SouthState Bancorp is hopping on a trendy strategy banks are using to free up their balance sheets and grow capital while underwater bonds drag on revenues.
The Winter Haven, Florida-based company said Monday it has agreed to sell 170 of its branch locations to Blue Owl Real Estate for $475 million and will then lease back the sold properties to continue operating in those communities. The agreement, slated to close in the first quarter, comes less than two weeks after SouthState closed its $2 billion acquisition of Dallas, Texas-based Independent Bank Group.
Chris Marinac, an analyst at Janney Montgomery Scott, said the $225 million pretax gain from SouthState's sale-leaseback deal could help the bank rebuild capital levels after a standard punch from its latest acquisition.
"I look at this as a capital-recycling exercise," Marinac said. "They're going to take the gain and reinvest it … I don't think it's a huge deal in the scheme of things. I just think it's a building block toward a lot of different levers they'll pull as they integrate the combined company."
The bank declined to comment on the agreement until its fourth-quarter earnings call next week. Blue Owl did not respond to a request for comment.
Banks have also looked for other tools to mitigate the bites that acquisitions take out of capital levels, said Paul Davis, CEO of research and consulting firm Bank Slate. But SouthState zigged from several banks
"It makes a lot of sense that they are looking to take one of their biggest fixed assets, monetize it and use that to fill any potential capital holes either tied to the deal, or tied to right-sizing the balance sheet," Davis said.
The level of dilution from bringing on Independent may not be clear by the time SouthState reports earnings next week, but Marinac said the gain from the sale-leaseback will help soften the blow.
SouthState's sale-leaseback also signals a commitment to continued operation of the 170 branches included in the deal, Davis said, even as many banks are assessing and shuffling their geographic footprints.
"Sale-leasebacks are usually for branches where the seller is 100% committed to keeping the branches open long term," Davis said. "When you commit to that kind of arrangement, it makes it harder for you — if circumstances change — to close those branches."
Per the deal with Blue Owl, each lease agreement has an initial term of 15 years, with three consecutive renewal options of five years each. Rent will cost the bank $40 million in the first year, offset partially by the elimination of $8 million in annual depreciation expense. The branches are spread across Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia.
As of last May, SouthState had 251 branches across the Southeast, while Independent had 92 across Texas and Colorado, per an investor presentation.
Marinac said going forward, many banks are likely to remain hesitant about selling their real estate because they "like being in control of their destiny" in case a situation arises that requires excess liquidity.
"Most banks are not going to be in a hurry to take that gain. …it's a comfort level. It's like having an extra insurance policy," Marinac said. "That's why I think many banks are going to keep that in their hip pocket, and not be in a rush to do it."
Still, Davis said the main buyers, like Blue Owl and MountainSeed, are eager to jump on these deals, and banks that don't need the flexibility to quickly shift their branch layout will still look to sale-leasebacks as options in 2025.
"You've got folks like on the other side of the deal … still very, very hungry to do these deals, so that could certainly help with pricing," Davis said. "From the buyer's perspective — with office space being a tricky thing — these buyers are adding office properties to their portfolio with a committed, long-term tenant, which is not the easiest thing to do."
