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Self-Storage Valuation in Today’s Mystifying Market
Presented by:Mike Mele, Vice Chairman,Self-Storage Advisory Group, Cushman & Wakefield
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July 13-16, 2021The Mirage, Las Vegas
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AgendaI. Self-storage investment highlightsII. Buyers and sellers in today’s marketIII. Leading U.S. marketsIV. ValuationV. Recent transactionsVI. Conclusion
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Section I:Self-Storage
Investment Highlights
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Why Self-Storage?Strong Industry Dynamics The self-storage industry performed well despite the economic
headwinds faced by the COVID-19 pandemic (counter-cyclical). Demographic tailwinds supporting continued growth in the
self-storage sector:o Strong housing marketo Flexible work conditionso Migration patternso Aging Baby Boomer generation (downsizing)o Strong and continued storage demand from Millennials
Buyers chasing sustainable yield; 6% to 8% stabilized pro forma Plenty of operating leverage, as many stores across the country
can streamline their systems/processes
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Self-StorageAsset Types
Core-plusCore
Value-addLease-up/
Certificate of OccupancyDevelopment
What Are Buyers Looking for?
Buyers are chasing yield in secure assets, and many are finding it with the success of the storage sector.
We are seeing buyer interest across the self-storage asset spectrum from ultra-premium core-plus facilities to ground-up developments.
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Stabilized Defined as a facility whose physical occupancy is 92% and economic occupancy is 85% Trading at compressed going-in capitalization rates around 5.5% Target levered IRR around 10%
Lease-up/Value-add
Completed facilities with less than 92% physical and 85%economic occupancy Operators increase occupancy by optimizing their operating efforts
(i.e., increased ad spend, new onsite management, etc.). These types of deals commonly require bridge financing. Target levered IRR around 15%
Development Use construction budget and land value to derive present value Use the site plan to develop revenue forecast and comparables
to develop operating expense forecast. Facility should be stable by Year 4. Typically require construction loans Target IRR around 20%
Deal Types
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Section II: Buyers and Sellersin Today’s Market
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Seller BreakdownBuyers have been paying premiums to acquire self-storage
assets due to their stable growth and consistent cash-flowing abilities. Private operators, large and small, are disposing assets
at premium sale prices.
Seller Groups DescriptionLocal owners/operators
Many local owners/operators are selling to large-scale investment firms at compressed capitalization rates.
Developers Many developers look to exit at Certificate of Occupancy or during/after lease-up.
Investment funds/companies
Common to see these sellers trade properties to distribute capital to their equity holders (often within specified, contractual timeframes).
Large private operators
The largest players in self-storage and commercial real estate are consolidating the self-storage industry through large-scale private storage acquisitions.
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Buyer Breakdown
We are seeing the buyer pool widen with interest from atypical storage investors.
The industry is experiencing large capital inflows from leaders in the commercial real estate investment industry because of the attractive,risk-adjusted returns thespace offers.
