Robert Poirier, associate vice president in Northmarq’s Atlanta office, arranged the $9.5 million sale leaseback of a single-tenant industrial property fully leased to Mount Vernon Mills, Inc. The 270, 252 sq. ft. facility is located at 235 River Road in Rockingham, North Carolina. Northmarq represented both the buyer and seller. The buyer was an institutional investor based in Arizona.  “Despite the current market, we were able to create a tremendous amount of interest from a very diverse group of investors, ultimately receiving 18 LOIs during the marketing process,” said Poirier. “At the end of the day, surety of close, and the strong reputation of the investor is what won the deal. Built in 1973, the property is situated on 27.74 acres and serves as a mission-critical facility for Mount Vernon Mills, the country’s largest apparel fabric manufacturer. Mount Vernon Mills’ Rockingham location produces open-end spun yarn and woven greige goods for the company’s flame-resistant products. Offering ample room for expansion, the industrial facility is strategically located right off US Route 220 and less than two miles from US Route 1 and Interstate 74. The tenant operates on a corporate guaranteed absolute triple net lease.

Northmarq investment sales broker Matt Lipson arranged the $1.25 million sale-leaseback of a Sonic Drive-In, a 1,127 sq. ft. single-tenant retail property. The building sits on 0.33 acres of land and is located at 228 West Maple Street in Columbus, Kansas. The property is leased to a 31-unit franchisee at the time of contract signing. Northmarq represented the Missouri-based seller and Hamman Real Estate represented the California-based individual investor in the sale. “There couldn’t be a better location to place a Sonic. The franchisee understands the market and is able to fully maximize the potential of the site. The buyer felt comfortable with the franchisees track record and award-winning success, and both seller and buyer we’re satisfied with price and terms,” said Lipson. “This is a very solid deal for both sides and will ensure the buyer a dependable rent check for now and the future.”  The freestanding restaurant is situated in central Columbus with a population of 3,856 within five miles. In addition to easy access to US Highway 160, the property is near Coffeyville Community College, with an enrollment of 1,772 students and Columbus High School.  Surrounding retailers include Dollar General, True Value Hardware, Subway, Napa Auto Parts, and Verizon Wireless.

Northmarq’s Josh Dicker, senior investment sales analyst with sale leaseback expertise, and Isaiah Harf, managing director, arranged the sale leaseback of a 28,000-square-foot, cold storage and meat processing facility located at 117 Masonic Drive in Princeton, Kentucky. Dicker and Harf represented the seller, Porter Road Butcher, which executed a long-term triple net lease at the time of sale. The buyer, a California-based private investor, acquired the asset for $5.0 million.  “The sale leaseback transaction was not only an investment in Porter Road’s unique real estate, but also an investment in their business and what they are trying to accomplish as an innovator in the direct-to-consumer butcher business,” said Dicker, a sale leaseback expert. “The deal represented a win for not only buyer and seller, but the local Princeton community in which Porter Road operates.”   Founded by two former chefs, Porter Road is a growing direct-to-consumer butcher service that sources their meat from local farms in Kentucky and Tennessee. The property was completely retrofitted in 2021 and converted to the state-of-the-art freezer/cooler and meat processing facility. Situated near multiple major highways, the facility is conveniently located an hour and 30 minutes from downtown Nashville and close to the company’s meat suppliers.  

