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Sale-Leaseback Transaction Safeguards Canadian Domestic Drug Production
May 15, 2023 4 Minute Read
Drug shortages have left pharmacy shelves bare and Canadians scrambling over the past year.
Reliable domestic pharmaceutical production has never been more important and that’s why the recent acquisition of Canada’s largest generic drug manufacturer Apotex Inc. and the concurrent sale-lease back of 2.2 million sq. ft. of its industrial real estate is so noteworthy.
It was a complicated transaction to put together, according to CBRE’s Tim Pacaud, who brokered the deal alongside his Toronto West office colleagues Scott MacKenzie and Jordan Lunan.
Apotex was being acquired by SK Capital, and proceeds from the sale of Apotex’s real estate were to be used to fund the merger. That required a buyer for 12 industrial buildings on over 90 acres across the Greater Toronto Area at a time when interest rates we’re making their steepest climb in history and many investors were shying away from major purchases.
"Lease back transactions are an increasingly popular strategy because they allow companies to monetize their real estate and inject that capital back into the business,” says Pacaud. “But getting this deal done in a shifting market was a big challenge.”
Cross-Border Collaboration
Pacaud and his colleagues were first contacted by CBRE New York’s Justin Aronson, whose client SK Capital was seeking to acquire Apotex. And Pacaud attributes much of the deal’s success to strong cross-border collaboration.
“The combination of local and global connections broadened our reach and gave SK Capital access to a strong, diverse pool of investors interested in taking over the Apotex real estate components,” he says.
With interest rates having reached their highest level in more than a decade, the cost of debt increasing and economic uncertainty continuing to colour investment conversations across the globe, it’s remarkable that the Apotex industrial properties garnered such broad attention from potential buyers.
“The sheer number of competitive offers we received despite the turbulent investment environment speaks to the strength of the Canadian industrial market,” Pacaud says. “Industrial assets may be one of the few commercial property types with the stability and potential returns needed to motivate a large portfolio purchase right now.”
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Deleveraging Risk, Accelerating Opportunity
With the sale of the assets being contingent on the merger of Apotex and SK Capital, many moving parts had to align for the deal to close.
“SK Capital committed to the acquisition of Apotex in the fall,” Pacaud recalls. “But the federal government had to approve of the sale to a foreign entity, while at the same time we had to find a buyer for the real estate who was willing to look past the uncertainties of the approval process and capital markets.”
Thankfully, CBRE was able to attract many quality buyers from its global network who had experience with complicated transactions and the ability to see the future potential in Canadian industrial real estate with a venerable long-term tenant.
U.S.-based REIT W.P. Carey ultimately completed a $640 million CAD sale-leaseback transaction for the 12 buildings.
“It was a combination of the right property type with a strong tenant and market sector, along with investor conviction,” says Pacaud. “And of course, the right team of real estate advisors helped.”
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Sale-Leaseback Benefits
The sale-leaseback transaction allowed SK Capital to optimize the capital structure for the transaction. Meanwhile, a 20-year lease gives Apotex stability regarding their lease term, rental rate, and growth rate, so they can focus on pharmaceutical manufacturing rather than having to run real estate operations.
“Not only did we facilitate a complex deal, we managed to reduce risks for all parties at a time of economic uncertainty and supported a critical industry,” says Pacaud.
He encourages companies to reach out to see how similar opportunities could help them inject capital into their businesses and reach their goals.
“There are opportunities, even in changing markets, to leverage the value of real estate. Sale-leasebacks can be complicated, but the real estate team can help you find buyers and get these transactions across the finish line.”
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