Private equity investors continue to seek entry to the storage industry by partnering with existing operators. Such joint venture deals have been around for more than 20 years, but have risen in popularity over the last three to five years amid a fiercely competitive investment marketplace.
“In the past 60 days, investors have gotten a little more conservative on their underwriting, but there are still as many people as ever – if not more – trying to break into self-storage,” said Michael A. Mele, a senior vice president and director of the National Self Storage Group for Marcus & Millichap in Tampa.
A joint venture can be a win-win for both operators and investors. Private equity firms can forge relationships with experienced operators who can manage day-to-day operations, and who also have the expertise to continue to grow portfolios in an increasingly crowded marketplace. Likewise, taking on a JV partner can give operators a capital infusion that can support strategic acquisitions, development or expansion at existing properties.
The ultimate goal is to put the capital to work and raise returns for both parties, said Christian Sonne, executive vice president of the Self Storage Valuation Group at CBRE.
Institutional investors such as Prudential, Heitman and TIAA have been actively investing in self-storage properties for many years. More recent additions include major private equity players such as TPG, Carlyle and Brookfield.
“The superior returns of self-storage, with low loan loss ratios, have naturally brought new capital to the sector,” said Sonne. Most of those big players are looking for scale – ideally placing $500 million in one fell swoop, he adds.
Middle market activity
However, there also are local and regional investment groups who have tens of millions rather than hundreds of million to invest. For example, Central Pennsylvania-based Investment Real Estate LLC recently announced its agreement to take on a private equity partner to help the company grow its portfolio of self-storage properties in the Mid-Atlantic region. Investment Real Estate, which operates Moove In Self Storage, plans to leverage its JV partnership to buy up to $200 million worth of properties over the next two years.
Generally, private equity is seeking out potential partners and knocking on doors to find experienced operators who have an existing portfolio.
“There are so many people trying to get into the market, that these operators can be a little bit choosy,” said Mele. In addition, that competition among investors has resulted in PE capital that is now more willing to go into smaller metros in order to get deals done.
Making it work
The structure of JV deals can vary. Oftentimes, an equity partner will acquire a 96% interest in a portfolio, with 4% kept by the prior owner who continues to manage the operation, says Sonne.
“That allows the equity partner to put a large amount of equity to work in the sector without having to spend the time to aggregate a portfolio,” Sonne said.
Taking on a partner is something that owner-operators need to approach cautiously. Forming a JV doesn’t mean taking on a completely silent partner. Most PE firms don’t want to get involved in the day-to-day management of self-storage properties, but, those partners will still have a voice in key decisions related to expenditures, capital improvements or when to sell an asset.
Private equity funds and even smaller LLC investment groups often have very strict rules related to reporting.
“So, if you feel like they are going to give you money and go away and let you run with it, that is not going to happen,” said Mele.
Some of the methods or processes operators relied on while running their own shop may not be acceptable with the new JV partner, Mele adds.
The fine print
In addition, the due diligence process in setting up a JV deal can be very intense and operators need to be prepared to be highly scrutinized. If an operator is considering multiple offers, it is important to compare and contrast return expectations, reporting requirements related to accounting, legal and financial, as well as exit strategies, says Sonne.
Choosing an investment group where there is trust and respect is important. Personalities of the people involved also can make a big difference.
“At the end of the day, it is a relationship, albeit a business one,” Sonne said.