Being Bought by a Self-Storage REIT: Where to Begin and What to Expect
|Copyright 2014 by Virgo Publishing.|
|Posted on: 11/25/2012|
If you're a self-storage owner, what's your exit strategy? Some of you will pass down the business to a family member or other protégé, but others will sell when the time is right. And as a seller, you want what's best for your family, your wallet and the community you serve. Could a real estate investment trust be the answer?
The industry REITs are endlessly growing, and your property could be their next great acquisition. Inside Self-Storage recently asked REIT executives to provide guidance on the topic. If you're interested in selling to a REIT, below are insights to what they look for in a buy and what you, as the facility owner, can expect in regard to timeline, price and your staff. Our contributors are:
How many acquisitions is your company expecting to make in 2013?
Doll: We are looking for quality assets that can add to our operational footprint, but do not have a limitation on the “number of acquisitions.” We have the staff and the resources to evaluate, review and complete transactions on a large volume of assets that come to market.
Halverson: During 2012, Extra Space Storage has or will acquire 87 assets for $676.5 million. The company has not yet provided 2013 guidance on its expected acquisitions.
Marr: We haven’t provided specific guidance for 2013 acquisition volume. Each of the past two years, we have targeted over $100 million in acquisitions, excluding large portfolio transactions.
Piegza: We’re certainly in the market to buy. We’ve had a history of making opportunistic acquisitions when they're available, but we’re willing to sit on the sidelines if the cap rates don’t line up properly. For example, we didn’t buy one property in 2009, but in 2011 we bought over $400 million.
What do you look for in a quality acquisition?
Doll: We look for three things: quality of the market, quality of the real estate and quality of the physical asset. We have the ability to “fix” a broken capital structure, a physical impediment, a challenged operating platform or an ineffective market program. What we cannot fix is bad real estate in a failing or declining market.
Halverson: Extra Space looks for properties that fit in its existing footprint in major metropolitan areas. Quality and location of the asset are also key factors.
Marr: We look for institutional-quality assets in high-quality markets. When evaluating an acquisition target, we conduct a very detailed analysis of the asset’s location, access and visibility, surrounding demography, macroeconomic conditions, and supply and competitive dynamics. Location in a core market is paramount, as CubeSmart is focused on deepening its presence in those markets characterized by attractive long-term growth prospects and significant barriers to entry. There is no magic formula, though. Every opportunity is unique, and we welcome the opportunity to discuss and evaluate any opportunities that may arise.
Piegza: Location, quality of construction, market area, and how well the property fits with our overall portfolio and operating strategy.
If an owner wishes to sell to your company, how should he initiate the process, and what can he do to prepare?
Doll: It’s easy ... Give us a call. Between Google Earth, our understanding of markets and the resources of our system, we can quickly evaluate our interest in the property.
As for what to prepare, the more information the seller has available, the less “guessing” a buyer has to price into his offer. At a minimum, you should be prepared to share your trailing 12 months of operational results, a unit-mix report (by size, number of square feet, in-place rents) and any information on debt that may not be extinguished at closing.
Halverson: The owner simply needs to reach out to Jim Stevens, senior vice president of real estate, or his team. They can be reached directly or by calling 801.365.4600.
Marr: He or she could start with a simple phone call to Jonathan Perry, senior vice president of investments, or anyone else on the CubeSmart investment team. Owners find that we are open, honest, and fair to deal with, so making that first call, while a huge step, is an easy one. We can quickly evaluate the location and quality of a facility, and usually provide an indication of interest during the first phone call. If we transition to underwriting the asset, we will request a set of specific due-diligence items from the owner; but these requirements are very straightforward and generally include financials and a variety of operational reports that should already be at the owner’s fingertips.
On average, what’s the time frame on a facility acquisition?
Doll: Generally, we can complete a transaction in 30 to 45 days, assuming there are no debt-assumption requirements. Title survey and environmental reviews are generally the drivers of time, so if a seller wants a shorter time frame, get this work done in advance.
Halverson: The typical acquisition cycle is somewhat dependant on the complexity of the transaction and the required due diligence. On average, the process takes between 60 and 120 days.
Marr: We pride ourselves on and have developed a reputation for moving quickly. We have the capital available to transact without financing contingencies and a streamlined due-diligence process that results in a condensed yet thorough period from contract to close.
What’s your policy on existing facility staff when you acquire?
Doll: We are always looking for qualified personnel to run our properties. Where owners are willing to allow us the chance to interview their personnel, it is a great opportunity to acquire local knowledge. From the employees' perspective, coming on board with Public Storage provides the financial security of a larger company, with opportunities outside the specific site.
Halverson: Employees are evaluated on a person-by-person basis. They are interviewed and evaluated on the same criteria as every Extra Space employee.
Marr: We generally make a concerted effort to successfully integrate the existing facility staff into our platform and are generally successful in doing so. However, we take pride in having talented, friendly, and service-oriented employees. Therefore, recognizing that our strong culture and customer-service reputation starts with our employees, we will make a change when there is not a fit.
Piegza: We like to keep the existing staff whenever possible. Of course, the decision works both ways. Each associate needs to decide if Uncle Bob’s is a good fit for his or her career goals as much as Uncle Bob’s needs to decide if the associate can meet our high level of performance expectations.
How do you decide the amount to offer for a facility?
Doll: There is not a set formula. The market and the location inside the market have a lot to do with the pricing. An “A-quality" asset in a great location in New York is going to be priced differently than a similar asset in Houston. The rents are different, the barriers to entry are different, and so the pricing is going to be different as well. Physical condition, risk and costs to drive occupancy and debt factors, interest rate, time to maturity, and assumptions costs and requirements are additional factors that will be considered if these are issues that the buyer must bear.
Halverson: Each property is evaluated and underwritten based on its trailing 12 months of performance,. And using proprietary data collected from 30-plus years of storage operation, Extra Space will model expenses to operate the property and potential revenue growth.
Marr: We look at a host of variables in determining the value of an asset. Ultimately, we have a yield-based, relative value approach to valuation.
Do you always rebrand the acquired facility, or do you sometimes leverage the existing facility name and reputation?
Doll: We always rebrand. To leave the existing facility name in place suggests you have no brand value and that you have not realized the economies and benefits of scale in the marketing and operations of self-storage facilities. We always rebrand.
Halverson: We develop a transition plan for all new acquisitions with the goal in all transactions to rebrand as an Extra Space Storage location. This is essential for the facility to take advantage of our platforms, training and marketing power.
Marr: We always rebrand acquired facilities. That enables us to most fully leverage the strong brand equity and significant scale advantages that we have established with CubeSmart.
Piegza: We rebrand. We believe our reputation is excellent and each acquisition enables us to expand our footprint. Further, Uncle Bob’s Internet presence alone makes a positive impact on any newly acquired store.
Is there anything else you’d like to share with our audience about the acquisition opportunity?
Doll: The REITs provide an excellent exit strategy for the individual owner. I can’t speak for them all, but as a group, they are professional, they are proven, and most are focused on making sure the transaction is extremely smooth so their reputation as a buyer is known as the “go-to guys.”
Public Storage acquires properties without a financing contingency. The transaction is never dependent on raising equity or securing debt financing, and with the highest credit ratings in the REIT industry, sellers know we can close.
Halverson: Extra Space Storage is an active acquirer and is looking to grow its portfolio. The company has a strong reputation for negotiating transactions that are mutually beneficial and for executing on agreed upon terms.
Marr: Over the course of the last three years, we have been the most active in our sector on the transaction front. During that period, we have established ourselves as a preferred buyer due to the speed at which we can transact and a reputation for closing without re-trading.