How portfolio sales are driving corporate sale-and-leaseback activity

In an increasingly uncertain economic environment, more corporates are turning to their existing real estate as a source of liquidity, with the sale of portfolios becoming a common strategy.

Sale-and-leaseback deals, where companies sell their own real estate to unlock capital then lease the asset back, are set to continue in popularity, building on the momentum of the past five years, according to JLL.

Disposals of corporate real estate in Europe last year rose 33 percent to €23.1 billion, across more than 460 transactions, according to JLL’s report Raising Capital from Corporate Real Estate.

The sale of portfolios has been pursued by companies in sectors ranging from food and beverage to healthcare, logistics and retail.

A recent example in May this year was Aviva Investors’ long income real estate fund’s investment of £107 million in UK logistics warehouses sold by clothing retailer Next and leased it back to them.

Acceleration of portfolio sale-and-leasebacks is already being attributed to the current coronavirus (COVID-19) volatility, with debt markets and other sources of capital more limited, says Nick Compton, head of EMEA corporate capital markets at JLL.

“Cashflow is of course a major, short-term factor for many owner-occupiers,” he says. “However, significant reassessment of current plans is also taking place; capital may be needed for new business opportunities.”

Portfolio transactions, such as UK pub owner and operator Enterprise Inns’ £348 million sale of 370 properties to Davidson Kempner Capital Management accounted for almost half the value of all disposals in Europe last year. Supermarket giant Sainsbury’s and British Land jointly sold then leased back 12 stores, also in the UK, with New York-listed Realty Income Corporation paying £429 million for the portfolio.

Rethinking and reshaping

Large supermarket and retail chains with property on their books are top among those considering sale and leaseback strategies as they reassess strategies.

“One of the big deciding factors for companies, particularly those who have been in joint ventures with developers, is the reassessment of what is core,” says Michael Evans, corporate capital markets director at JLL. “Real estate ownership for supermarket and retail chains, for example, is not central to their business and joint ventures are often a distraction.

“While such divestment decisions have been made in the past, they will continue and be accelerated by the current COVID-19 crisis.”

Last year, French grocery chain Carrefour sold its stake in its property vehicle Cargo Property Assets to Argan, a listed real estate company specializing in logistics. The deal, which netted the group €290 million, was made possible because Carrefour had already “spun out” its distribution assets into the Cargo vehicle.

In the U.S, where the likes of Bed Bath & Beyond and Macy’s sold their real estate prior to Covid-19, department store chain JCPenney, having filed for Chapter 11, is currently spinning out its portfolio 850 properties into a separately owned real estate investment trust.

Portfolios being brought to market may vary slightly by country and quality, says Compton. But what matters most for investors is consistency of lease length.

“When portfolios trade, there’s generally some level of uniformity of lease length given that most buyers are long income funds,” says Compton, pointing to the strong appetite of triple-net lease funds. “Geographically, investors tend to prefer assets in one region rather than across two or three. That gives them greater scope to then go on and create platforms focused on certain countries, sectors and assets that are critical to ongoing operations.”

HQs still of interest

Despite the growth of portfolio sales, companies are also continuing to release their headquarter offices. Deloitte recently sold its €190 million Copenhagen headquarters to Norwegian investor KLP Forsikring, while British Telecom sold its London headquarters to Orion Capital Managers for £209 million late last year.

“The quality of assets being released over the past year has been high and, in some cases, unique,” says Evans.

The office, retail and industrial & logistics sectors continue to be the most active real estate sectors, accounting for 76 percent of all sale-and-leaseback disposals in EMEA last year. And private equity owners of mid-sized corporates were a key component of activity in 2019, pushing their portfolio firms to dispose of property to pay down debt, consolidate or release cash.

“Regardless of asset type, there’s a real drive now to be better prepared for what the future holds,” Evans says. “There were already strong signs last year that companies were thinking much more holistically across their real estate footprint.

“That trend will continue through and beyond COVID-19.”