How risky is the tenant covenant on a sale-and-leaseback industrial asset?
The tenant covenant on a sale-and-leaseback industrial asset can be strong or weak; the particular risk is that the whole investment rests on one operating company, the rent was set as part of a financing deal rather than in the open market, and the seller may be raising cash because it needs it. Buyers manage it by testing rent cover, the guarantor, how important the site is to the business, and whether the building would re-let at that rent. Scayled covers the downside case: if the tenant leaves, it finds 250 to 350 businesses the building suits and the person who signs at each.
- What is a sale-and-leaseback?
- Why is the covenant risk different from a normal letting?
- How do you underwrite a sale-and-leaseback tenant?
- What happens to a sale-and-leaseback in insolvency?
- How do you watch the tenant during the hold?
- Where does Scayled fit?
What is a sale-and-leaseback?
In a sale-and-leaseback, a business that owns and occupies its property sells it to an investor and signs a lease to stay in occupation. The seller releases capital tied up in real estate; the buyer gets an investment let to an established occupier, usually on a long net lease.
Sale-and-leasebacks can cover one building or a portfolio of sites under a single master lease, and the tenant is typically the operating company, sometimes owned by private equity.
Why is the covenant risk different from a normal letting?
The tenant is also the seller, and the rent is part of the price negotiation. A higher rent supports a higher sale price, so a sale-and-leaseback can leave the building over-rented compared with the open market. That matters at expiry, or if the tenant fails and the building has to be re-let.
The reason for the sale matters too. Many sellers are simply moving capital into their core business, but a sale-and-leaseback can also be a way to raise cash under pressure or to fund an acquisition with added debt, both of which weaken the covenant after completion.
How do you underwrite a sale-and-leaseback tenant?
Test rent cover (earnings before interest, tax, depreciation, amortisation and rent, divided by rent) for the business as a whole and, where available, for the site. Check the group's total debt and leases, identify which entity signs the lease, and secure a guarantee from the strongest entity in the group.
Judge how important the site is to the operation. A site that is central to production or distribution is more likely to be kept in a restructuring than one that duplicates capacity elsewhere. Then value the building on the assumption that the tenant leaves: market rent, re-letting time and the number of businesses that could use it.
What happens to a sale-and-leaseback in insolvency?
In a US Chapter 11 case the tenant can assume or reject each lease. Sites central to the business are more likely to be kept; others can be rejected, and the landlord's claim for future rent is capped under section 502(b)(6) of the Bankruptcy Code. Under a master lease, sites are generally treated together, which is one reason buyers favour them.
In the UK, administration, a company voluntary arrangement or a restructuring plan can reduce rent or release sites, and other markets have their own regimes. In each case, the practical downside is a building back in hand at a time when the market knows it is available.
How do you watch the tenant during the hold?
Many sale-and-leaseback leases require the tenant to supply financial statements each year, which is the most direct source. Credit monitoring from Creditsafe, Dun & Bradstreet or Experian sends alerts when a tenant's score, filings, court judgments or directors change. CreditRiskMonitor's FRISK score estimates bankruptcy risk for public companies, and MSCI's Income Analytics service scores tenants to quantify real estate income at risk.
News on the tenant's sector, refinancing, acquisitions and site closures, together with regular conversations with management, fills the gap between filings.
Where does Scayled fit?
Scayled does not underwrite or monitor tenants. It acts on the downside case, when the building is vacant or coming back. A leaseback building was often configured for one operator, so the brief sets out what the space actually suits, and Scayled finds 250 to 350 businesses that match, with the person who decides at each and a personal email ready to go.
For a single-let leaseback building, the Full version of The Campaign usually fits: 250 to 350 businesses for US$749, one payment, no subscription and no commission. It can be briefed for a lease or a sale, so a fund weighing a disposal can test owner-occupier buyers for an industrial building at the same time as tenants. Smaller units can start Focused, from US$449.
Lease The Vacancy In-House, Before You Appoint An Agent.
The Campaign finds the 250 to 350 businesses the building suits, names the person who decides at each and writes every email, ready in about five days. One payment of US$749 per property, no commission and no subscription. A focused 100 to 150 from US$449.