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A corporate’s key objective is usually one of creating and capturing value from its core business. As most corporate entities require real estate in order to run their core business efficiently, these corporate entities tend to invest heavily in real estate across various sectors – retail, offices, logistics, leisure, hospitality, healthcare etc. Unintentionally, many corporate entities amass vast real estate portfolios worth significant amounts of capital in order to operate efficiently and effectively.
The real estate portfolios owned and occupied by many corporate entities represents capital tied down in non-core business. Capital that is not being ‘worked’ to optimise return on capital employed or return on equity. Capital that is not being utilised within the entity’s core business to create and capture value.
The thrust of this article is how corporate entities can realise and put to good use the significant amounts of capital within their real estate portfolios without negatively affecting their use of the real estate portfolio and their core business. In a nutshell, how does a corporate entity optimise and align its real estate strategy and business strategy efficiently and in a cost-effective manner?
There are myriad reasons for owning vast real estate portfolios. Reasons (intentional and unintentional) include, inter alia, retaining full control and flexibility over the land and buildings; reluctance to negotiate with landlords; and simply not having an understanding of the implications (on core business) of owning a substantial real estate portfolio.
Consideration should now be given to what a corporate occupier should do in order to make a decision on its real estate portfolio.
Options analysis
The key to any corporate occupier maximising the returns and flexibility from its real estate portfolio is to regularly undertake a review of the portfolio and conduct options analyses.
An options analysis would allow a corporate occupier to consider its two primary options for owned properties – Do Nothing or Unlock Value.
The ‘Do Nothing’ option is one to which serious consideration should be given, and could be appropriate where the property is unique or requires regular redevelopment to suit the needs of the business.
Consideration should be given to the strength of a corporate occupiers profit and loss account and the timing for any transaction. A transfer of real estate ownership typically introduces a new cost item to a corporate entity / occupier and it is essential that any rents payable are affordable for the entity both in the shortand long term.
Timing of any option is critical – if an option is decided to be best, then its timing should be considered in the context of the property market, financing conditions, industry sector and corporate occupier specific issues. The ‘do nothing’ option could be the best option until the timing is right.
To ‘Unlock Value’, the first step is to determine which option best meets a corporate occupier’s needs and achieves their real estate portfolio objectives.
Unlocking Value is a combination of real estate and financial structuring. It is the process of releasing idle capital tied up in real estate assets in order to optimise a corporate entity’s use of its assets for re-investment in the core business. It delivers its greatest benefits where returns from re-investing the (unlocked) capital into core business / identified projects are higher (than the return on the capital prior to unlocking value) i.e value creation. When focussed on the right assets, it also aligns the real estate portfolio to support, rather than hinder, the corporate business strategy.
Unlocking Value options include asset-backed finance, traditional sale and leaseback, structured sale and leaseback, real estate securities (for example, a real estate investment trust)andpropco/opco transactions. Other unlocking value options include development agreements and joint ventures.
Of the unlocking value options, a traditional and / or structured sale and leaseback transaction would standout as the best options for a typical corporate occupier to achieve both balance sheet optimisation and release capital whilst also transferring property ownership to a specialist property investor, thus allowing the corporate occupier to focus on its core business. A structured sale and leaseback has the added advantage of incorporating flexibility specifically to match the corporate occupier’s needs.
Once the decision has been made to unlock value from a real estate portfolio in the means best suited to the occupier, the key consideration should beselecting the portfolio for the transaction i.e. which assets should be within the unlocking value portfolio?
Portfolio determination & analysis
An objective of unlocking value is aligning the real estate portfolio with the corporate business strategy. The intention is to retain the ability to control key ‘core’ assets over the longer term, and if possible provide flexibility to exit non-key assets at appropriate points in time with surplus assets being disposed immediately. This alignment (of real estate and business strategy) essentially determines the occupational strategy and therefore the real estate portfolio, which would be the subject of unlocking value.
Following portfolio determination, detailed portfolio analysis should be undertaken to reflect the corporate occupier’s (occupational) strategy; determine the attractiveness of the portfolio to prospective investors / landlords; and, inter alia, ability to raise long-term finance on the portfolio.
With the options analysis concluded, an unlocking value option determined, portfolio determination and portfolio analysis finalised, the next step is to structure the transaction ensuring it meets most, if not all, of the corporate occupier’s real estate and business strategy objectives.
ADENEKAN ADENIRAN