Originally published by GlobeSt In addition to climbing rents, industrial tenants are faced with higher annual lease escalations, operating expenses and utilities as competition for space remains elevated, according to a new report from Newmark.  The total cost to occupy warehouse space has increased 42.2% since 2019. Rent has been the biggest driver, but rent and non-rent expenses alike contributed significantly to the growth.  Acute supply/demand imbalance and increasing construction costs caused rent growth to soar during the past few years, and yet, “for a sector in which tenants are predominantly on triple-net leases, rent growth is only part of the story: nearly all occupancy costs are increasing, not just at lease signature, but over the lifetime of the lease,” Newmark reported.  The current inflationary environment has exacerbated rents and lease escalations, as well as non-rent occupancy costs – operating expenses and utilities.  Annual Escalation Skewing Close to 4%  Pedro Nino, Clarion Partners’ VP of Research & Strategy, tells GlobeSt.com that the spread between high-quality industrial market rent growth and lease escalations has significantly widened across essentially every market that he studied over the past two and a half years.  “The average annual escalation is now skewing closer to 4% in many markets, including non-primary/non-coastal, where 2% to 3% has long been the standard,” Nino said.  “We are also aware of several recent leases achieving annual escalations as high as 6% in markets where recent robust demand has depleted existing occupiable space to essentially zero.  “When considering that Class A industrial rents have expanded by as much as 10% to 25% on average per year after 2019, it makes business sense for tenants to accept higher escalations to secure space and shield from the quickly moving market, and for property owners to seek higher escalations to avoid the potential drag of carrying leases drastically below market.”  Pushing Back Means ‘Deal Doesn’t Get Done’  Robert Poirier, Northmarq Associate Vice President, tells GlobeSt.com that competition for industrial space is at an all-time high, but economic conditions are the primary drivers behind increases in lease escalations and operating expenses.  “In just the past five or six months, we’ve gone from drafting leases with 1.5% escalations to now between 2.5% and 3%,” Poirier said.  “Sellers of sale leasebacks would obviously prefer to keep their escalation costs as low as possible, but they’re finding that pushing back results in a deal not getting done.  “We’re seeing these occupiers come to terms with where the market is, and they’re understanding that due to rampant inflation, investors need to be writing increased escalations into the leases, especially for smaller credit tenants. Investor appetite for higher credit ratings or publicly traded companies may provide more flexibility, but escalations are up across the board.”  Landlords Must Get ‘Creative’ to Reduce Costs  Rene Velasquez, Managing Director of Asset & Property Management, BKM Capital Partners, tells GlobeSt.com that security costs, in addition to inflation, are some of the main drivers for operating expense increases.  “Still, the market fundamentals for the multi-tenant industrial space continues to be strong,” Velasquez said. “To look after their tenants’ financial wellbeing, landlords must get creative in reducing operating costs, and the more proactive ones are managing controllable passthrough expenses to limit the impact to their tenants’ bottom lines.  “Lease escalations will continue to climb due to e-commerce as pent-up demand for small industrial space continues to outpace supply, which should help maintain rental rates and keep vacancies low. Furthermore, construction costs, as a result of supply chain disruptions, will make new construction projects difficult to get under way and keep inventory limited.”  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt In a move that woke up the often “staid” net lease real estate sector, REIT STORE Capital Corp. is being acquired by a partnership between global institutional investor GIC and Oak Street, a division of net lease investor Blue Owl, in an all-cash deal worth $14 billion, GlobeSt.com reported Thursday.  Industry followers said that this represents a “monster” transaction in the net lease sector that provides substantial additional scale to one of the largest existing players in Oak Street and a relatively new net lease investor in GIC.  Jeff Cox, Northmarq managing partner, tells GlobeSt.com that given the challenges of rising capital costs and potential economic headwinds, “it makes sense that parties involved would pursue this relationship. It also suggests that net lease product remains in high demand and continues to grow as a favored asset class among investors.”  Would Make It Third-Largest REIT  Scott Merkle, managing partner for SLB Capital Advisors, a real estate advisory specializing in sale leasebacks, tells GlobeSt.com that “in the normally staid net lease real estate world, this is a monster transaction” that, if consummated, will result in the take-private of the third largest publicly traded net lease REIT.  “GIC and Oak Street are acquiring one of the most prolific sale-leaseback investors that regularly deploys well north of $1 billion a year.”  As one of the largest sovereign wealth funds in the world, Singaporean-based GIC has been particularly active in U.S. real estate.  The STORE transaction represents GIC’s second investment in the U.S. net lease sector following the formation in 2021 of a new net lease retail real estate platform with RPT Realty.  Oak Street, which had $16.6 billion in AUM as of June 30, 2022, has continued its rapid growth in the sale-leaseback arena, which has been bolstered by its acquisition by Blue Owl in 2021  This year’s Q2 registered the strongest Q2 period sale-leaseback performance in both deal count (236 discrete transactions) and deal volume ($10.2bn) since SLB Capital Advisors began tracking the market.  “While sale-leasebacks are not immune to broader market choppiness, it continues to be an outstanding time for corporate owners of real estate to consider monetizing owned facilities,” Merkle said.  Deal a Bit ‘Unexpected’  David Auerbach, managing director at Armada ETF Advisors, says that the transaction highlights the demand for net lease properties as investors seek yield in the REIT space.  “With so many net lease players, I would not have expected STORE to be the first one acquired, but the move is significant since STORE is an S&P MidCap 400 constituent and follows on the heels of the O/VER merger back in November of last year.  “The transaction is significant as two of the largest players in private equity/sovereign wealth funds are partnering on the transaction and diversifying both parties’ portfolios into desirable net lease assets.”  Colleague Al Otero, portfolio manager at Armada ETF Advisors, notes that “It’s good to see a large real estate transaction come back into the marketplace as activity has slowed precipitously since the Federal Reserve started raising interest rates earlier in the year.  “The willingness of sophisticated investors to step back into the market at this time is a testament to the operating platform, underwriting prowess and asset quality that has been established at Store Capital since its inception.”  © 2022 ALM Global Properties, LLC. All rights reserved. 

