Q&A: Jay Koster, Managing Director of Corporate Capital Markets, Jones Lang LaSalle
According to recent findings by Chicago-based real estate services firm Jones Lang LaSalle, more cash-strapped corporations across the globe are exploring the benefits of sale-leaseback transactions as a way to extract value from their non-core assets.
According to CoStar Group, U.S. sale-leaseback volume totaled $2.3 billion in the third quarter, a 9% increase over the same period a year ago. And 2009 is shaping up to be an active year for the investment structure if the number of companies beating down Jay Koster’s door are any indication.
Koster is managing director of corporate capital markets at Jones Lang LaSalle and the company’s point person in the sale-leaseback area. He has more than 20 years of experience, starting his career at The Prudential Realty Group in Houston, and most recently serving as head of the capital markets group at The Staubach Co.
NREI caught up with Koster to obtain details on what he is seeing on the front lines of the sale-leaseback market.
NREI: Do you expect sale-leaseback activity to pick up in 2009, and why?
Koster: If you review the last six months, we saw a significant ramp-up in corporate appetite to execute sale-leasebacks and we saw capital markets that weren’t meshing with that heightened corporate demand. What we do see as we go into 2009 is increasing corporate demand. We have compression of the bid-ask spread between buyers and sellers and more capital starting to gravitate into the sale-leaseback investment sector.
NREI: Why are corporations becoming more interested in the sale-leaseback option?
Koster: As you point out, there has been a significant increase in the appetite of corporations to pursue sale-leasebacks. The inquiries from our clients are probably up 300% over where they were 18 months ago. I would say that corporate demand is far greater than it has been in the last five years.
More than 18 months ago, regardless of what your credit looked like, there was significant debt capital available to you. With the credit market challenges we’ve gone through over the last year, to say that the window of available credit is substantially different than it was 18 months ago is a significant understatement.
Corporate clients are looking at where they can find capital capacity. If banks are constrained to lend because they’re experiencing their own challenges from a balance- sheet perspective, where do I find capital to continue to operate and grow my business?
Investors are still willing to commit capital against companies’ owned asset base, especially hard assets like their real estate, because they have specific collateral in the event of any distress situation with that corporate borrower.
The reason we haven’t seen significant transaction volume in the second half of 2008 is that there is still a mismatch of seller and buyer expectations in the marketplace. They’ve moved closer together, but that gap certainly has not closed yet, even in this sector where it’s more transparent than traditional real estate investments. But with the demand from the corporate side continuing to increase, we expect to see a collapse of that bid-ask spread and start to see an alignment where transactions can start to close in 2009.
For instance, capital is available for your strongest investment-grade credit tenants that are willing to commit to longer-term bond net leases. People are indicating there will be even more capital available in early 2009 for that secure type of activity.
NREI: What is the source of that capital?
Koster: Largely pension funds and life insurance companies.
NREI: Given the spate of bankruptcies and business failures these days, how reliable is gauging any company’s credit going forward? Is that a big issue?
Koster: It is and that is why you can look at corporate bond yields and look at where there is stronger pricing and weaker pricing. The strongest pricing corporate bond issuers are in the safer businesses with the least amount of exposure potentially to major disruption in their business activity. For instance, we’re hearing from the private placement world that they’re very cautious of retail, which is fairly obvious.
They are fairly cautious of financial institutions because there remains uncertainty, and maybe difficult visibility as to when those organizations really are going to turn the corner. There tends to be more of a focus on organizations like Pepsico that have a reasonably strong long-term credit outlook, a business model that’s been around for a long time, and has tended to weather cycles better than some of the other cyclical businesses.
NREI: The New York Times is in the market trying to do a sale-leaseback on its Midtown Manhattan headquarters, isn’t it?
Koster: We have heard from various discussions that they are evaluating structures that would include direct financing, whereby the building’s financing is pledged as collateral, all the way up to potentially a sale-leaseback.
NREI: Are there any markets where sale-leasebacks are more prevalent than others?
Koster: Everybody is looking for long-term security and as much certainty as they can find in terms of where they want to put money to work today. So long-term core real estate markets like New York City, Washington, D.C. and others that have strong international appeal and reasonably strong barriers to entry from a new development perspective are the types of real estate markets where I believe you’ll see strong appetite for sale-leaseback deals. With these markets, not only might you find good credit fundamentals, you also could have good real estate fundamentals.