Use cases for a sale and leaseback

Sale and leasebacks are a mechanism which can be deployed for different purposes at varying points in a sponsor’s hold period. They are a value creation tool but the proceeds also provide liquidity which can be deployed by Sponsors for a variety of uses. The question to be addressed is where in the hold period would a sale and leaseback process create the most value?

Fund the acquisition

The earliest and most direct use of a sale and leaseback is to provide funding for the acquisition of the business itself. The sale and leaseback process can be run concurrently with the acquisition process and timed to complete at the same time.

This is a more complicated process than undertaking the sale and leaseback later in the hold period but it is feasible. It relies on the seller being supportive as access to the real estate is essential to undertake investor’s property due diligence. Given the additional uncertainty and conditionality on the business acquisition, sale and leaseback investors might seek a cost coverage provision.

This approach is very common in the US and is growing in Europe. It is complicated further in some European jurisdictions by statutory pre-emption rights which create a timing delay (often several months) between signing of the real estate transaction and closing.

Fund M&A

Monetising an existing owned asset releases proceeds to fund inorganic growth without drawing on a debt facility or calling capital. We frequently work with sponsors using sale and leaseback as part of a buy-and-build strategy who would otherwise be relying on the debt package or an equity cheque. Some sponsors choose to undertake a sale and leaseback in advance of planned M&A to build up a war chest of cash to move quickly when opportunities arise whereas others might already have targets further progressed.

Where a bolt-on owns real estate, the same process can be executed and the acquired property can be monetised, funding part of the deal. Sale and leaseback investors are typically supportive of the company’s growth and the original investor offers a funding source for future sale and leasebacks. This should streamline the process through the existing relationship and an agreed form of lease although you are not obligated to use the original investor for future sale and leasebacks.

Accelerate the business plan

Proceeds can be deployed to accelerate a sponsor’s wider value creation plan for the company. EBITDA generating Capex projects are a frequent use of proceeds with new production lines or expansions. Many sponsors are also raising proceeds to fund operational improvements including data and AI transformation.

Optimise the financial structure

Proceeds can be used to optimise the financial structure and derisk the investment by refinancing existing debt or deleveraging. Sale and leasebacks provide a long-term financing solution and remove ongoing exposure to volatile interest rates. In addition, it is covenant-lite and provides balance sheet benefits due to its accounting treatment compared to traditional financing.

Alongside diversifying the capital stack, sale and leasebacks can be a competitive form of financing when compared to LBO financing and corporate bonds with many sponsors using sale and leasebacks to reduce the company’s WACC.

Exit and continuation

Where an asset is moving into a continuation vehicle, a sale and leaseback is a good fit: the mechanism can crystallise real estate value as part of the recapitalisation, separating it out from the operating business valuation used to price the transaction. This supports liquidity to exiting LPs while the business continues under the same sponsor.

A sponsor approaching an exit with real estate still sitting on the balance sheet should strongly consider a sale and leaseback. Crystallising the real estate arbitrage before exit provides a final opportunity to improve returns. Otherwise, value is left on the table for the next buyer to capture.

The final word

Sponsors who get the most from a sale and leaseback consider their real estate as a capital question which is reviewed pre-acquisition and continually throughout the hold. The opportunities to execute a sale and leaseback are spread across the hold period and the best use will vary by portfolio company.