With a flood of private equity producing a “tough acquisition environment,” Chairman and CEO Arlen Nordhagen says self-storage REIT National Storage Affiliates Trust is bypassing deals that it considers too pricey.
The influx of private investments into the self-storage sector has spurred historically low cap rates, Nordhagen explained on the REIT’s Oct. 31 earnings call. The average second-quarter cap rate for Class A facilities in the top 50 metro markets was 5.23 percent, according to commercial real estate services company Cushman & Wakefield.
“As a result [of low cap rates], we’ve lost out on a handful of deals which have gone at prices that leave us scratching our heads a bit,” Nordhagen told Wall Street analysts.
Despite the lingering challenges posed by private-equity buyers, the Greenwood Village, CO-based REIT still aims to expand its asset base by about 10 percent per year, Nordhagen said. That equates to an annual average of $500 million in acquisition volume over the next five to 10 years.
“Now, it’s not going to be every single year that we can hit that,” he added, “but I do believe over the long term we can do that.”
During the third quarter, National Storage Affiliates spent $35.8 million on wholly owned acquisitions, lifting its nine-month deal total to $416 million, Nordhagen said. The REIT expects to end the year with $475 million to $500 million in wholly owned and joint-venture acquisitions.
“We enjoyed robust acquisition volume in the first half of 2019. We knew that our acquisition activity would be front-end-loaded. So our pace in the back half of the year is in line with our expectations,” he said.
The REIT continues to underwrite deals, albeit cautiously, Nordhagen said. Going forward, he said, National Storage Affiliates executives remain confident of “solid” acquisition volume thanks to:
- The growth of its network of regional operators. In one fell swoop, a new regional operator can bring aboard $100 million to $1 billion worth of assets, Nordhagen said.
- A five- to six-year captive acquisition pipeline of over 100 facilities valued at more than $1 billion.
- The $1.5 billion-plus opportunity to buy out its current joint-venture partners, as well as the chance to enter new joint ventures.
- The potential to purchase facilities from independent sellers outside its network of regional operators.
Nordhagen noted that about 35,000 independent mom-and-pop operators in the U.S. own one to three self-storage properties apiece — all of which could be acquisition fodder.
“We don’t want to buy all of those properties,” he said, “but we certainly would like to buy a lot of them … that are good institutional-quality assets in markets where we have a good [regional operator] presence.”
On the acquisition front, National Storage Affiliates has stayed away from certificate-of-occupancy and non-stabilized properties, Nordhagen said.
“We try to focus on buying stabilized properties,” he said, “because our experience is that in the high-supply markets, the risk level of the non-stabilized assets is substantially greater, and in my experience has not been worth the price. The risk is just too great.”
Other highlights of National Storage Affiliates’ third quarter:
- Same-store revenue increased 3.7 percent versus the year-ago period.
- Same-store NOI rose 4.2 percent compared with the same period a year earlier.
- Same-store property operating expenses climbed 2.7 percent versus the same time in 2019.
- Average same-store occupancy was 90.2 percent, up from 89.9 percent in the third quarter of 2018.
- Markets that enjoyed strong growth in same-store revenue included Atlanta, GA; Las Vegas, NV; and Riverside-San Bernardino, CA.
- Markets that lagged in same-store revenue included Dallas, TX; Portland, OR; and Tulsa, OK.
About 40 percent of its portfolio is being affected by new supply, mostly in the top 50 metro markets.