Nursery group sells freeholds in £34m sale-and-leaseback deal

The off-market sale-and-leaseback acquisition cost £34 million.

Sale-and-leasebacks work by buying the freeholds of day nurseries and renting them back to the operator.

Partou, the largest Dutch nursery group, acquired Just Childcare earlier this year. Partou itself is part of Kids Foundation.

Set up in 2004, Just Childcare has grown to become one of the largest groups in the UK with 62 nurseries. The freeholds of 23 of these settings now been sold to LXi REIT, a real estate investment trust based in London.

The deal enables the group to keep these operating nurseries on 30-year leases, and is likely to fuel more acquisitions in the UK (see commentary below.)

The nurseries have been acquired from the sale of the freeholds and leased back to Kids Foundation, one of Europe’s leading providers of education and care services for children, with more than 900 educational settings across the UK and northern Europe.

The freehold properties have been sold to LXi REIT in exchange for long leases on the operating nurseries.

LXi REIT said 'the transaction reflects the tenant’s ambition to further grow and invest in its UK business'. 

John White, partner at LXi REIT advisors, said, ‘We are delighted to have made this first, substantial sale-and-leaseback acquisition for the company in the robust nursery school sector. The portfolio provides LXi with highly secure, inflation-linked and diversified 30-year cashflows, supported by sustainable rents and strong residual values.’

Commentary: What are the benefits for nursery groups of sale and lease back?

‘Certain operators will arrange “sale leasebacks” on freeholds. This allows them to unlock and tap capital stashed in their freehold property assets by selling them to a property fund then leasing them back over a fixed duration.’  LaingBuisson - Childcare UK Market report, 2020

Essentially, nursery groups that sell their freeholds can release capital to buy more nurseries.

Arun Kanwar (above right) of Cairneagle Associates told Nursery World that the benefit of sale-and-leaseback for nursery groups is that it releases capital to invest in expansion and it can also dilute ingoing multiple.

‘In terms of financing expansion, nursery groups have four options – existing cash, debt (bank or other), equity investment such as private equity, or taking it out of the property through sale and leaseback, which is experiencing a bit of a resurgence. The Pine Fund is also back [a Jersey-based unit trust that previously invested in sale-and-leasebacks.]

‘It’s a really important mechanism for investors to reduce the upfront payment for businesses, and if the rent yield is good (which it often is), it will also dilute the multiple paid for the business. This might be after buying the business. By releasing capital, you could go and buy another X nurseries, which you could not have done otherwise.’ 

‘A lot of this is about the perceived best use of capital. A lot of large groups prefer leasehold only because money is not tied up in property and you can invest in the business and expansion.

‘The market is extremely hot at the moment, and the opening up of sale leaseback options is likely to further stimulate the marketplace of buyers (for those investors and strategics that prefer leaseholds), which is also good for sellers.’