ABOUT US

LeadCrest Capital Partners is a dedicated European sale-leaseback and build-to-suit investment specialist. The company provides their investors with stable, predictable, and inflation-protected returns, that are built on an investment strategy that features quarterly-distributions.

This investment strategy is centered on providing European firms regardless of:

  • THEIR SIZE
  • CORPORATE OWNERSHIP
  • SECTOR OF OPERATIONS

with an attractive, alternative source of financing that is achieved through the monetization of corporate-owned real estate.

Sector Definition

In a sale-leaseback, a company/corporate user sells a balance sheet property (“sale”) and commits to rent it back under a simultaneous lease agreement (“leaseback”). Typically, all operational and financial responsibility of the property remains with the seller. This is classified as a “triple net lease” and the tenant is responsible for maintenance costs (both operational and capital expenditures), real estate taxes, and property related insurance costs.

circle_image

Sells Property

Pays Rent

seller_button_image
sale_button_image

Pays 100% Market
Value for Asset

Leases Back
Property

seller_button_image
sale_button_image

Transaction Types

Net lease is the broader name given to the sector which typically includes the following three types of transactions:

Sale
&
Leaseback
In a sale-leaseback, a company/corporate-user sells a balance sheet property (“sale”) and commits to rent it back under a simultaneous lease agreement (“leaseback”).
Built-to-Suit
In a build-to-suit, a company/corporate-user finances the construction of a new asset (corporate headquarters, store, warehouse, etc.) By first entering into a forward purchase agreement with a buyer, the company can then generally secure more favorable financing terms from their lender, as the source of construction financing repayment has been identified. The buyer agrees to a pre-approved purchase price upon completion of works in exchange for a lease agreement which will start upon the tenant moving into the completed premises. It is therefore like a sale-leaseback transaction, but on a “to be built” asset. In some cases, a buyer may provide the construction financing, eliminating the need for the company to secure construction financing in the first place.
Net Lease
A net lease transaction is simply the sale of a net leased property from one investor to another. The original investor who acquired the asset sells the real estate to a new investor who then assumes the existing lease contract. Sale-leaseback and build-to-suit transactions are generally regarded as “primary” transactions whereas net lease transactions are qualified as “secondary” transactions.

Net-Lease definition

In a primary transaction, the seller enters into a lease agreement where all operational and financial responsibility of the property remains with the seller. The most common lease terminology to qualify such type of lease is “triple net lease”. Under a triple net lease, the tenant is responsible for:

 

  • Maintenance costs (both operational and capital expenditures)
  • Real estate taxes
  • Property related insurance costs

Sale - Leaseback Rationale

Investor/Buyer Viewpoint

From the investor standpoint, a sale-leaseback is a bond, which is enhanced with real estate serving as collateral. The sale-leaseback investor benefits from non-cancellable long term cash flows in the form of rent payments that are based on the tenure of the lease. The bond investor benefits from long-term cash flows in the form of interest payments that are based on the term of the bond. Assuming the lease is structured as a triple net lease, the sale-leaseback investor will have minimal cash flow leakage, so rental income closely equals investment income. This is like a bond investor, where interest income equals investment income.

 

Beyond just being comparable to a bond, a sale-leaseback investment has several features which compare positively to a bond investment. First, over the term of the sale-leaseback investment, the rental income increases annually based on the terms of the lease, thereby increasing the investment’s initial yield. The rent increases are often tied to CPI and are generally upward only. Bond investment yields are generally fixed over the term, based on the initial interest rate. Second, a sale-leaseback investor has the potential to benefit from an increase in the residual value of the real estate, when compared to the initial value, following the expiration of the lease. The bond investor is repaid PAR at maturity of the bond, based on the initial principal amount of the bond.

 

Lastly, a sale-leaseback investment features the ownership of an asset and as such provides strong downside protection, which closely matches the downside protection enjoyed by the bond investor. In a bankruptcy process, if the tenant elects to assume the lease, the sale leaseback investment’s cash flow stream is often unaffected, and its value may increase as the company exiting bankruptcy posts a stronger balance sheet and therefore a better credit. If the lease is rejected, the investor may sue to recover damages alongside other creditors while retaining title to the property. The property may be either held, re-leased or sold. The ownership of strategic or mission critical operating facilities offers a high recovery rate in bankruptcy processes.

 

The table below summarizes certain aspects of a sale-leaseback transaction relevant to a traditional bond or loan.

 

Feature
“Bond-type” lease agreement
“Triple-net” lease agreement
Annual rent escalations
Upside through residual real estate value
Seniority in tenant’s capital stack
Comment
Long-term fixed lease term with no break or exit options
All capital, operational expenditures, real estate taxes and insurance costs are the responsibility of the tenant
Directly linked to CPI or even better annual fixed escalations
Excluding any cap rate compression, upside through higher rent at exit Potential for further upside through cap rate compression
Most senior and secured creditor
Impact on Cash-flows
Visibility and predictability of CF
Low/no leakage in CF High conversion from rent to NOI
Inflation-protected CF
Additional profit at the back end on and above the secured annuity
High safety and low volatility of CF

Corporate/Seller Viewpoint

A sale-leaseback transaction is an appealing source of alternative capital for corporate users (tenants). It enables a company to monetize 100% of its real estate value (increased liquidity) and maintain operational control of the assets. Rather than holding a non-revenue producing asset on the balance sheet, a sale-leaseback allows a company to unlock and redeploy that capital. The result is an asset light company with increased liquidity. In the scenario where the tenant is a publicly listed company, this signals to the market that they are deploying capital to core businesses. The table below summarizes aspects of a sale-leaseback transaction that will assist the tenant in maximizing shareholder value, improving cash flow, and reducing risk.

BENEFITS OF SALE AND LEASEBACK TRANSACTION
Proceeds: realization of 100% of asset value
  • Corporate-owners can capture 100% of the fair market value of a real estate property through a sale-leaseback transaction
Long-term, non-bank financing
  • Long-term debt financing is not currently available in the bank debt markets
  • Long-term leases take away refinancing risk
  • Matches a long-term asset (property) with a long-term liability (lease)
  • No amortization or principal repayment
Limited financial covenants
  • Sale-leaseback financing rarely has financial covenants
Flexibility in use of proceeds
  • Sale-leaseback proceeds can be used for corporate growth (M&A, acquisition or construction of new facilities, expansion into new territories, capex/reinvestment, R&D funding) or balance sheet management (debt reduction, corporate restructuring,/LBO)
Accounting: operating lease treatment
  • Can be structured as an operating lease which will benefit off-balance sheet treatments
  • Leaves borrowing capacity unaffected
Tax credit
  • Rent as an expense will reduce corporate income tax
Improved financial ratios
  • Monetization of illiquid non-operating cash flow producing assets allows for an automatic improvement in critical financial ratios such as ROA (Returns on Assets) or ROCE (Returns on Capital Employed)
Operational control
  • Tenant remains in operational control of the assets
  • Lease agreements structured to meet tenants needs

© 2023 leadcrestcap.com All rights reserved.

© 2023 leadcrestcap.com All rights reserved.