Some US banks are moving to sell their branch real estate properties and lease them back, in an effort to raise capital and offset underwater securities sales.
Banks have announced at least eight sale-leaseback transactions in the last 12 months, including six just this year. The transactions, in which banks sell branches and then lease them back from the buyer, have become attractive because they free up cash that banks can use to reposition their securities portfolios and improve earnings, without disrupting operations at the branches sold, sources said in interviews with S&P Global Market Intelligence.
Scott Merkle, managing partner at SLB Capital Advisors, an advisory firm that specializes in sale-leasebacks, said he has observed an uptick in the transactions involving community banks in particular. The potential gain on sale from sale-leaseback deals became especially attractive for banks following the bank failures in 2023 because they can be a "highly effective tool" for offsetting unrealized losses in banks' bond portfolios, Merkle said.
In one recent example, Fulton Financial Corp. struck a $55.4 million sale-leaseback deal in May with Blue Owl Capital Inc. in conjunction with an underwater securities sale after realizing a $20.4 million pretax gain on sale from the transaction.
In another, Atlantic Union Bankshares Corp. generated a $27.9 million before-tax gain on sale in a $45.8 million sale-leaseback deal with Blue Owl last year, more than offsetting the $27.7 million pretax net loss from a $228.3 million securities sale, according to a regulatory filing. The deal was also accretive to Atlantic Union's earnings because the loss position in the company's securities portfolio was hurting its tangible common equity (TCE).
Following the deal, Atlantic Union's TCE as a percentage of tangible assets rose to 7.15% at the end of the fourth quarter of 2023 from 6.45% at the end of the third quarter, according to S&P Global Market Intelligence data.
"There was no other way that we saw that we could go out and generate accretive earnings at the level that you could with the sale-leaseback without diluting our capital," Atlantic Union's head of corporate development and strategy, Toler Cross, said in an interview.
Immediate returns
Banks can offset underwater securities sales with sale-leasebacks because of a 2019 change in the Financial Accounting Standards Board's accounting treatment of leases, which allows institutions to recognize the gain on sale from a transaction immediately, said Patrick Roberts, the chief revenue officer at MountainSeed Holdings LLC, an asset management firm that has been involved in recent sale-leaseback deals.
Prior to the change, banks recognized the gain on sale over the course of a lease's duration, Roberts said in an interview.
The immediate gain on sale from Atlantic Union's sale-leaseback deal made its securities sale possible, Cross said.
"I would not have sold my investment portfolio at a loss had it not been for the gain on sale of the sale-leaseback," Cross said. "I don't know how the math for that would make sense for us."
Others, such as First Fed Bank, Bank of the Sierra and Plumas Bancorp, said they would consider securities sales after realizing substantial gains on sale-leasebacks in recent months. Plumas realized a pretax gain of about $20 million from its sale-leaseback deal in February.
In a pair of sale-leasebacks executed in April 2023, Pinnacle Financial Partners Inc. sold a combined 51 properties to affiliates of Oak Street Real Estate Capital LLC, generating pretax net gains, after expenses, of roughly $55.4 million and $37.4 million. Pinnacle subsequently restructured part of its bond portfolio, generating a net loss of $9.2 million that the sale-leasebacks offset.
More on the way
Firms that have been buyers in recent sale-leaseback deals said they have more transactions in their pipelines.
Blue Owl has a "robust pipeline" of potential sale-leaseback deals and is currently in talks with around 20 financial institutions regarding assets totaling roughly $2 billion, Co-President Marc Zahr said in an interview.
At MountainSeed, 2024 sale-leasebacks include a $14.7 million deal with First Fed parent company First Northwest Bancorp; an $11.0 million deal with Citizens Holding Co.; a $17.2 million deal with Finward Bancorp; a $25.7 million deal with Plumas; and a $7.5 million deal with First Seacoast Bancorp Inc.
The company has more sale-leaseback deals set to close by the end of June and recently secured another $2 billion for additional deals, Roberts said. Roberts added that he expects the momentum of sale-leaseback transactions to grow in the higher-for-longer rate environment.
"We have a strong, strong perspective that this is only going to increase over time," Roberts said. "It's, in our opinion, the least expensive way to increase capital in the environment that we're in."
