Leveraged Buy Outs in RE?

Atlantic Cap's picture
Rank: Chimp | 15

Do any Real Estate shops (REPE in particular) use leveraged buyouts? It looks like the big names such as Blackstone and Apollo have done LBO's to buy and takeover a company (Caesar's for example).

Does this strategy work on a single asset?

Is this the same as a value-add strategy and just a nomenclature difference in the RE world?

Comments (16)

Funniest
May 6, 2019

If you mean getting a $3-5billion loan and buy a REIT or 20k unit portfolio, then yes

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May 6, 2019

Does it occur on a smaller scale or only corporate sized transactions?

Is this not the same as a value-add strategy on a distressed asset?

Most Helpful
May 7, 2019

I guess you could say every real estate acquisition that gets a 70%+ LTV loan is a leveraged buyout?

I don't think the term is used very often in real estate, although the concept is the same. In both REPE (even at the single asset level) and Corp LBOs you use a bunch of leverage to buy an asset and use the cash flow from the asset to pay the loan's interest

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May 7, 2019

I can't think of any case in RE where you would acquire an asset with Equity only. Therefore all deals are LBOs.

    • 1
May 7, 2019

What about all those money launderers out there buying Trump condos all cash ;)

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May 8, 2019

I know this a troll question but would that be the money being used to pay the debt. They are the customer and the condo complex owner would be the one using the cash to pay-down interest/debt.

May 9, 2019

Hey, don't snitch man

Cash and cash equivalents: $7,286
Financial instruments and other inventory positions owned: $313,129

May 7, 2019

Small investors buy RE with cash only all the time

May 7, 2019

Every REPE firm is using leverage, on every deal

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May 6, 2019

So a nomenclature difference - got it. Thanks.

May 7, 2019

There are certain firms that do cash only deals, but I would consider pretty much every acquisition that uses debt to be an LBO.

May 8, 2019

In a seller's market (like now) a lot of times firms will use 'all-cash' offers to gain an advantage/compress closing timelines, but even in these cases (unless it's a very large PFA or REIT) the winning bidder/buyer is probably going to put debt on it post close with a standing/revolving LOC. So yeah, most deals are 'LBO', but people make it out to be a lot more complex than it is.

May 9, 2019

I would consider LBO's related to only acquiring companies. The megafunds acquire real estate operating companies all the time and I guess you can consider that an LBO.

May 9, 2019

Yes, real estate investing is all about using leverage as well, but the terminology is different. No one calls a mortgage a leveraged loan, but they naturally are. Think about it, you buy a home with 20-30% equity (pretty standard for residential and commercial), which is equivalent to levering up 3-5x. If down the road you can sell the property for more than you paid for it, you pocket the difference. Could be from valuation appreciation (bull market) or value creation (e.g. renovations).

From a lender's underwriting perspective, real estate loans are more "secure" because there's tangible assets for collateral. With a typical leveraged loan, it's predominantly cash flow, which not only fluctuates, but can get impaired or cease to exist altogether. As a result, actual leveraged loans cost more since their risk profiles are higher. Despite the risks, banks desire leveraged loans because of more interest income, lucrative fees, and ancillary revenue. Leveraged loans maximize borrowings, and banks gain from lending as much as possible...at least in the short-term.

Yet regulators scrutinize leveraged loans a lot more because they not only lack sufficient collateral, but are more sensitive to economic downturns. Many prominent economists and policy makers like Janet Yellen are warning that corporate debt (which includes leveraged loans and high yield bonds) will be the cause of the next financial crisis/recession.

Sorry if I stated a lot of obvious stuff, but I work in LevFin, so I happen to know a thing or two about this topic.

    • 4
May 11, 2019
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