Atlantic Union Bankshares recently sold 25 branches and leased them back from the buyer, then used the proceeds to restructure its securities portfolio. It's a class of transaction that could become more attractive for banks seeking capital in a protracted high-interest-rate environment, according to experts.
The Richmond, Virginia-based Atlantic Union closed its sale-leaseback deal last month, netting about $22 million after taxes. At the same time, the $20.6 billion-asset Atlantic Union disclosed the sale of approximately $228 million in available-for-sale securities, adding that the after-tax loss of $27.7 million connected to the securities sale was largely offset by the sale-leaseback gain.
"The sale-leaseback of these properties was driven by our ongoing assessment of our balance sheet and enables us to turn a fixed asset into an earning asset," Beth Shivak, Atlantic Union senior vice president and head of corporate communications wrote in an email to American Banker. "The gains for the transaction are being used to help reposition our balance sheet for a higher-for-longer rate environment."
Tyler Swann, managing director, investments at W.P. Carey in New York, said sale-leaseback is seeing growing interest from companies "across the board, in all sorts of industries," as rising rates have rendered capital scarce and more expensive. Indeed, once a management team gains a comfort level with the idea of selling its real estate, "then it's purely a question of what's my cheapest source of capital," Swann said. "Is it to have capital tied up in my real estate ... or can I take the money and redeploy it more efficiently in my business?"
"I have to imagine for a business as interest rate sensitive as banking, rising rates have to make you reevaluate what your sources of capital are," added Swann, whose firm wasn't involved in the Atlantic Union deal.
David Bishop, an analyst who covers Atlantic Union for Hovde, also predicted an uptick in sale-leaseback deals involving banks. "We think we will see more banks pursue strategies … to unlock embedded equity and reposition balance sheets for a higher-for-longer environment," Bishop wrote Sept. 28 in a research note. Bishop stated he viewed Atlantic Union's course as "positive," predicting the overall result would be slightly accretive to 2024 full-year earnings. Bishop boosted his earnings-per-share estimate for 2024 by 5 cents, to $3.30, reiterating his outperform rating.
In a market forecast published at the beginning of 2023, New York-based Blue Owl Capital, which purchased the Atlantic Union branches, reported $3.1 billion of real estate acquisitions in 2020, followed by $5.1 billion in 2021. The volume of acquisitions surpassed $7.1 billion in 2022. As the pace of business has quickened, Blue Owl's sale-leaseback revenue has increased correspondingly. Through the first six months of 2023, sale-leaseback revenue totaled $56.4 million, up 55% year over year, according to Blue Owl's most recent 10-Q report filed with the Securities and Exchange Commission.
As part of the deal with Blue Owl, Atlantic Union, which operates a total of 109 branches, agreed to lease the locations it sold for 17 years. First-year rent will total approximately $2.9 million after taxes, according to a current events report Atlantic Union filed with the SEC on Sept. 21. "We like these locations and have no plans to close," Shivak wrote in the email.
Once a sale-leaseback deal is consummated, little or nothing connected to a property's operation changes, Swann said.
New renters "typically exercise the same level of control over real estate after a sale-leaseback as they did as owners," Swann said. "Generally speaking, the tenant is going to be responsible for everything, just like they would have been if they owned the building," Swann said. "Essentially, the [new] landlord's only interaction is providing the capital upfront and collecting the rent check once a month."
For Swann, the biggest precondition that needs to be satisfied before he considers a sale-leaseback deal is ensuring sellers are certain about their strategies. In the case of banks, "you're making a commitment to your branches," Swann said. "You have to really know you want to be in those buildings and paying rent for the long term."
W.P. Carey has historically focused on industrial sale-leaseback transactions but has done a growing amount of retail business in recent years, according to Swann.
Atlantic Union's deal came five months after the $46.9 billion-asset Pinnacle Financial Partners in Nashville, Tennessee, executed a sale-leaseback deal with Oak Street Capital Partners, a Blue Owl subsidiary. Pinnacle agreed to sell and lease back 49 properties, netting $85.7 million before taxes. Like Atlantic Union, Pinnacle used proceeds from the sale-leaseback to restructure its securities portfolio, selling $166 million of securities for a net loss of $9.2 million.
