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Cash Crunch Fallout: Distressed Companies Clamor for Sale-Leaseback Deals

Squeezing Cash Out of Corporate Concrete is a Rare Bright Spot in Today's Commercial Real Estate Market. But It Remains to Be Seen How Many Transactions Will Reach the Finish Line
January 28, 2009
While investment sales have tanked in most U.S. markets across every property type, interest remains keen in sale-leaseback transactions as more cash-strapped companies look at their non-income-producing assets as an alternative capital source for reducing debt or funding operations.

Businesses of all types, under pressure to quickly boost liquidity, have stepped up their push for sale-leasebacks as an avenue to monetize their assets. Banks have sold off their retail branches and office buildings in response to declining capital positions. Retailers have sold and leased back store locations, corporate headquarters offices and distribution facilities, in response to steep declines at the cash register. Deep-pocketed investment management firms and institutional buyers such as W. P. Carey & Co. LLC, Inland Real Estate Group of Companies Inc. and USAA Real Estate Co. are circling the market and making some deals, however, the buyer pool is shallower as other traditional and high-powered providers of sale-leaseback capital such as GE Real Estate have backed out of the market due to their own financial distress.

After enjoying a boom through 2007 and a good portion of ’08, sale-leaseback deals have slowed significantly in recent months. According to an analysis of CoStar COMPs sales data, total dollar volume in all property categories nearly doubled in 2007 from the previous year to just over $10 billion. Sales, however, dipped 15% in the first three quarters of 2008 compared with the same period the previous year, from $6.47 billion through Sept. 30, 2007 to $5.49 billion during the same period last year.

Then, sale-leasebacks -- along with every other type of transaction -- fell off a cliff in the fourth quarter of last year. Although CoStar is still finalizing sales data for the quarter ended Dec. 31, early numbers show that sales plunged to $557.6 million, the lowest total for a three-month period since the $376.6 million reported in second-quarter 2005.

That said, drilling a bit deeper into the data also illustrates how popular these transaction have become. Sale-leasebacks were about 2.2% of all closed transactions by dollar volume in third-quarter 2007, totaling about $2.1 billion. During the same quarter last year, those transactions had doubled as a percentage of total sales volume to 4.4%. In fact, third-quarter 2008 was the strongest of the year for sale-leasebacks and among the strongest on record.

Despite the fourth-quarter meltdown, interest and inquiries about deals remain high.

"Sale leasebacks are still a bright spot in the real estate market right now," Bruce Westwood-Booth, managing director for Jones Lang LaSalle's Corporate Capital Markets Group, told CoStar Advisor. "Volume was very strong last year and we had another record year in that area," said Westwood-Booth, who heads the JLL team that landed last week’s marketing assignment from Burlington Coat Factory to sell and lease back corporate facilities in New Jersey. "Whether we're just picking up market share or whether our clients are more interested, it's hard to say. The interest we're generating from a velocity perspective is almost as good as we were generating a couple years ago. But pricing has been impacted, so we're also seeing a rise in cap rates."

Other Jones Lang LaSalle executives report that a growing number of corporations are exploring sale leasebacks.

Industrial Developers and Brokers: How is the recession affecting your building sales, leasing and development planning? Will 2009 be the worst year ever for industrial real estate as feared? Will all the shuttered buildings hurt demand? Where's the upside -- and what's your strategy for riding out the storm? CoStar News is gathering insights and anecdotes for an upcoming article and presentation on the 2009 state of the industrial market. Please send us your responses to any or all of these questions, along with your contact info, by Monday, Feb. 2.


Jay Koster, managing director of Jones Lang LaSalle’s Corporate Capital Markets practice, predicts a significant sharpening of the corporate appetite for sale-leasebacks in 2009. Inquiries from the firm's corporate clients are up by 300% versus 18 months ago, Koster said.

"Corporations are looking for capital capacity to operate their businesses and position themselves to take advantage of opportunities that will arise through this market cycle," said Koster. "We expect that appetite will be matched by heightened demand from investors that recognize inherent value in real estate leased to strong-credit corporations."

JLL predicted an increase in corporate sale-leasebacks last year -- "and that trend will absolutely continue [in 2009] as corporations remain challenged in securing new sources of capital," added Kenneth Rudy, Jones Lang LaSalle’s president /COO. "Investors are more willing to commit capital to acquire companies’ owned assets tied to long-term, credit leases. We also expect to see more corporate dispositions to come from downsizing in 2009 as corporations mark-to-market the value of surplus real estate inherited in acquisitions at market clearing prices."

As with any other type of transaction, pricing will continue to be a roadblock, Westwood-Booth noted.


For news on new development, site selection, significant land transactions and commercial real estate trends, join the distibution list for CoStar's free weekly In The Pipeline column and newsletter. Read this week's edition.


