A REIT Opportunity in the Sale/Leaseback Space
In a sale/leaseback transaction, the owner-occupant of a commercial property sells the asset it owns and occupies by executing a long-term lease with a real estate investor. This structured financing alternative has evolved into an attractive strategy for many corporations to unlock the value of their real estate assets.
Over the past several decades, corporations have been increasingly executing sale/leaseback transactions -- usually to better allocate capital, but also in many cases to manage residual real estate risk. This off-balance sheet alternative provides the occupier 100% of the value of the property compared to traditional mortgage financing, which is usually around 65% loan-to-value.
One of the early pioneers of the sale/leaseback structure was New York-based W.P. Carey
State Farm has been increasingly utilizing the sale/leaseback strategy as a way to decrease its inventory of owned assets and monetizing its balance sheet to take advantage of the low-cost REIT debt and equity. According to SNL Financial, State Farm "owns more than 100 buildings" and State Farm says that "the company may sell and lease back additional locations, as thousands of State Farm employees work in leased locations today."
As I reported last week in my REITs on the Street column, triple-net REITs (like W.P. Carey) "represent a stable alternative to the fluctuating stock and bond markets" as most REITs invest in "premier net lease properties with favorable lease terms, strong tenant credit and prime location."
Although the stable REIT sector appears "bond like," Mr. Market has confused the free-standing "brick and mortar" class with bonds,which is precisely why we have seen a large selloff in the sector. Many REITs like Realty Income