SLB Capital Advisors Sale Leaseback Market Update – August 2022

Our SLB Capital Advisors Market Update comprises brief but informative detail and commentary regarding sale leaseback transaction volume, cap rate trends, and acquisition activity, which we hope may be useful and pertinent to your business. To access this report, please click here.

SLB Capital Advisors Sale Leaseback Market Update – August 2022

The sale leaseback market data in this report is through June 30, 2022. As we’ve communicated previously, Q4’21 into early Q1’22 exhibited a pristine sale leaseback environment, however, we started to see noticeable buyer caution at the beginning of Q2’22 and continuing into early Q3’22. Many buyers struggled to lock in debt financing, which in turn led to challenges in pricing assets appropriately. At SLB, for much of the past few months, we saw a much greater range of pricing, from top offer to bottom, for assets that we brought to market.  While the market seemed to be finding a firmer footing in early August, we are feeling the effects of recent broader market turbulence.

And yet, despite the increases in interest rates, inflation headlines, decline in M&A activity, and overall “risk-off” environment, the second quarter of 2022 came in with an eye-popping deal count that is the highest Q2 we have seen. With 236 discrete transactions, Q2’22 registered the strongest Q2 performance by deal count since SLB began tracking this data, and aggregate dollar volume totaled a strong $10.2bn (over half of which was a single transaction).

By transaction count contribution, the Industrial segment continued its heightened activity, contributing 50% of all Q2’22 transactions, the highest contribution since a pandemic-influenced 2020.  Retail followed Industrial performance in Q2’22, contributing 22%, down from 26% in Q1’22.  Specialty (11%), Office (9%), and Healthcare (6%) followed suit.  Healthcare contribution has lagged behind its historical norm (10-12% in 2018-20) largely owing to Industrial and Specialty outperformance.

Overall dollar volume for Q2’22 was bolstered by BREIT / Stonepeak’s $5.6bn acquisition of The Cosmopolitan in Las Vegas.  Top transactions also include Prologis’ $310mm acquisition of a Cedar Fair Entertainment asset and Oak Street’s $150mm acquisition of three distribution centers from Badcock Home & More (Oak Street also acquired Badcock’s headquarters for $24mm).

SLB Capital Advisors Sale Leaseback Market Update – August 2022 Page 2

In terms of general middle market M&A, North American M&A came off its unsustainable pace to register declines in deal value and volume.  The pullback in activity was due to a combination of geopolitical conflicts, inflation, and pandemic-related supply chain issues.  According to Pitchbook, ~4,570 deals closed for a combined value of ~$550bn, exhibiting a decline of 20% and 18%, respectively, from Q1’22 to Q2’22.  GF Data’s average middle market EBITDA valuation multiple was 7.5x for Q2’22 and average total leverage notched down 0.2x to 3.9x, potentially a function of both higher borrowing costs as well as more conservative lender views.

Even as companies’ cost of capital has begun to widen, sale leasebacks remain a highly attractive alternative, given effective sale leaseback multiples in the mid-teens.  There continues to be an attractive value arbitrage across various industry sectors driven by the delta between business and real estate multiples.  Our estimated sale leaseback cap rate range of 12.5x to over 16.5x still compares favorably to general middle market transactions (7.5x for Q2’22 per GF Data).  Attractive arbitrage opportunities remain prevalent across many middle-market sectors.

SLB Capital Advisors has been fortunate to serve as a trusted advisor to many top-tier private equity groups and corporates, having executed a broad range of transactions year-to-date.  Our pitch activity, a leading indicator for M&A, remains strong, and despite a choppy financing environment, we anticipate strong activity over the next couple of quarters.

To access the full report, please click here.