The art of the sale-leaseback

Life is filled with lessons. Some are pleasant; others are painful.

When it comes to the latter kind, I firmly believe they’re best learned secondhand. As in through someone else’s experiences.

That’s part of the value Wide Moat Research offers: my long list of past trials and errors that ultimately helped me form the sleep-well-at-night (SWAN) investment philosophy I champion today. I got to personally see what doesn’t work, which now allows me to steer you in better directions.

Take sale-leasebacks, which happen when a land-owning business sells its property to a landlord to then rent it back from them. This gives the business instant cash and the landlord steady rent.

At least that’s how it’s supposed to go. As I once found out firsthand as a young commercial real estate (CRE) broker and developer, that happy outcome is not guaranteed.

One of my clients back then was a logistics developer who also ran a food commissary company called Top Food Services. After I leased up one of his warehouses, I then helped him sell parts of his side business to a 1031 exchange investor.

1031 exchanges allow real estate investors to sell property, then reinvest the proceeds directly into another qualifying property instead of paying capital gains taxes.

In this case, it meant a $2 million property sale with a 10-year lease and two five-year renewal options. It looked like a pretty sweet deal on paper. But the problem was that “paper” only told so much.

The parties involved were privately owned and therefore didn’t have to maintain the same strict reporting requirements that publicly traded entities do. So my client was blindsided when, only a few months in, the tenant filed for bankruptcy.

My lesson learned: a long lease is only as good as the people who sign it.

The sale-leaseback concept in and of itself is remarkably simple and hassle-free.

Almost nothing changes operationally speaking. The seller’s sign still stays above the door, and its business still goes on as usual.

But from a financial perspective, it now has cash on hand to strengthen its business. It can use that money to open stores, make acquisitions, reduce debt, or invest in technology – just to name a few possibilities.

Yes, it now owes rent on a property it used to own. But that’s a monthly fee it can budget for: payable over time. Just as long as it can earn higher returns on its initial sales-specific intake, a sale-leaseback transaction can be a very smart move.

I’ve touted McDonald’s (MCD) many times at this point for all the real estate it outright owns. But that doesn’t mean that’s the best mode of operation for every company out there.

Take Tractor Supply (TSCO), for example. Its competitive advantage comes from the brand it’s worked so hard to establish. Its merchandising, distribution network, inventory management, and customer relations are worth much more than the dirt beneath its stores.

So it makes sense that Tractor Supply only rents the spaces it occupies. And the same goes for most:

That makes the potential sale-leaseback marketplace enormous. And SLB Capital Advisors is seeing a surge in companies acting on it this year.

The U.S. market apparently completed 178 transactions during the second quarter alone – making it the highest second-quarter amount recorded since 2022. Meanwhile, dollar volume rose about 27% sequentially to $4.6 billion, even as general merger and acquisition (M&A) slowed.

Since Q1 wasn’t too shabby either, the first half of 2026 came in as the strongest yearly start in four years.

There were dozens of companies that made H1-26 such a sale-leaseback success story, of course. But some of the most prominent players were real estate investment trusts (REITs) like W. P. Carey (WPC).

Back in May, investment firm Pacific Avenue Capital Partners bought up Oldcastle Lawn & Garden… then immediately did two things with it:

That significantly sized transaction was hardly an afterthought. It was part of Pacific’s entire strategy to purchase the business in the first place.

That’s the potential power of a sale-leaseback. When it’s done right, everyone wins.

Golden Entertainment certainly won in April when it sold seven of its casino properties to VICI (VICI) for $1.16 billion. And VICI, for its part, got a 30-year, triple-net master lease that will generate $87 million of initial annual rent.

That’s a 7.5% capitalization rate (cap rate) for starters. And then there are 2% annual rent increases that kick in after the second year. So it’s set up quite nicely from here.

Over in the healthcare space then, Care Trust REIT (CTRE) acquired 15 skilled-nursing facilities in California for about $380 million. The resulting sale-leaseback contract comes with annual escalators that should keep its profits safe from inflation.

So this model clearly works across numerous industries and tenant types. It just needs to be based in solid fundamentals on both sides of the deal.

The aforementioned SLB Capital estimates that sale-leaseback cap rates generally range from 6.95% to 8.65%. That’s roughly equivalent to 12–14 times annual rent, which looks attractive at first glance.

But before investors get carried away by the potential profits, they should first consider the buyer’s cost of capital – keeping in mind that long-term bond yields are approaching 5%. Simply put, debt is more expensive these days and that ends up affecting everything else.

A REIT buying properties at 7.5% cap rates therefore can’t create sustainable value if its blended cost of debt and equity is 8%. Growth doesn’t work unless it’s funded at sufficiently attractive spreads.

There’s plenty of opportunity for net-lease REIT investors these days, including in smaller-cap companies. But I will point out that the largest and best-capitalized competitors have a genuine competitive advantage that shouldn’t be overlooked.

W. P. Carey, VICI, Realty Income (O), Agree Realty (ADC), and Essential Properties (EPRT) all have greater access to funding sources such as unsecured debt, public equity, and retained cash flow. Though even then, management has to be careful that their adjusted funds from operations (AFFO) per share growth remains just as strong as their growth in assets.

Keep that in mind whenever you’re reviewing one of their transactions. I’ve seen how wrong it can go when investors forget to check every detail…

And how very profitable it can be when they do.

For instance, last June, I told my Wide Moat Confidential members that the then publicly traded Denny’s could unlock $150 million in value by selling its properties and renting them back. Just five months later, it was acquired in a $620 million deal that included $150 million in sale-leaseback financing.

My readers realized around 45% returns as a result – in less than five months!

That’s the exact kind of experience I want more of you to have firsthand.

There are many companies that own real estate but should be leasing instead. In which case, the sale-leaseback tool could very well unlock value.

This form of financial engineering is just one of the ways our team at Wide Moat evaluates the efficient use of capital that ultimately drives shareholder value.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily