The value of sale-and-leasebacks

by Jason Huljich, Joint CEO

The past six-to-nine months have been trialling for businesses, especially business-to-consumer enterprises with household spending across the country contracting by 12.1%¹ according to ABS June 2020 quarter national accounts data. It’s official, we are currently wading through a technical recession. In the current environment, more and more businesses are looking for alternatives to equity raising and extending their debt arrangements to support business operations.

The sale-and-leaseback of real estate assets is an ingenious way to free-up cash to help enable a business to expand. A sale-and-leaseback transaction is when a business that owns the property it occupies, sells the property to an investor but then leases it back, usually on a long-term lease. This process is an emerging trend among national operators who have multiple premises or one-off, fit-for-purpose properties.

For example, Arnott’s owners KKR sold its $800m property portfolio on sale and leaseback terms of up to 30 years. Telstra sold its $416.7m Data Centre in Clayton, Victoria, also on a 30 year sale-and-leaseback term and has also put its 16 storey, Pitt Street (Sydney) telephone exchange on the market for a rumoured $300m under a 10 year leaseback arrangement.

On a smaller scale, Flight Centre offloaded its St Kilda Road (Melbourne) headquarters for $62.15m, leasing back 75% of the building, while RMIT University is divesting its 14 storey, Bourke Street (Melbourne) tower for $120m on a five year leaseback term.

Sale-and-leasebacks are more common in the industrial real estate markets, rather than offices, as many properties are unique and cater for a particular type of operation. In other words, industrial-style businesses are wedded to their properties, and the real estate can’t be substituted for a generic space like offices typically can. Also, a lot of industrial business own their properties, as the price point is lower than large commercial office assets.

The benefit of sale-and-leaseback for businesses is it generates cashflow, which can help enable growth.

On the flipside, the benefit for investors is it enables confidence in achieving a steady revenue stream, generating better likelihood of returns.

Usually, sale-and-leasebacks are arranged on long lease terms. The jewel in the crown is securing assets with a triple-net-lease covenant. Usually, tenants are responsible for a property’s maintenance, repairs, and services such as electricity and water utilities. However, on a triple-net-lease the tenant is also responsible for the capital expenditure on the property.

For an investor, this means very limited out of pocket costs and better revenue generation which often translates to stronger returns.

In short, it seems the increasing prevalence of sale-and-leaseback is a win: win for operators and investors and could be just the right strategy to enable a business’s growth during the current COVID-restrictive environment.

1. Australian Bureau of Statistics: 5206.0 – Australian National Accounts: National Income, Expenditure and Product, Jun 2020