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How Grocers Can Unlock Capital By way of Actual Property

Rising operational prices, in addition to rising meals prices, have challenged already skinny margins within the grocery enterprise. Additional, hawkish Fed insurance policies are elevating the price of debt capital, and the newest tremor in banking has triggered lenders to be extra threat averse.

What many grocers might not notice, nevertheless, is that the capital they want would possibly already be inside their grasp, or to be particular, beneath their ft, within the type of the true property their facility stands on.

[Read more: “How to Renovate Stores on a Budget”]

Sale Leasebacks

Concurrently promoting an owned property and leasing it again from the customer beneath a long-term lease is known as a sale leaseback – a strategic financing software that enables grocers to unlock capital tied up in actual property. The money raised from these transactions can be utilized to fund progress initiatives similar to funding in tech infrastructure to maintain up with pandemic-fueled e-commerce necessities and in new services, or to pay down debt which may be extra expensive in the present day due to rising rates of interest.

Sale leaseback transactions are significantly appropriate for grocers, since many operators personal their properties. And, whereas senior administration could be uncomfortable with the considered giving up management of an owned property that’s integral to the enterprise, relinquishing possession doesn’t imply dropping management over mission-critical services. The truth is, the long-term lease that’s half and parcel of a sale leaseback affords grocers the same stage of management as in the event that they nonetheless owned the property. A typical sale leaseback time period typically spans 15 years or longer, with renewals extending for an extra 20 years or extra on the tenant’s choice, offering efficient management for 35 to 40-plus years.

Transactions within the Grocery Business

A widely known grocer that has made use of the sale leaseback technique is nationwide participant Albertsons Cos. (whose banners embrace Albertsons, Safeway, Shaw’s and Acme). The corporate executed greater than $2.6 billion of sale leaseback transactions, with belongings starting from retail shops to distribution facilities, between 2017 and 2019.

Early final yr, regional participant Hy-Vee Inc., introduced in no less than $118 million via a package deal of sale leaseback offers for shops within the Minneapolis-St. Paul area.

In 2021, The Kroger Co. executed a sale leaseback on 28 of its grocery retailer properties in Washington state, Oregon, Idaho and Alaska, totaling 4.5 million sq. ft. Harps Meals Shops additionally accomplished a sale leaseback of 13 free-standing grocery shops for $30 million in Arkansas and Missouri.

Sale leasebacks had a report yr in 2022 in each transaction quantity (874 transactions) and greenback quantity ($31 billion). Strong sale leaseback exercise final yr was pushed by a number of elements, together with patrons’ sturdy urge for food to deploy capital, engaging arbitrage alternative, and the sale leaseback’s engaging price in contrast with different types of capital.

This yr, the massive sale leaseback theme is that on a relative cost-of-capital foundation, sale leasebacks are much more engaging now than a yr in the past, which makes it an excellent time for grocers to think about this financing choice. The price of company debt has risen by greater than 400 foundation factors within the final yr, representing doubling of curiosity prices in some circumstances. The fee for a sale leaseback has risen, too, however the rise has been far more muted (as measured by cap charges), widening by roughly 100 to 150 foundation factors.


Merely proudly owning actual property, per se, isn’t sufficient to boost capital in a sale leaseback transaction. The well being of the underlying enterprise and its potential for progress are necessary elements, too. Traders search tenants who can successfully fulfill obligations over the lifetime of a long-term lease. Furthermore, traders are on the lookout for steady corporations with sturdy steadiness sheets that may stand up to fluctuations in earnings and gross sales.

However, location of the property doesn’t play as massive a task in a sale leaseback transaction in contrast with typical actual property offers. Since sale leasebacks are extra closely reliant on the underlying credit score of the corporate, a property that’s not in tier-one metropolitan areas or prime areas could possibly be engaging so long as the underlying enterprise is wholesome.

There are a selection of levers obtainable so {that a} grocer can construction the optimum transaction for his or her distinctive circumstances. These embrace the time period of the lease, base hire and hire escalations. Negotiating a change-of-control provision that doesn’t impede an eventual exit or sale of the enterprise can be essential.

Worth Arbitrage

Sale leaseback transactions are particularly engaging for grocers due to the arbitrage alternative they current. Grocers have the choice to promote their actual property at a valuation a number of that’s often greater than the enterprise valuation a number of.

Remember that virtually all monetary belongings, together with workplace buildings, factories and even companies, are valued at a a number of of the money circulate they produce. Within the present setting, actual property valuation multiples are greater than enterprise valuation multiples, permitting enterprise house owners to reinvest proceeds from actual property belongings into company belongings that may enhance the corporate’s potential for progress and better earnings era.

The challenges grocers face now, significantly growing prices, provide chain disruptions, labor shortages, altering client conduct and fierce competitors, might persist. Accordingly, the capital {that a} sale leaseback transaction supplies could also be extra necessary now than ever.


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