Once upon a time, there was a young man named William Polk Carey who was born for business.

As a kid back in the 1930s and 1940s, he sold soda and homemade writing ink to his neighbors. So by the time he went to Princeton University, he was already quite the entrepreneur.

Carey had a mini refrigerator that first year at school, making him the envy of his schoolmates. So he bought as many as he could afford, then leased them out for a reasonable fee.

The business move was such a success that, by the end of his sophomore year, he made over $10,000. Better yet, Carey had the beginnings of an idea to make a whole lot more…

For a while after graduation, he worked for his stepfather’s car dealership. But in 1973, he founded W.P. Carey (WPC) based on a very simple concept: He and his would buy buildings from business owners, then rent them right back.

This “sale-leaseback” model makes a lot more sense than you might think at first glance.

From the original owner’s perspective, it offers a quick, large infusion of cash to be used wherever needed. That might be to pay down debt, grow the business directly, or invest in a side project or asset.

Whatever the reason, the building remains at their disposal, just without the risks involved in ownership.

And while the buyer obviously takes on that risk, it also gets property-related tax cuts (like cost segregation and bonus depreciation), plus all those rent checks that add up very nicely in the end.

So nicely, in fact, that there’s an entire list of companies that utilize it… ones you can benefit from today.

Sale-Leasebacks Are Much Bigger Than You May Think

As I wrote about recently, I love triple-net-lease rental contracts – where the tenant pays property taxes, insurance, and maintenance. This gives them more autonomy in how they operate and lower rent payments than they’d otherwise have to pay.

Meanwhile, it gives their landlords far less headaches and very predictable revenue streams. That’s why a whole entire real estate investment trust (“REIT”) sector has sprouted up around the concept.

Net-lease REITs tend to operate stand-alone buildings that host a single company. And these are the exact kind of buildings that are perfect for sale-leasebacks.

If you automatically have an image of convenience stores and fast-food facilities, you’re not wrong. According to SLB Capital Advisors’ most recent Sale Leaseback Market Update, the largest sale-leaseback transaction last year was when Realty Income (O) bought up a portfolio of 105 7-Eleven properties for $771 million.

But some of the other transactions listed might surprise you:

Source: SLB Capital Advisors

For example, the second-largest transaction was Gaming and Leisure Properties’ (GLPI) $395 million purchase of two Bally’s casinos – not exactly your local corner shop. Six of the top 10 involved industrial properties (usually warehouses), and one was Washington, D.C. acquiring the Capital One Arena.

That sports and entertainment venue hosts the NBA’s Washington Wizards, the NHL’s Capitals, and Georgetown’s men’s basketball team. It seats about 20,000 people, hosts more than 220 events every year, and covers 1 million square feet.

So it just goes to show you how many sale-leaseback options exist and how many takers there are. It has become an increasingly attractive opportunity, especially after the Great Recession and then, more recently, the 2020 shutdowns.

After all, occupants get 100% of the properties’ value. If they chose traditional mortgage financing, in comparison, they’d probably get no more than a 70% loan-to-value. The average is usually around 65%.

In short, if a REIT – or the District of Columbia – is willing to buy up your property without kicking you out? It’s probably very well worth your while.

The Sale-Leaseback Buyer’s (Investor’s) Choice

Of course, you personally probably don’t have the money to buy a whole entire building. Or even the desire, net-leased or not.

But that’s why I brought up REITs before. You can buy as many or as few shares of them as you’d like, letting them put the really big bucks to work for you.

As more and more businesses look for creative ways to handle the slings and arrows of the 21st century, they’re very well positioned to benefit. Plus, their low cost of capital allows them to bid aggressively on individual transactions and portfolio sales alike.

I already mentioned Realty Income’s sale-leaseback with 7-Eleven last year. However, that’s hardly its first such contract; many of its 1,500-plus customers operate under the same kind of agreement.

You might recognize some of these names, such as BJ’s, Tesco (in Europe), or The Encore Boston Harbor Resort and Casino.

Another promising sale-leaseback user is Four Corners Property Trust (FCPT). It wasn’t that long ago when it signed a $25 million deal with a top automobile service operator for six newly built sites. And another recent transaction involved two outpatient centers from an investment-grade health care system.

I’d also like to point out Agree Realty (ADC). It has bought out dozens of sites from Tractor Supply and Sherwin-Williams – two of my favorite former rental clients. Unlike Walgreens and AutoZone, which I just wrote about, these companies have kept their moats and therefore their repeatable profits.

Finally, I’ll point out VICI Properties (VICI), a gaming REIT with trophy casino assets like Ceasars, MGM, and The Venetian. The vast majority of its holdings were purchased through sale-leaseback deals.

The industry has clearly come so far since William Carey got involved. Yet his model and mantra – “investing for the long run” – still stands today.

I wouldn’t be surprised to see an entirely new wave of participants from here: perhaps facilities like airport hangers, railroads, racetracks, and amusement parks. In which case, there’s plenty more deals to be made and profits to collect…

Both from these sale-leaseback REITs – particularly the ones below – and the investors who buy into them.

(Note: In the table below, “YTD” represents “year to date” and the market caps are in billions of U.S. dollars.)

Source: Wide Moat Research

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

What other ways do you invest for the long run? Write us at [email protected].