non-US investors seeking safe investment in the US, with similar advantages with a dollar denominated return.
This fund is structured to also provide a tax-advantaged environment for non-US investors.
Key Risk Drivers
Bondable, triple net leases are inherently low maintenance. However, this does not mean they do not contain risk that requires real estate and financial experience to evaluate.
Acquisition due-diligence, in-depth knowledge of the market and demand factors, expertise in real estate property and tenant risk evaluation, as well as confirmation of the corporate credit and site specific strategy are crucial to delivering above average returns and making good productive investments in this sector.
Experienced and hands on management play an important role in overseeing and managing this type investment over the life of the lease.
In summary, with their corporate guaranteed bond-like payments, real estate collateral and minimal ownership responsibilities, corporate sale lease backs in the form of triple net leases can be important investment additions to high net worth and institutional investor portfolios; and with the proper due diligence and fund management, enable superior bond-like returns with lower associated risk.
Philip F. Blumberg is Chairman and Chief Executive Officer of the Blumberg Capital Partners group of companies. Blumberg Capital Partners, as an institutional Investment Manager has sponsored and managed among the top rated and performing investment Funds in the US. Mr. Blumberg is Chairman of the firm’s Investment Committee.
The Blumberg Group of companies includes Blumberg Grain, a leading global Food Security firm and Blumberg Steel a steel fabrication and component manufacturer.
He has been featured as a frequent guest on CNBC, Reuters, Fox and other outlets to provide his perspective on cyclical investing, market dynamics, and responsible fiduciary investing.
He received his M.B.A. from Harvard Business School and his undergraduate degree from the University of North Carolina - Chapel Hill with Honors in Business.
David Blumberg serves as Vice President of Blumberg Capital Partners. In that capacity, Mr. Blumberg is a member of the Investment Committee and responsible for operations implementation.
Mr. Blumberg has an affiliation with CityScape Global conferences and Real Estate Summits around the world, where he provides his perspective on trends and innovation in the commercial office sector.
Mr. Blumberg has also authored publications in the Journal of Sustainable Real Estate with pieces on LEED systems in the U.S. Commercial Office Market.
Prior to joining Blumberg Capital Partners, Mr. Blumberg worked for Deloitte Consulting LLP, within their Strategy and Operations Practice.
A native of Miami, Florida, Mr. Blumberg is a graduate in Business with Honors from the University of North Carolina.