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.
The sale leaseback market data in this report is through September 30, 2022. Sale leaseback transaction volume has remained robust in the face of a third consecutive quarterly decline in M&A activity and continued interest rate increases. Though Q3’22 did not register some of the single outsized transactions that colored previous quarters, it matched the Q2’22 record deal count of 237 transactions. Aggregate sale leaseback dollar volume totaled $5.1bn.
The rising interest rate environment has expectedly widened cap rates, with cap rates increasing 100-150 bps vs. the Q4’21 pristine pricing environment. Widening has been more muted in primary markets. However, with loan and bond yields approaching or exceeding 10%, the sale leaseback cap rates are not only well inside many companies’ WACCs, but they are now also inside many companies’ debt financing costs. The debt market for larger investment-grade transactions has also seen yields increase, influencing even more businesses to consider the sale leaseback as an alternative.
By transaction count contribution, the industrial segment outpaced all other segments, contributing 58% of all Q3’22 transactions, the highest industrial contribution since a pandemic-influenced 2020. Retail followed Industrial performance in Q3’22, contributing 17%, down from 22% in Q2’22. Specialty (8%), Office (5%), and Healthcare (4%) followed suit.
Top transactions for the quarter include Boston Properties’ $592 million acquisition of Biogen’s headquarters and Oak Street’s acquisition of QVC/HSN’s distribution centers for $443 million.
North American M&A continued its decline for the third consecutive quarter. Inflation and rising interest rates continue to impact activity with interest rates placing a drag on overall valuations and impacting seller timing. According to Pitchbook, ~4,457 deals closed for a combined value of ~$490bn, exhibiting declines of 19% and 4%, respectively, from Q2’22 to Q3’22.
With companies’ cost of capital widening considerably, the sale leaseback has become an even more attractive financing alternative than it already was. Additionally, 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 6.25% to 8.25% (over 12x to 16x implied real estate multiple) still compares favorably to general middle market transactions (7.4x for buyout transactions in Q3’22 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.
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