Buyer GroupsREITs
Investment funds/companies
Family offices/trustsPrivate storage operators
Private individuals
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Section III: Leading U.S. Markets
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Leading Primary Markets
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Attractive Secondary Markets
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Section IV: Valuation
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REVENUE Adj. T - 1Scheduled Base Rental 1,178,100 Physical Occupancy 80%Economic Occupancy 75%
Ef fect ive Gross Rental Income 884,886 Merchandise Income - Cost of Goods Sold - Ancillary Income (e.g. Admin, Late Fees) - Tenant Insurance Income - Truck Rental Income 34,943 Other Income -
EFFECTIVE GROSS INCOME 919,829
OPERATING EXPENSESTaxes 86,418 (Costs for) On-site Management 90,000 Off Site Management 45,991 Insurance 29,467 Advert ising 18,417 Repairs and Maintenance 25,784 Reserve for Capital Improvements 11,050 Ut ilit ies 82,833 Administ rat ion 22,100 Bank Charges 12,073 Telephone 2,947 Professional Fees 3,500 Other - Non-Operat ing Expense -
OPERATING EXPENSES 430,580 Operat ing Expense Rat io 47%
NET OPERATING INCOME 489,249
ADJ. T-1ect ive Gros EGI 919,829al Operat in (EXP) 430,580
NOI 489,249
$/ NRSF PRICE CAP122 9,000,000 5.44%
120 8,850,000 5.53%
118 8,700,000 5.62%
116 8,550,000 5.72%
114 8,400,000 5.82%
112 8,250,000 5.93%
110 8,100,000 6.04%
108 7,950,000 6.15%
MA
RK
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AN
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Self-Storage ValuationConsiders the market value of the subject property by analyzing the facility’s historical net operating income
and its future earning potential.The purchase (sales) price is the net operating income
divided by the direct capitalization rate.In industry, we derive the present value by forecasting
future cash flow based on a stabilized scenario.Important metrics to analyze are levered IRR, equity
multiple, and cash-on-cash return.
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NET OPERATING INCOME 489,249 556,147 631,697 670,316 692,282 714,987 Pro Forma Cap Rate 5.62% 6.39% 7.26% 7.70% 7.96% 8.22%
DEBT SERVICE YR 1 YR 2 YR 3 YR 4 YR 5
Beginning Balance 6,090,000 6,090,000 5,940,089 5,784,458 5,622,890 5,455,158
Interest 225,816 225,816 220,097 214,159 207,995 201,596
Debt Service (375,727) (375,727) (375,727) (375,727) (375,727) (375,727)
Ending Balance 5,940,089 5,940,089 5,784,458 5,622,890 5,455,158 5,281,027 NET INCOME AFTER DEBT 113,522 180,420 255,970 294,589 316,555 339,260
DSCR 1.30 1.48 1.68 1.78 1.84 1.90Debt Yield 8% 9% 11% 12% 13% 14%
DISPOSITION ANALYSIS YR 1 YR 2 YR 3 YR 4 YR 5Disposit ion Cap Rat e 5.63% 6.00% 6.10% 6.20% 6.30% 6.40%Sales Price 8,697,761 9,269,124 10,355,689 10,811,549 10,988,604 11,171,677
Levered IRR - 20.3% 33.5% 29.6% 25.8% 23.6%Unlevered IRR - 8.7% 13.5% 12.7% 11.7% 11.1%Cash-on-Cash Return - 6.9% 9.8% 11.3% 12.1% 13.0%
Note: In practice, we perform a 10-year cash-flow forecast. To comply with lender requirements, deals should have a debt
service coverage ratio greater than 1.20x-1.25x. Levered IRR and cash-on-cash return are important pricing
and return metrics.
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Section V:Recent Transactions
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Lease-up portfolio (2) Management synergies
East Coast of Florida Recent property improvements
$123 per square foot 1,300-plus units
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Stabilized facility One competitor within 1 mileLocated in the Tampa /
St. Petersburg / Clearwater MSA 811 Units
Densely populated area Expansion potential and upside
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Lease-up facility Excellent upsideLocated in the Phoenix MSA Positive net migration
Limited competition Strong operating results
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Stabilized facility 3-mile median income more than $81,000
Located in the San Joaquin Valley Opportunity to push ratesExcellent frontage and visibility Expansion opportunity
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Section VI: Conclusion
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ConclusionSelf-storage market has been extremely active. Some drivers of activity are: Industry consolidation Strong demographic and demand drivers Low-interest-rate environment Demand for all types of self-storage assets in various
markets throughout the U.S. Widening buyer pool with growing appetite for assets Bullish performance outlook for 2021
(limited industry headwinds)
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Mike MeleVice Chairman, Self-Storage Advisory GroupCushman & Wakefield813.462.4220mike.mele@cushwake.comwww.cushmanwakefield.com
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