What is a sale-leaseback deal?
A sale-leaseback deal is a transaction in which a company sells its real estate assets to another party and then leases them back for a fixed period of time. This way, the company can free up capital that was tied up in its properties and use it for other purposes, such as investing in its core business, paying off debt, or restructuring its balance sheet.
Sale-leaseback deals are common in various industries, such as retail, hospitality, and health care, but they are also becoming more attractive for banks, especially in a high-interest-rate environment. By selling their branches and leasing them back, banks can reduce their exposure to interest rate risk, improve their capital ratios, and optimize their branch network.
Why did Atlantic Union Bankshares do a sale-leaseback deal?
Atlantic Union Bankshares, a $20.6 billion-asset bank based in Richmond, Virginia, recently completed a sale-leaseback deal of 25 of its 109 branches. The bank netted about $22 million after taxes from the transaction and used the proceeds to restructure its securities portfolio.
According to Beth Shivak, Atlantic Union senior vice president and head of corporate communications, the sale-leaseback deal was driven by the bank’s ongoing assessment of its balance sheet and its desire to turn a fixed asset into an earning asset. She also said that the gains from the transaction were used to help reposition the bank’s balance sheet for a higher-for-longer rate environment.
Atlantic Union sold about $228 million in available-for-sale securities, which resulted in an after-tax loss of $27.7 million. However, this loss was largely offset by the sale-leaseback gain. The bank also purchased about $300 million in held-to-maturity securities with longer durations and higher yields, which will enhance its net interest income and margin over time.
What are the benefits and challenges of sale-leaseback deals for banks?
Sale-leaseback deals can offer several benefits for banks, such as:
- Liquidity: Sale-leaseback deals can provide banks with immediate cash inflows that can be used for various purposes, such as funding loan growth, paying dividends, buying back shares, or making acquisitions.
- Capital efficiency: Sale-leaseback deals can improve banks’ capital ratios by reducing their risk-weighted assets and increasing their common equity tier 1 capital. This can help banks meet regulatory requirements and enhance their financial flexibility.
- Branch optimization: Sale-leaseback deals can help banks optimize their branch network by allowing them to sell underperforming or redundant branches and lease back only those that are strategically important or profitable. This can lower their operating costs and improve their efficiency ratios.
However, sale-leaseback deals also pose some challenges for banks, such as:
- Lease obligations: Sale-leaseback deals can increase banks’ lease obligations and reduce their ownership rights over their properties. This can limit their ability to modify or relocate their branches in the future and expose them to potential rent increases or lease termination fees.
- Tax implications: Sale-leaseback deals can have different tax implications depending on the structure and timing of the transaction. For example, if the sale price is higher than the book value of the property, the bank may have to recognize a taxable gain on the sale. Conversely, if the sale price is lower than the book value, the bank may have to recognize an impairment charge on the property.
- Market conditions: Sale-leaseback deals can be influenced by the market conditions of both the real estate and the banking sectors. For example, if the demand for branch properties is low or the supply is high, the bank may have to sell its properties at a discount or face a longer marketing period. Similarly, if the interest rates are low or the credit quality is high, the bank may not be able to generate enough returns from reinvesting the proceeds of the sale.
Will more banks follow Atlantic Union’s example?
Experts predict that more banks will consider doing sale-leaseback deals in the near future, as they face increasing pressure from rising interest rates, regulatory capital requirements, and competitive forces. Tyler Swann, managing director of investments at W.P. Carey, a real estate investment trust that specializes in sale-leaseback transactions, said that sale-leaseback is seeing growing interest from companies across various industries as capital becomes scarce and more expensive.
Swann added that once a management team gains a comfort level with the idea of selling its real estate assets, then it becomes a question of finding the cheapest source of capital. He said that for a business as interest rate sensitive as banking, rising rates have to make them reevaluate their sources of capital and whether it makes sense to have capital tied up in their real estate assets or whether they can take the money and redeploy it more efficiently in their business.