Northmarq, one of commercial real estate’s leading investment sales brokerage firms, has completed the sale leaseback of a five-location portfolio occupied by Little Caesars. The single-tenant retail properties are located across Nebraska and North Carolina. Matt Lipson and Chris Lomuto of Northmarq represented the seller, a California-based franchisee. The assets traded for approximately $5.7 million to a REIT based in Florida.  “This transaction was a perfect example of how a franchisee can leverage real estate to complete an acquisition. The incoming franchisee was acquiring these fee properties, along with a portfolio of leased properties from an existing Little Caesars franchisee,” said Lipson, Associate Director in Northmarq’s Portland, Oregon office. “We were able to structure a sale leaseback on the five fee properties at attractive terms to both real estate buyer and franchisee, that closed concurrently with their business acquisition. Post-transaction, the franchisee now has a sizable entity, with attractive leases throughout, and no pesky loan contingencies.”  Little Caesars is the third largest pizza chain in the world with more than 4,000 locations in the United States. The combined properties total more than 15,000 square feet and are located in smaller, tertiary markets.  “This is an exciting time at Little Caesars. Unit count is growing, the network is growing, strategic advantages are being realized, and it seems like this is really just the beginning for them,” said Lomuto, Associate Director in Northmarq’s Walnut Creek, California office. “We’re excited to be part of that effort and couldn’t be happier to help our franchisee client continue to grow their business with the acquisition of these locations.”   

Originally published by Wealth Management The corporate sale-leaseback market is coming off a record-high first quarter for deal-making. Despite repricing occurring in the wake of rising debt costs, industry insiders remain optimistic of continued strong momentum ahead in the remainder of the year.  The $8.4 billion in sales logged in first quarter is on par with fourth quarter 2021 activity and nearly triple the $2.9 billion in transactions recorded in the first quarter of 2021, according to a market analysis by SLB Capital Advisors. “That is the biggest first quarter that we’ve seen. The dollar volume was driven largely by two casino deals, but the 186 is the highest count that we’ve seen over the last few years by a good 20 to 30,” says Scott Merkle, managing director of SLB Capital Advisors.  The casino transactions included VICI’s acquisition of the Venetian Resort, Expo and Convention Center for $4 billion and GLPI’s acquisition of two Cordish Companies’ Live! properties for $674 million. Merkle also attributes activity to the huge volume of M&A activity that occurred in 2021.  Traditionally, companies use sale-leasebacks as a financing tool to monetize or “unlock” 100 percent of the equity tied up in real estate. That capital is often used to reinvest back into the business, improve balance sheets or finance expansion. Another catalyst for sale-leasebacks is M&A activity, with the acquiring entity using a sale-leaseback on the real estate of the business they are buying to help finance the acquisition. According to BMO Capital Markets, the U.S. saw 478 M&A transactions last year that were valued at nearly $1.9 trillion.  “A lot of times what we see on the M&A side is groups that will utilize that sale-leaseback as part of the capital stack, and there was an incredible amount of M&A activity last year,” says Jeff Tracy, a senior vice president at Northmarq in Tulsa, Okla. A sale-leaseback of the real estate can bring in 20 to 30 percent of the overall capital stack needed, which helps to reduce the amount of equity and/or debt a buyer needs to bring to the table, he adds.  Some industry experts estimate that industrial assets represent nearly half of all corporate sale-leaseback transactions, and expansion of the industrial sector over the past few years has provided fresh inventory for eager buyers. “Our business has never been more brisk. We are seeing a lot of activity as corporate users continue to look to monetize their industrial real estate and corporate-owned facilities, because they realize it’s a better use of funds to be able to put that capital to work within their business,” says Erik Foster, a principal and head of industrial capital markets, Capital Markets at Avison Young in Chicago.  