Sale Leasebacks Brew Anew

Wall Street Journal - May 13, 2009

Corporate sale-and-lease-back deals came to a virtual halt in Europe in the first quarter as property investment dried up, but signs of life may be emerging as cash-strapped companies look for new sources of financing.

Renault SA, the French car maker, is exploring the potential sale of property it owns and which is reported to be valued at as much as €1 billion ($1.36 billion). Eroski, a cooperative retail chain with more than 1,000 stores across Spain, is exploring the sale of as many as 150 supermarkets that could generate proceeds of as much as €300 million, according to people familiar with the matter.

"We are considering selling offices and commercial property as a sale-and-lease-back," says Renault spokeswoman Gita Roux. "Interest rates are high and it's hard to get credit, so property sales are part of a broader plan to improve our cash flow."

Ms. Roux wouldn't comment on how much Renault expects to raise through property sales, saying it depended on the price the company could achieve in the market.

Eroski is being advised by Cushman & Wakefield; neither Cushman nor Eroski would comment.

In a sale-and-lease-back arrangement the owner of a property -- typically a corporation or a government agency -- sells the property it is occupying and leases it back, usually on a long lease of 20 years or more. The advantage for the company selling is that it gets cash that it can reinvest in its business or use to lower debt, can stay in the property, and doesn't have to pay the money back.

As the recession grinds on and debt remains expensive and hard to come by, companies are again considering using their property to raise cash. But deals have been hard to do because of the lack of debt financing and the gap between what sellers hope to gain from a sale and what buyers are willing to pay.

Now, that buyer-seller gap is narrowing and there is also a greater willingness on the part of some buyers to pay with cash now with the hope of raising debt later.

One such buyer is W.P. Carey & Co., a New York investment group that in April paid cash for the space that New York Times Co. owns in its headquarters in midtown Manhattan. W.P. Carey is prepared to do similar all-cash deals in Europe.

"We're doing deals, but there is a premium to that because we're taking on the risk, hoping that we will later be able to get mortgage financing," says Edward LaPuma, head of W.P. Carey's international business.

In Europe, advisers on sale-and-lease-back transactions say chief financial officers from London to Lisbon have been comparing the costs of raising finance through issuing new shares, bonds or by turning their own property into cash.

With stock prices down, share issuance is expensive because investors, fearing stocks could keep falling, are demanding hefty discounts.

Bonds are costly because yield premiums over government paper have widened over the past year, and investors are shying away from corporate debt from all but the highest investment-grade issuers. Banks that used to issue mortgages with just 20% equity are now demanding as much 45%.

"If you're considering a sale-and-lease-back, it's not about where we are in the real-estate cycle," says Matthew Stone, head of occupier strategies for Europe, Middle East and Africa for Cushman & Wakefield. "It's about the need to raise capital and finding the least expensive way to do it."

A number of large deals were done last year. Caixa Galicia sold a portfolio valued at €250 million, said property consultants CB Richard Ellis. Banco Popular sold buildings in Madrid and Barcelona, raising €127 million. Banco Santander raised €4.4 billion with the sale of its Madrid headquarters, 1,152 branches and 10 individual buildings, and French bank BNP Paribas sold its Paris headquarters for €250 million.

With property investment down sharply, sale-and-lease-back deals screeched to a halt this year. But advisers are saying momentum could resume in the next few months.

CB Richard Ellis has deals in the works valued at more than €4.1 billion with clients in financial services, manufacturing, pharmaceuticals, research and development and technology, and retail, says John Wilson, executive director of corporate services. That compares to about €3 billion during the same period last year, he says.

There is a flip side to the sale-and-lease-back scenario. Low property prices create an opportunity for companies or public administrations that have enough cash on hand to buy the buildings they occupy from cash-strapped landlords.

In December, London's Metropolitan Police bought New Scotland Yard from the British REIT Land Securities PLC. And in April, British Land Co. sold an office building on 2-3 Triton Square in London to the building's main tenant, Abbey National PLC.

"We are talking to a number of large corporations seeking to buy their buildings," says Matthew Richards, director of corporate capital markets at Jones Lang LaSalle in London. Sphere: Related Content