12/11/2002: CIA Commercial Investment Advisors

By Joy C. Shaw
December 11, 2002
The Wall Street Journal

NEW YORK – In an environment where corporate financing has been hard to get, especially for smaller, credit-impaired companies, sale-leaseback transactions, an alternative form of financing that is tied to real property or equipment, have been gaining popularity.
In sale-leaseback transactions, companies sell their property or equipment and subsequently rent them back from the new owner, who either holds the investments in portfolios or securitizes them into commercial mortgage-backed securities.
By completing such transactions, participants say, companies can "unlock" full real-estate value, gain immediate access to cash and decrease debt. The deals are also often used to improve companies' financial statements.
The sale-leaseback market is still very small relative to the commercial real-estate market or other debt-financing markets, but anecdotal evidence suggests unprecedented interest in these deals.
"There are more sale leasebacks being structured than ever before," said Sean Sovak, chief acquisition officer at W. P. Carey , a New York-based corporate real-estate financing firm that specializes in sale-leaseback transactions. The company's sale-leaseback business more than doubled to about $1 billion this year compared with $400 million last year. Mr. Sovak said he expects the volume to double again next year to around $2 billion.
Mr. Sovak attributes the growth in part to "a wider appreciation of the sale-leaseback instruments" and in part to the low-interest-rate environment, which makes the deals more affordable.
Stan Wendzel, senior vice president of Lowe Corporate Services, an Irvine, Calif., commercial real-estate financing firm, said he also believes there has been an increase in the volume of sale-leaseback deals due to both the growing supply of capital and higher demand by corporate users of such transactions.
Most notably, tightness in financial markets over the past year forced many companies to look for funding in unconventional places. "A lot of companies have fewer financing alternatives," he said "Raising cash through stock offerings is less available, especially for industries being hit hard, while sale leaseback is more viable than ever."
Mr. Sovak said the vast majority of sale-leaseback deals are used to pay down existing company debt, while others are used to improve balance sheets and boost working capital.
In a deal closed in September, for example, W. P. Carey bought the corporate headquarters and a mammography facility of Hologic Inc., Bedford, Mass., for $33 million. A Hologic official said in a Sept. 3 press release that proceeds from the transaction were used to pay down a $25 billion note.
Mr. Wendzel said there seems to be a growing amount of capital chasing quality leased real-estate investments, while both stock and bond markets are faced with a high degree of uncertainty.
"There seems to be an abundance of capital," he said. Investment firms have been able to raise more money than ever for the capital investing in sale leasebacks, he said.
The growing supply, in fact, has made it cheaper for companies to do sale leasebacks this year. One way to measure the supply effect, he said, is so-called capitalization rates, or the ratio of expected income compared with estimated value of the property.
Capitalization rates on single-tenant net leased assets have moved down by at least 0.25 percentage point so far this year. For a $10 million transaction, this would translate into a reduction of the company's rental cost by approximately $25,000 a year, Mr. Wendzel said.
However, while sale leasebacks are gaining popularity, they will likely remain a niche market due to perceived risks. Because sale-leaseback transactions are often used by struggling companies that intend to move real estate assets off balance sheet, they can be riskier than the overall commercial real-estate market, participants and analysts say.
"Some companies may have difficulty raising capital and turn to the sale-leaseback market for financing," said Terry Winograd, a senior director of CMBS group at Fitch. "If that's the case then there may be additional risk associated with the transactions."
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