Last month, Citibank sold six properties in Manhattan and in the outer boroughs for more than $12 million, only to lease the very same spaces back from the buyer. This is nothing new for the banking giant, which also sold its lower Manhattan headquarters last year. But Citibank isn’t the only one joining the sale-leaseback game to cash in on its assets.
Because of the uncertain state of the economy, many financial institutions are following Citibank’s lead, and companies in other industries are also selling their offices to cut their losses as a result of the credit crunch.
In a recent Webcast interview, The Real Deal’s Jen Benepe sat down with Robert Freedman, CEO of commercial real estate firm GVA Williams, to discuss how a declining market sparks sale-leasebacks.
Log on to www.therealdeal.com to see the full interview. And log on every Monday and Wednesday for a new edition of The Real Deal’s weekly Webcast, featuring a recap of each week’s breaking real estate stories and exclusive interviews with industry insiders.
The Real Deal: Citibank recently sold off a number of properties and then leased them back. It sold six Citi branches for $12.3 million last month. And in its biggest deal, Citigroup sold its headquarters at Greenwich Street for $1.6 billion to SL Green at the end of 2007. What is the appeal for them, and why are they doing this?
Robert Freedman: They’re unlocking their balance sheet. Like many financial institutions, they’re writing down non-performing assets as a function of the roiling debt market and the credit crisis.
TRD: Basically, they’re looking for some fast cash, correct?
RF: Yes, they’re looking to monetize an asset that’s not fully reflected on their balance sheet. For book purposes, for tax purposes, there are a number of different strategies.
TRD: Is there also some underlying reason with the Office of the Comptroller of the Currency in terms of their assets on their balance sheet?
RF: Yes, the Office of the Comptroller of the Currency prescribes for all of our banking institutions a primary capital-to-assets ratio. The real estate doesn’t qualify as primary capital. They’re in the business of lending, and their lending capacity would be crimped if they don’t have adequate primary capital.
TRD: Deutsche Bank also sold its buildings in a high-profile leaseback to the
Paramount Group last year. And Merrill Lynch sold its flagship bank in London for about $1 billion. Do you expect other financial firms to join the flow in doing the same thing?
RF: Yes, I think you’re going to see a lot more of this; it makes all the sense in the world. And moreover, many of their assets are trophy properties, which are trading at a premium, and they’ve ratcheted up in value to such an extent that it’s a market-timing issue. It’s a good time for them to sell because these assets have had a very steep run-up in value.
TRD: Can you give us some names of who you think are going to start unloading their properties?
RF: I think every major financial institution is going to have to look at this, no question, and they all have fairly significant real estate assets in this town and others.
TRD: What about other industries? The Real Deal reported on a possible sale-leaseback involving the healthcare company GHI on Ninth Avenue. So have you seen other kinds of companies either doing this or poised to do it?
RF: A lot of the healthcare companies that we’re dealing with — take hospitals, for instance — they’re rich in hard assets like real estate, and they have to look at levering those assets as their core businesses are struggling.
TRD: Who are some of the buyers, and are international companies contributing more to the recent trend than usual, as in the case of the recent Citibank branches selling to Irish company [Markland Holdings]?
RF: Clearly, because of the currency play, you’re seeing foreign buyers all over. Frankly, the British have always been very significant buyers; Greeks are major buyers. Remember, a lot of financial institutions occupy trophy properties. These are fortresses, these are best in class properties, the very properties that are trading at a premium. So there’s a market-timing aspect to sell. It’s the old adage, you know, sell high and buy low.
TRD: Have sale-leasebacks always happened when the economy tanks?
RF: Historically, yes, and unfortunately, I’ve been through too many market cycles. I’ve been in this business about 35 years, and yes, it’s a very predictive pattern that you clearly have to look at and unlock values to offset losses. So it’s quite a classic corporate response to a downturn in the economy.
TRD: So altogether, we should be seeing a number of sale-leaseback transactions happening over the next year, at least.
RF: Yes, I think you’re going to see a spate of them.