W. P. Carey sees growing appetite for sale-and-leaseback deals

REFIRE met recently with the senior European team of net lease specialist REIT W. P. Carey to learn more about a couple of deals the company has concluded in the UK and Europe recently.

The largest, and by the sounds of it, more complex of the deals was a €280m cross-border sale-and-leaseback transaction of 16 industrial assets totaling 414,000 sqm. Twelve of the properties are in Italy, three in Spain, and one in Germany. The portfolio is let on a triple-net lease to the Fedrigoni Group, a global manufacturer of high-quality specialty papers for luxury packaging and other creative applications, premium labels and self-adhesive materials.

The deal was completed in two tranches - the first in December 2023 for €144 million; the second in January 2024 for €136 million. The twelve properties in Italy were acquired by a property fund managed by Savills Investment Management SGR S.p.A., whose investor is W. P. Carey.

Fedrigoni is a more than 135-year-old business headquartered in Milan, and operates in more than 130 countries, supplying products to 30,000 companies across various industries. The deal falls very much within the W. P. Carey investment criteria: the portfolio is mission-critical to Fedrigoni's business and generates a significant portion of the tenant's revenue. Each property has unique production capabilities. The properties are in locations that are difficult to replicate (due to access to water and specific permitting requirements) and house specialised equipment. And many of the properties are environmentally-friendly and sustainable - often self-sufficient and generating surplus energy which can be sold back to the grid.

The portfolio is let on long-term master leases for a term of 20 years, with built-in rental growth in line with the consumer price index, on the basis of triple-net contracts.

Christopher Mertlitz, Head of European Investments at W. P. Carey, said the sale-and-leaseback model remains attractive and competitive compared to debt and offers a liquidity solution for companies with capital requirements. Given the high cost of borrowing, companies can utilise the capital tied up in their illiquid property assets to grow, finance their ongoing operations and future expansion, as well as to invest in research and development.

W. P. Carey took the view, he said, that interest rate cuts were unlikely in the immediate future, with continued upward pressure on yields and downward pressure on property valuations in the eurozone and the US. But, depending on market and asset class, there are initial signs that prices may have bottomed out.

However, the likely current plateau (for interest rates) "will help to reopen the market as the price spread between buyers and sellers narrows further. Cap rates have also stabilised in most markets. These factors are likely to contribute to increased transaction activity in the property market in 2024. Sale-and-leaseback transactions will continue to be an attractive source of capital for companies compared to traditional financing," said Mertlitz.

As a company that's not dependent on any specific sector, Mertlitz said that W. P. Carey sees good opportunities in manufacturing, logistics, food production and food retail, all of which have been re-acting and adapting strongly to long-term trends. Hence, a second deal which W. P. Carey closed this year was for a supermarket and its associated petrol station in Doncaster, UK, for €27m.

Both assets are triple-net leased to one of the UK's largest supermarket brands, Morrisons. The supermarket and petrol station both have a history of strong performance. Again, the attraction here to W. P. Carey was the strict planning laws, licensing requirements and high land value costs, creating significant barriers for new entrants, thereby increasing the value of the established sites.

On this deal, the supermarket and petrol station are triple-net leased for 14 years and 13 years, respectively, with inflation-linked rent increases.

Net lease, also known as triple-net lease, is a commercial real estate lease structure where the tenant is responsible for paying not only the base rent but also most, if not all, of the property expenses, including taxes, insurance, and maintenance costs.