Market adjusts to higher rates  The broader market is adjusting to higher costs of debt financing for real estate, which has climbed 150 to 250+ basis points since January 1. Although sources agree that rising interest rates haven’t changed the volume of sale-leaseback deals that are getting done, it is resulting in price adjustments and fewer bidders. “As debt has gotten more expensive, buildings can’t sell as aggressively as they did a couple of months ago,” notes Foster.  On average, cap rates have increased between 25 and 75 basis points, depending on the building, location, tenant and term. “The better locations and better credits are going to be less impacted, because there is a significant amount of capital still out there that is chasing deals,” says Tracy. The smaller or more challenging credits and tertiary locations are seeing bigger moves in cap rates, he adds.  Although there is still significant capital targeting sale-leasebacks, the bidder pool has thinned with some investors that have pushed pause amid the repricing that is occurring. Instead of getting 10 offers, a sale-leaseback listing might get six or seven now, because buyers are being more cautious, notes Merkle. SLB Capital Advisors is currently working on a sale-leaseback of an industrial portfolio valued between $75 million and $100 million. First round offers came in during the first week of April with nine groups that advanced. Typically, buyers increase their offers when moving to the second round. However, due to the rise in interest rates, many moved in the opposite direction, lowering their price. The deal is under LOI and moving forward, but the pullback on bidding speaks to how buyers are moving more cautiously, notes Merkle.  Stan Johnson Co. is working on the sale-leaseback of a portfolio of properties for a recreational vehicle business. One of the bids received was structured with a floating cap rate. The bidder included a cap rate range that allowed the seller to choose the rent level they wanted to set, as well as a fixed basis point spread over treasury to account for rate fluctuations.  So, depending on how rates moved prior to the deal closing, the cap rate also could move. “That is something I haven’t seen before, and I think it points to the fact that groups still have a desire to get deals done and they need to deploy capital. But they’re trying to be creative as possible in not only making sure they are competitive, but also protecting themselves from a downside scenario of a big interest rate move,” says Tracy.   Avid buyer interest  Rising interest rates could cool what has been a white-hot seller’s market for sale-leasebacks over the past year. However, industry participants are still optimistic about the near-term outlook. “While cap rates have risen, real estate is still at incredibly attractive levels for owner-operators to monetize their real estate in a sale-leaseback,” says Merkle. When one looks at sale-leaseback from a multiple perspective, multiples on real estate that might have been 15x are now 14x. Those numbers are really compelling for a business to execute a sale-leaseback when their business is worth multiples of say 8-10x, he adds.  SLB Capital Advisors has seen an uptick in pitch activity, inquiries from companies considering a sale-leaseback on assets, in recent weeks. “So, in spite of the pricing environment shifting rapidly over the past 45 days, we’re still in an environment where there is a ton of activity, and I expect to see a lot of continued sale-leaseback activity through the balance of the year,” says Merkle.  Another reason for that optimism is that there is still a significant amount of investor capital aimed at sale-leasebacks. “The buyer pools are more diverse and deeper than I have ever seen in my career, and that continues to put pressure on pricing and provides owners with great liquidity options,” notes Foster.  W.P. Carey Inc. alone recently announced that it had entered into $400 million in new investment agreements since the end of first quarter. The net lease REIT specializes in corporate sale-leasebacks, build-to-suits and the acquisition of single-tenant net lease properties.  In addition, more investors have entered the sale-leaseback market looking to acquire assets. “There has been a huge wall of capital looking to be deployed into sale-leasebacks. We’ve seen even more buyers step up to the plate over the last 12 months or so,” says Merkle. Some buyers are moving more cautiously, but there is still a lot of capital available for sale-leasebacks, he adds.   

