As corporate interest in agricultural investment grows, there are emerging sale and leaseback opportunities within Australia’s agriculture industry. Attracting and embracing investment mitigates common agricultural capital constraints, allows for investment in infrastructure and improves supply chains, which in turn, maximises Australia’s international competiveness. Industry trends of increased corporatisation, aggregated land holdings and institutional investment should come as no surprise, with investors searching for higher returns on perceived “safe” investments.
In this Alert, Partner Catherine Wheeler and Senior Associate Ryan White summarise the key points surrounding sale and leaseback opportunities for owners and potential investors in Australian agriculture.
Sale and leaseback
Sale and leaseback arrangements provide the investor with legal title over an asset with a simultaneous lease of the asset back to the owner. Commercial terms can be varied, which provides a degree of flexibility for both parties, but would generally be long-term.
A sale and leaseback is an effective mechanism for owners to realise some of the capital locked up in their landholdings or other business assets, while enabling them to continue to carry on their business operations. It allows the seller to redistribute otherwise illiquid capital into the business and/or use this capital to reduce debt. A sale and leaseback structure allows the investor to leverage an established management system, providing the investor with exposure to agribusiness assets without having to conduct the day-to-day operations of the agribusiness.
Investors are also increasingly looking to invest in non-farmland assets in Australia as part of that investor’s chain of production: a sale and leaseback structure also can be applied to non-farmland agricultural assets such as water rights, logistics and commodity trading.
High-profile transactions include:
- Select Harvests Limited generating $67 million on the sale and leaseback of almond plantations to First State Super, on a minimum lease term of 20 years;
- Private equity group TPG, which owns Inghams Enterprises, Australia’s largest integrated poultry company, generating $650 million on a 20 year lease term with five further 10 year options;
- McWilliam’s Wines Group generating $15.7 million from its Hanwood, Station and Kirkgate vineyards, on a 15 year lease term with an option to renew the tenancy for 5 years with Hong Kong-listed group CK Life Sciences;
- Singaporean-based Olam International concluding a $211 million sale of its Victorian almond orchards on a minimum 18 year lease term with Zurich-based asset management company Adveq Real Assets; and
- Blue Sky Water Fund, investing in the acquisition of Australian water entitlements with a view to either sell or lease-back to generate income for investors.
Advantages to owners
From a seller/lessee perspective, a sale and leaseback arrangement can offer:
- Operational flexibility: Leveraging real estate provides capital funds which can be injected into the business to expand core business operations.
- Restore finances: Funds raised from selling capital can satisfy debt obligations and shrink the cost of borrowing. In addition, new rent payments could potentially be smaller than existing mortgage payments.
- Secure attractive prices and terms: Strong investor demand for limited long term, high quality investments (such as agricultural assets) means owners hold a position of strength during negotiations to secure attractive prices and leaseback terms.
- Reduce risk: Risks and burdens associated with owning, managing and financing farmland such as debt service payments, building depreciation, maintenance, tax liabilities and insurance are reduced.
- Vertical integration: Opportunity to leverage off buyer/lessor distribution chains in some circumstances.
Advantages to investors
From a buyer/lessor perspective, a sale and leaseback arrangement can offer:
- Consistent income stream: Farmland assets and long-term lease agreements with the existing occupants provide stable, long-term financial returns which can be distributed regularly to investors.
- Established management: Investors can utilise established management and operational systems, providing both a quick and easy start up and the benefit of existing know-how.
- Asset appreciation: Investors take the benefit of capital appreciation in farm values without the year to year variation in operational returns.
- Tax concessions: Acquiring building and rural infrastructure potentially provides significant tax advantages through depreciation benefits and other write-offs.
Sale and leasebacks should be examined on a case basis and the requirements of individual transactions will vary, but every owner and investor contemplating a sale and leaseback transaction should carefully consider:
- Due diligence: Owners and investors should conduct legal and physical due diligence to weigh up the financial aspects of ownership and leasing as well as the risk and reward associated with the farming operation. Owners should profile the investor on their long term plans and scale of operations whilst investors should determine whether strong local management and operational systems can be retained.
- Contract terms: Parties to a transaction should ensure they understand key terms and conditions of the contract. The sale price and rental structure over the lease term should fairly and reasonably balance an acceptable return rate to the investor and affordability to the seller/lessee. Investors must ensure they obtain ownership of necessary formal and informal assets such as water entitlements and access arrangements.
- Strategy: Investors should understand any regulatory legal issues surrounding foreign investment and they should have developed a clear public relations entry strategy. Flexible exit strategies at the ownership level should also be developed.
- Tax implications: Owners and investors should be mindful of the stamp duty, GST and income tax implications of the sale and leaseback transaction.