"Investors aren't just looking at the income stream anymore, they're looking at the real estate. In the past, they wouldn't scrutinize the real estate. Today, that has changed. Because of the inability to forecast what debt will look like in two years, it's creating a complexion of uncertainty that investors are trying to 'Band Aid' through higher yields, and that's impacting pricing."

Retailers Unload Corporate Real Estate



The New Year has brought a flurry of mostly industrial transactions, especially among national retailers looking to unload corporate headquarters and distribution facilities. Home Depot, the nation’s largest home improvement chain, last week sold distribution centers in Alabama and Georgia to Inland Real Estate Acquisitions Inc. for $59.2 million, or about $45 per square foot. Atlanta-based Home Depot will lease back the nearly 1.32 million square feet for 18 years. Mark Cosenza, acquisitions coordinator for Inland Real Estate Acquisitions, the purchasing arm of Oak Brook, IL-based Inland Real Estate Group of Companies Inc., described the two 657,000-square-foot rapid deployment centers as key hubs in Home Depot’s supply chain.

Also last week as mentioned, Burlington Coat Factory Warehouse Corp. retained Jones Lang LaSalle’s Capital Markets group to market two buildings totaling 1.25 million square feet for a sale and partial leaseback to the apparel distributor. The 730,392-square-foot Edgewater Park Distribution Facility is in Beverly, NJ, while the 521,441-square-foot Burlington Coat Factory Distribution Facility, which serves as the apparel company’s corporate headquarters, is 10 minutes away in Burlington, NJ. The clothier will lease back most of the space, including offices and distribution, Westwood-Booth said.

Partial leaseback transactions - where a company sells the entire building or portfolio but only leases back certain buildings or portions of buildings - are on the rise as shrinking companies work to economize on space and operating costs, Westwood-Booth said.

"With the layoffs and corporate rightsizing, companies do not want to pick up any more occupancy expenses than they really need. They don’t want to support vacant space."

From a broker’s perspective, "it’s nice when we can sell buildings that are either fully leased or completely vacant, versus trying to stabilize and market two buildings that are half full," Westwood-Booth said.

In another deal, US Industrial REIT II entered the Chicago market with the purchase of Cinram Distribution Center, a 595,000-square-foot facility in Aurora, IL. Cinram Distribution LLC sold the 12-year-old facility at an undisclosed price and reportedly will lease it back from the REIT, owned by affiliates of USAA Real Estate Co. and other institutional investors.

Leaseback Specialist May Tap Office Market



Perhaps the most active of all buyers is sale-leaseback specialist W. P. Carey & Co. LLC. Earlier this month, the mammoth investment manager and its non-publicly traded REIT affiliates announced a $39 million deal to acquire four manufacturing plants and a headquarters building in North Carolina leased to Frontier Spinning Mills, maker of Fruit of the Loom underwear and other apparel. The four sites acquired by W.P. Carey REIT affiliates Corporate Property Associates 17 - Global CPA 16 - Global are located in Mayodan and Sanford, NC. Additionally, the REITs paid $15 million for a cold-storage facility in Glendale Heights, Ill., leased to Kronos Foods.

Those deals, however, are relatively small change compared to a potential office transaction in Manhattan between W.P. Carey and The New York Times, which this week reported a 48% net income drop in the fourth quarter and is facing expiration of a $400 million credit facility this spring. The "Gray Lady," hammered by weakness in print advertising like most U.S. newspapers, tapped Cushman & Wakefield to sell its ownership interest in the 52-story, 1.55 million-square-foot headquarters at 620 Eighth Ave. in Manhattan and announced last week it is in advanced talks with W.P. Carey -- which usually doesn't acquire CBD office properties -- to buy the interest for up to $225 million. Other media companies, including Sam Zell’s Tribune Co. and A.H. Belo Corp., publisher of the Dallas Morning News and Providence (RI) Journal, have announced similar plans to put properties on the block.

Other significant transactions reported by CoStar News during the last quarter of 2008 include:

  • Orlando, FL-based CNL Lifestyle Properties, Inc. closed on the acquisition of three ski resorts from family-owned Ludlow, VT-based Triple Peaks, LLC, for a reported $132 million. Triple Peaks leased back the properties and will continue to manage the resorts, which include the 632-acre Okemo Mountain Resort in Ludlow, VT, the 1,167-acre Crested Butte Resort in Crested Butte, CO, and the 230-acre Sunapee Mountain Resort in Sunapee, NH. (CoStar COMPS #1633011)


