Suppose a company enters into a $25 million sale-leaseback transaction at a 10% cap rate, which means that its annual lease payments are 10% of the transaction price, or $2.5 million.  To see how the transaction impacts the financial position of the company, assume the following valuation and leverage statistics:

Assume the company uses the sale-leaseback proceeds to pay down balance sheet debt. In addition, EBITDA will be reduced by the amount of the lease payments. The table below shows the same valuation and leverage statistics pro forma for the sale-leaseback transaction:

As a result of this $25 million transaction, the company’s equity value has increased by $10 million, using the same valuation metric as before. Liquidity has also increased, because leverage has been reduced by $25 million, taking it from 50% to 44% of total capitalization and from 3.0x to 2.6x EBITDA.

Thus the sale-leaseback transaction has increased the equity value of the company while actually reducing risk.  This happened because the company sold its real estate at a higher multiple of cash flow (10.0x cash flow, based on the 10% cap rate) than its EBITDA valuation multiple of 6.0x.