Sale leaseback transactions have gained popularity in recent years as owner occupants look to extract the value of their real estate in order to free up capital. But beyond the motivations that drive traditional sale leasebacks, many business owners have found success leveraging this transaction type to fund M&A activity. Franchisees are the primary actors exploring these creative avenues, and while a sale leaseback could be used to fund M&A needs across nearly all asset classes, the most frequent property types involved are quick service restaurants, convenience stores and car washes. These property types are often owned and operated by franchisees with growing portfolios of multiple assets, and M&A activity is commonplace. One Seller, Two Buyers and a Broker So, how does this actually work? In an M&A sale leaseback, you typically have four players: the franchisee seller of the business and assets, the franchisee buyer of the business and future tenant of all properties involved in the sale leaseback, a real estate investor who buys the real estate assets, and a broker that facilitates the transaction.  "Sale leaseback transactions are a common vehicle for owner occupants to extract value from their real estate, but this creative solution is gaining popularity with franchisees as they expand through mergers and acquisitions." To start the process, the franchisee seller and franchisee buyer identify each other and enter into an agreement for the operations and real estate. A broker enters the conversation early on as well. They need to evaluate the sale leaseback of the real estate component and this analysis often influences the terms of the agreement between franchisees. Additionally, the broker helps to identify a real estate investor. At the close of the transaction, two events occur: one franchisee purchases the business assets and assumes the franchise agreements and third-party leases, and at the same time, concurrent with closing, the franchisee buyer executes a long-term triple net lease with the real estate investor.  In this type of transaction, proceeds from the sale of the real estate are transferred from the investor to the franchisee seller, while proceeds from the sale of the business come from the franchisee buyer. The new investor now has guaranteed income coming from their tenant in the form of a long-term lease. That lease typically features attractive terms including a triple net lease structure – making the tenant responsible for all taxes, insurance and maintenance costs – along with regular rent increases and lease extension options.    A Creative Solution to Fund Growth This creative funding solution may appeal to many candidates, including those interested in limiting their exposure to real estate and minimizing or helping to bridge the typical 25 to 30 percent cash equity need required to complete a transaction. A company may view the cash flow of their business as more valuable than the static return of owning the real estate. They may be in a rapid expansion mode and unable to tie themselves to multiple loans or the contingencies that come with them. This solution also works well for emerging franchisees that aren’t sitting on a surplus of cash or those that don’t have an established lending relationship necessary to complete larger transactions. For this type of candidate, there are real estate investors that have extensive experience helping smaller franchisees grow into larger companies. They will not only buy the first round of real estate but will subsequently help fund new acquisitions, work with the franchisee on upcoming capital expenditures and open up more opportunities for acquisitions than the franchisee would have if they were simply relying on their franchisor and brokers.  Low Inventory, High Demand Creates Ideal Environment As we approach mid-year 2022, market conditions are ideal for these transactions, and franchisees considering this strategy are encouraged to act. Inventory is low and demand for sale leasebacks continues to be incredibly high, but today’s market uncertainties could shift the environment quickly. Inflation, rising interest rates, continued cap rate compression especially in the net lease retail sector, supply chain issues, labor shortages – these factors all have the ability to influence market dynamics, and franchisees considering this creative funding vehicle are urged to watch the market.     To download a copy of this report, please provide the following information: hbspt.forms.create({ region: "na1", portalId: "7279330", formId: "f465878d-b7b5-4a74-ace8-549108cb50cf" });

Northmarq, one of commercial real estate’s leading investment sales brokerage firms, has completed the sale leaseback of a two-location portfolio occupied by Oryx Oilfield Services. The facilities are located at 900 East Highway 11 in Kermit, Texas and 922 Farm to Market 81 in Goliad, Texas. Together, the transaction included 13 buildings totaling more than 118,000 square feet. Northmarq’s John Rotunno represented the tenant, who executed a long-term lease at the time of sale. The portfolio was acquired for an undisclosed price by Real Capital Solutions, a private equity group based in Colorado. “The impact of COVID-19 on sectors outside of non-essential retail was substantial in some cases, and Oryx’s oil field service business faced challenges including a decline in revenue,” said Rotunno, Associate Director in Northmarq’s New York office. “By executing a sale leaseback of their real estate, Oryx can now consolidate debt and focus company resources on the business’s future growth, providing critical working capital.” With roots in the oil and gas industry, Oryx has a solid history of service to key customers, providing facility maintenance and construction, pipeline construction and fabrication facilities for facility components. The portfolio properties serve as mission critical locations for Oryx’s service operations, and the properties feature office and warehouse space, manufacturing and fabrication facilities, as well as an abundance of fenced acreage totaling approximately 95 acres.

