We attended the ACG M & A East conference at the Philadelphia Convention Center. While the hotel sector has long known that separating real estate from the operating companies will produce an optimal capital structure, industrial distributors and manufacturers often own their own warehouses.
At the conference, we spoke with a number of attendees about the opportunity exists that for Private Equity and Strategic buyers of companies to engage in the sale-leaseback of core supply chain assets.
For buyers of companies in a world awash in capital, the prices of target deals are often bid up. Buyers need to examine the real estate portfolio of any potential acquisition as a way to improve profitability and pay down purchase equity. Real estate is the largest off-balance sheet liability but historically, private equity firms have focused their cost cutting on labor expenses or the cost of goods. However, the most savvy private equity players realize that lease obligations in many cases are a greater amount than loan liabilities thus of great importance.
It is not uncommon for companies to undervalue their real estate in regulatory filings, so there is the possibility that real estate assets could be worth more. The differential in valuation often attracts activist investors who claim that a company’s real estate is worth more than what filings indicate.
The best performing PE firms look at opportunities to quickly monetize real estate assets through a REIT offerings or a sale-leasebacks to recover whatever equity has been invested. MCREA is a trusted advisor in this space.