Chapter 51
FINANCIAL MANAGEMENT : Managing operational real estate

A company’s real estate assets can be owned outright and financed using equity capital (i.e. without using them explicitly as backing for a financing), be used as backing for a specific financing (mortgage, sale and leaseback) or be rented using an ordinary lease. Raising financing backed by real estate can handicap a company in the future if it wished to raise ordinary debt as the lenders will know that the real estate is already pledged to third parties. Financing real estate using equity capital means keeping room for manoeuvre in the future (with the possibility selling it and renting it) and providing comfort to shareholders, lenders, suppliers, customers and staff.  A sale and leaseback can be used to move from ownership to lease (operating or finance).

The optimal financing method will depend on the nature of the asset (strategic, ordinary or not long term for the group), on the maturity of the group (more rental for a young group and more ownership for a group that has reached maturity), on the desires and constraints of shareholders (in particular when shareholders are family members), on taxation (capital gains) and on the financial constraints with which the group is confronted.

Groups in the same sector with different methods of holding their property will present different growth and risk profiles, which justify valuation multiples that are also different. Investors will take this aspect into account, either by reasoning in terms of EBITDAR multiple (i.e. before rent), or by valuing the operational activity separately from the real estate activity (Opco-Propco).

The distinction within the company of flows relating to real estate (rent) and flows relating to the operating activity means that the managers of the different sites can be forced to comply with a healthy constraint and thus optimise management. This distinction can be concretised by setting up a real estate subsidiary that is managed separately or a virtual subsidiary using analytical accounting.

All in all, when it comes to real estate, the financial director must first and foremost, be pragmatic.