Prime Time for Sale-Leasebacks

ELLIOT ZWIEBACH

SEAL BEACH, Calif. — If there was ever a time for supermarket owners to consider sale-leaseback financing, it is now, according to a real estate developer here.

“Capital rates are at historic lows in today's market, so a retailer can recognize a market premium for his real estate if he sells to an investor and then leases it back,” Matt Heslin, president of real estate firm Heslin Holdings here, told SN.

“As a result, a retailer that owns quality real estate and has decent credit can get a maximum price for it, even if he's not necessarily a credit-worthy tenant, because low capital rates and low interest rates are in the sellers' favor.”

Sale-leasebacks offer opportunities for retailers to free up cash tied up in real estate — cash that they can use to invest in their business or pay down debt, he explained.

Heslin is a former real estate executive with Smart & Final, Los Angeles, where he spent 14 years before leaving in 2003 to form his own real estate investment and development company.

While several major supermarket chains have engaged in sale-leaseback deals, those arrangements seem to be more common among wholesalers lately, he pointed out, citing the sale-leaseback by Associated Grocers, Seattle, of its distribution center and headquarters in February, and by C&S Wholesale Grocers, Keene, N.H., of four warehouses in January.

Heslin said sale-leasebacks have been more common in the drug store industry — as a means of de-leveraging a company's balance sheet and paying down debt — than they have been in the supermarket industry.

“Many supermarkets have been slow to recognize the financial benefits of the sale-leaseback financial structure,” he pointed out. “Historically, grocery store operators have preferred to own the real estate, which is often in shopping centers where they are the anchor tenants, because they like to control their real estate and the common-area costs. As owner/operators they are free to charge whatever rents they want to their stores.”

Shareholders tend to like sale-leasebacks, Heslin said, because they can increase returns on equity.

“If you unlock capital by selling your real estate assets and use the proceeds to open more profitable stores and pay down debt, then the return on assets should also rise, along with the return on equity, which is a plus for shareholders. The revised organizational capital structure that results can help improve the retailer's financial ratios, which makes a company more attractive to potential lenders, ultimately driving down the long-term cost of capital.”

Retailers considering a sale-leaseback may want to consider unloading a pool of real estate simultaneously, “which can benefit the retailer by forcing a buyer to take everything you've got at once — good stores with bad, pigs with beauties — all at a blended price,” Heslin said.