As banks and the capital markets continued to peer warily through the blinds at corporate borrowers last year, many companies were forced to canvass previously uncharted sources of capital. Since most corporations have at least one address, it's not surprising that many have decided to monetize their bricks-and-mortar assets in order to fulfill their capital needs, turning to the traditional sale/leaseback structure to get the job done.
Proving the adage that any publicity is good publicity, understanding and acceptance of the traditional real estate sale/leaseback vehicle seems to have only increased amidst last year's blowup of bad press surrounding off-balance-sheet financing, with the bulk of the consequent Financial Accounting Standards Board (FASB) fallout affecting synthetic leases rather than credit tenant leases or traditional sale/leasebacks.
"It's been a great opportunity to get the word out about sale/leasebacks," said W. Sean Sovak, chief acquisitions officer at New York-based real estate investment banking firm W.P. Carey & Co. (NYSE: WPC). "I think companies will continue to realize the importance of this instrument going forward."
If the firm's recent performance is any indication, Sovak shouldn't have much trouble making good on that prediction. W.P. Carey completed more than $1 billion in sale/leaseback transactions in 2002, more than doubling its 2001 volume. In addition, the firm raised over $470 million in funds under management last year - roughly double what it raised in 2001. According to Sovak, this growth is continuing at the same rate.
"There's a lot of investment capital flowing into the real estate markets right now," Sovak noted. "People are paying more attention to diversification, stability, and income-generating investments."
From the corporate perspective, companies with large, illiquid, and oftentimes depreciating real estate assets on their books can get 100% of the full market value of those properties through a sale/leaseback transaction, in contrast to the 50% to 70% that banks or asset-based lenders are willing to shell out. In fact, Sovak noted, W.P. Carey actually sources deals through banks on occasion, which are more than happy to relegate some of their senior-lending pressure to other lenders.
"There has always been a market for sale-leasebacks, especially investment grade," Sovak said. "Even below investment grade credits, however, are going to get better value for their asset through a sale/leaseback than what they would get from the banks."
The resultant funds are typically used to help with acquisitions, to reinforce the company's working capital or to pay down indebtedness. Sovak noted the enormous increase in the amount of corporate debt over the past five years, and that much of that debt is starting to mature. According to Federal Reserve figures, corporate debt swelled a full 59% in the years spanning 1995 to 2000. "Banks are going to want to reduce their exposure," Sovak continued, "so companies are going to have to explore alternative sources of capital to pay down their debt."
So given President Bush's tax-exemption proposal for equity dividends, is Sovak worried that W.P. Carey - a publicly traded limited liability company that funds its acquisitions through its four publicly held, non-traded REITS - could see some of its fundraising deluge diverted into other dividend-paying stocks?
"I don't think that Bush's plan to make dividends tax free is going to cause a wave of non-dividend-paying companies to start paying dividends and consequently drain off our fundraising," Sovak replied. "Will other dividend-paying companies become more attractive? That's what Bush is hoping for, but I think it's more psychological than anything else."