EUROPE NEWS: Leasebacks make a comeback

With the exception of the Spanish cajas selling and leasing back their properties in Spain, the market for large sale-leaseback transactions in Europe seemed to almost disappear in the aftermath of 2008, often due to lack of financing. Yet, just last month, an announcement arrived suggesting the sector is finally rebounding for big-ticket deals.

Moor Park Capital Partners led a group of private investors, including New York’s Och-Ziff Capital Management and Malaysia’s Employees Provident Fund, in a £700 million (€835 million; $1.1 billion) sale-leaseback transaction of 12 hospitals operated by Spire Healthcare, the second largest private hospital provider in the UK. The deal will help Spire and its ultimate owner, private equity firm Cinven, to refinance a large part of the debt against 12 of the 38 sites.

“We think there are many opportunities out there,” said Gary Wilder, one of the original partners at London-based Moor Park. “There is a whole arena for large ticket sale-leaseback deals. It has been fairly quiet for the last few years, but I think this is a good ‘re-opening’ of the whole opco/propco arrangement.”

For the Spire Healthcare deal, Moor Park and its investors have bought acute-care hospitals. “We liked these facilities given the general macro-economic climate. Looking at the age dynamics of the UK population, we could see ever more requirement for quality private healthcare,” Wilder explained.

Jagdeep Kapoor, co-founder of Moor Park, said the firm also liked the management team at Spire Healthcare, a business that is continuing to expand. The firm met each hospital director, and they all were “on the ball” and knew exactly what they wanted to do, he noted.

Spire Healthcare was formed in June 2007 when Cinven bought BUPA Hospitals in a £1.44 billion (€2.13 billion) deal. The private equity firm then proceeded to bolt on Classic Hospitals and Thames Valley Hospital in 2008. Following the recent sale-leaseback deal, debt at the enlarged group has fallen from around £1.4 billion to £700 million.

Wilder explained that the deal was attractive to Moor Park’s investors because they are long-term investors looking for fixed-income returns rather than equity-like returns. In addition, they get the opportunity to realize private equity real estate returns towards the end of the investment.

“Clearly, it is complicated because the financing market is not as robust as it was in the days running up to 2008,” Wilder said. “More equity is required and more investor education is required. Working on these transactions is not straightforward, as you need to understand the business, the credit and the dynamics of the underlying assets. The underwriting also is complex, requiring you to assess individual unit performance, opco performance and other aspects of the business.”

Despite the complexity, Wilder noted that sale-leaseback transactions in general are clearly attractive to the end user, whether it is a corporate, a financial institution, a government entity or a private equity house looking to recapitalize, refinance or restructure the balance sheet.

John Wilson, a sale-leaseback specialist at property services firm CBRE, said his firm also is seeing renewed activity. “We are starting to see the market come back,” he said. “The corporates themselves have gone through a period of consolidation, and sale-leasebacks are being used to effectively restructure organizations. We have done a lot of work with such groups over the last two-and-a-half years, and that is now coming to fruition.”

While the big-ticket sale-leaseback market might be re-opening, there also is a sign of continued interest in smaller deals. Just days after the Spire Healthcare transaction was announced, New York-based America Realty Capital, a US REIT focused on sale-leaseback transactions, announced the formation of a $1.5 billion global REIT. Forty percent of the REIT’s capital will be allocated to Europe for deals in the £5 million to £75 million range. Moor Park is the exclusive adviser on the REIT’s European deals, the first of which is a McDonald’s restaurant in Carlisle, northern England.