  • Countrywide Home Loans sold the office building at 5220 Las Virgenes Road in Calabasas, CA, to digital technology developer DTS, Inc. for $15.64 million or $182 per square foot. The sale is a partial sale-leaseback; Countrywide will continue to occupy 59,457 square feet of the 85,948-square-foot building. DTS is consolidating three locations into the building. Built in 1999, the three-story, multitenant office building is in the Calabasas/Westlake Village submarket. Lynwood Fields and Gary Weiss of Madison Partners represented the seller. Matthew Miller and Carlo Brignardello of CresaPartners represented the buyer. (CoStar COMPS #1613192)


  • AIC Ventures acquired an industrial building at 4375 Willow Drive in Medina, MN, from Temroc Metals for $6 million, or $77 per square foot in a 15-year sale-leaseback transaction. The 77,900-square-foot manufacturing facility was constructed in 1987 in the Southwest Industrial submarket. The building features two drive-in doors. (CoStar COMPs #1609878)


  • Consolidated Container Co. sold its 155,820-square-foot Sparrows Point, MD, industrial building at 7100 Old North Point Road to New York-based Angelo, Gordon & Co. for $8.22 million, or about $53 per square foot. As part of the deal, plastic packaging manufacturer Consolidated Container will lease back the facility for an undisclosed term. (CoStar COMPS #1601303)


  • Taurus Investment Group purchased the flex building located at 15 Morgan in Irvine, CA, from Evans Analytical Group (EAG) for $6.8 million, or roughly $190 per square foot. The transaction was a 15-year sale-leaseback. The 35,427-square-foot R&D building was built in 1983 in the Irvine Spectrum submarket. The building underwent a $1.5 million renovation in February. Grant Freeman of Staubach Financial Services and Matthew Osborn of Jones Land LaSalle represented the seller. The buyer was self-represented. (CoStar COMPS #1596326)


  • One Liberty Properties Inc. agreed to purchase and lease back eight properties from Office Depot Inc. for $47.6 million. The eight properties, which are located in seven states, contain an aggregate of 218,137 square feet of retail space and each property is leased on a net basis. The initial term of each lease expires on Sept. 30, 2018, and provides Office Depot with four five-year renewal options.


  • Omega Healthcare Investors (NYSE: OHI), a healthcare REIT, purchased a Pennsylvania health care portfolio from Guardian LTC Management for $40 million, or $310 per square foot, in a sale-leaseback transaction. The lease keeps Guardian in the buildings, which include skilled nursing, retirement and assisted-living facilities, through 2018. (CoStar COMPS #1594267)


  • Taurus New England Investment Corp. and partner DivcoWest acquired a 385,000-square-foot mixed-use portfolio in North Reading, MA. Teradyne Inc. sold the two RiverPark buildings for $27.5 million, or about $71 per square foot and will lease back one building for nine months and portions of another for five years. (CoStar COMPS #1580359)


  • Private investors acquired the industrial buildings at 2255-2267 Agate Court in Simi Valley, CA, from Turbonetics for $5.35 million, or $153 per square foot. The seller, a turbo systems manufacturer, will continue to fully occupy both buildings. The industrial facilities total 34,875 square feet and were constructed in 1985 in the Moorpark/Simi Valley Industrial submarket. Bram White, SIOR, and Stuart Scott with DAUM Commercial represented the seller. Grant Harris with Lee & Associates represented the buyer. (CoStar COMPS #1592915)


  • W.P. Carey Co. affiliate Corporate Property Associates 17 -- Global Incorporated completed the acquisition of two fitness centers for $63 million. Life Time Fitness, Inc. was the seller of the two buildings, which total 220,340 square feet and are located in Columbia, MD, and Scottsdale, AZ. It was the second large sale-leaseback transaction completed by Life Time Fitness in recent months. At the end of August, Senior Housing Properties Trust (NYSE: SNH) acquired four centers from the fitness operator for $100 million, which were leased back to Life Time Fitness under similar terms.

  • Development and investment firm Beacon Partners purchased the distribution center at 2655 Annapolis Drive in Winston-Salem, NC, from Hanesbrands for $13.2 million, or $34 per square foot. The undergarment manufacturer will continue to occupy the property for approximately five more years. The 385,000-square-foot building was built in 1996 in the South Forsyth County Submarket. John Shultz and Hap Royster of Triad Commercial Properties represented Hanesbrands. Beacon Partners represented themselves in the purchase. (CoStar COMPS #1568094)


  • American Realty Capital Trust (NYSE: ARCT) secured $33 million in mortgage financing from TD Bank, N.A. to acquire 50 bank branches triple-net leased to PNC Bank. The PNC Bank branches are located in Pennsylvania, New Jersey and Ohio and total 275,000 square feet. On Sept. 29, the REIT closed on the acquisition of six drugstore properties net-leased to Rite Aid for $18.8 million, which included $12.8 million in assumed debt. The Rite Aid stores total 75,000 square feet and are located in Ohio and Pennsylvania.
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