Northmarq, one of commercial real estate’s leading investment sales brokerage firms, has completed the sale of a 170,000-square-foot, two-building industrial facility located at 5501 Fulton Industrial Boulevard in Atlanta, Georgia. Northmarq’s Robert Poirier represented the seller and tenant, Diaz Wholesale & Manufacturing, which executed a long-term triple net lease at the time of sale. The buyer, a New York-based institutional investor, acquired the asset for $16.0 million.  “The tenant was extremely interested in taking advantage of current market conditions,” said Poirier, Associate Director in Northmarq’s Atlanta, Georgia office. “Because of timing constraints, we conducted an off-market campaign, created a very competitive environment, and received offers from 8 of the 10 potential investors. The entire process took less than 60 days, and we were able to set a new record for price per square foot in Atlanta’s Fulton Industrial submarket on comparable buildings.” Founded in Atlanta in 1980, Diaz Foods is a leading distributor of specialty foods across 28 states, and this property serves as a mission-critical distribution facility. The two-building property is situated on 12.4 rail-served acres in one of the main industrial corridors of metro Atlanta with close proximity to Interstates 20, 75, 85 and 285. The cold storage and distribution site features freezer-cooler, refrigerated and dry storage, along with office space and a dedicated truck maintenance building. The facility was originally built in 1980 and was renovated in 2004.

A guide to sale leaseback transactions There are many ways for companies to raise capital: recruiting investors, reinvesting profits, borrowing funds, and selling stock are among some of the most common methods. Each of these methods has its own advantages and disadvantages, and many times, these traditional methods of raising capital come with downsides that can restrict companies from achieving their financial goals. In these cases, companies may begin looking for more creative ways to fund their initiatives. One capital-raising tool that has become more common in recent years is the sale leaseback. “What is a sale leaseback?” you might ask. In real estate, a sale leaseback is where a company sells all, or a portion of, the real estate that it owns and occupies, while it simultaneously signs a long-term lease to continue to occupy and use the property from the subsequent buyer. It is also common to see sale leasebacks with owned property other than real estate, such as commercial aircraft, cargo barges, solar plants as well as large scale machines and equipment. Sale leaseback transactions allow the owner/user of a property to extract their equity from an asset while still maintaining their ability to use it. For the seller, a sale leaseback transaction gives them access to the capital they need without incurring debt or impacting their balance sheet. For the buyer, the purchase of a sale leaseback provides a stable, long-term investment with an occupant already in place. Additionally, in some cases, the owner and the future buyer can negotiate the lease to help satisfy their goals. How do sale leaseback transactions work? There are typically two agreements involved in a sale leaseback transaction: one that states that the current owner/user will sell the property to an investor at a fixed price that both parties agree upon, with the second stating that the new owner agrees to lease the property to the previous owner with lease terms that both parties agree upon immediately following the sale. While the conditions of each sale leaseback vary, these two agreements form the basis of every sale leaseback transaction. Structuring the transaction this way provides advantages to both the buyer and the seller. By completing a sale leaseback, the original owner/user of the property ensures that they can continue to use it after the sale with little to no interruption. The buyer also benefits by receiving an immediately cash-flowing asset with no immediate risk of vacancy.