REITs made some big scores on off-market acquisitions in 2013. But such deals may be harder to find in 2014 as more sellers opt for the bidding wars created when they put properties up for sale on the open market.
Institutional buyers have been chasing off-market sales in an environment that remains competitive for high-quality properties.
“Investors are absolutely out knocking on doors and trying to pry loose opportunities that don’t hit the market,” said Aaron Swerdlin, executive managing director of the Self Storage Group at NGKF Capital Markets.
Sizable Off-Market Acquisitions
That work paid off with some sizable off-market sales that closed in 2013.
Most notably, Public Storage Inc.’s purchase of the Stor-All portfolio was an off-market transaction. The Glendale, CA-based REIT bought the 44 Stor-All facilities for $430 million in December.
Salt Lake City-based Extra Space Storage Inc. also landed some off-market buys in 2013, including the $195 million acquisition of the All Aboard Mini Storage portfolio in August. The portfolio encompassed 18 properties in California.
In its third-quarter call with Wall Street analysts, Public Storage acknowledged the REIT had taken advantage of off-market acquisitions.
“In one case, the seller came to us,” said Ron Havner, chairman, president and CEO of Public Storage. “The pricing was right for them, their view of the outlook for the business was right, and so they brought their portfolio to market.”
Off-Market Deals Don’t Ruffle Feathers
Such off-market, or direct, sales have been fueled by different factors in the past couple of years.
“One is that the REITs have been courting these people for a long time,” said Michael Mele, first vice president of investments and senior director in the National Self Storage Group at Marcus & Millichap.
REITs have their people out looking for these deals before they hit the market, and both buyers and sellers are leaning on business relationships. In many cases, these are sellers have been in the business for a long time, Mele said, so they feel comfortable picking up the phone and asking a REIT to make an offer.
Another reason sellers may choose a direct sale is the perception that the sales process distracts from day-to-day operations.
Also, a direct sale doesn’t “ruffle the feathers” of on-site managers. Employees might be wondering whether the new owner will keep them or let them go, according to Swerdlin.
“I think if it is done right, it’s not disruptive at all,” he said, “and you can actually get your on-site people 100 percent committed to the process and they can actually add value.”
Some sellers also might go for a direct sale because it cuts out the middleman, saving on brokers’ fees and perhaps speeding up a deal.
Leaving Money on the Table?
However, brokers are quick to point out the downside of off-market sales. Swerdlin cautions that direct deals can “leave money on the table” by doing away with competitive bidding.
“The more sophisticated the owner, the more they realize that these buyers are groveling all over their store. So, if they are that interested without a process, just think of how interested they would be with a competitive bid process,” Swerdlin said.
Marketing a property to several bidders gives a seller more bargaining power.
“When it is time to make that fly or no-fly decision and you have six issues that all might have some monetary value, if you don’t have another buyer or two waiting in the wings, that buyer has a lot of leverage to negotiate a price reduction,” Swerdlin said.
If the seller attracts interest from more than one buyer, he or she can say reject an unattractive offer and move on to the next buyer. “That has a lot of value,” Swerdlin said.
Relying on Relationships
Some REITs have depended on existing relationships to land off-market deals. For instance, REITs that are third-party managers of facilities have a ready pipeline of potential acquisitions at what easily could be below-market prices, according to Mele.
“What they are really doing is forming a relationship and making it easy for the seller to say, ‘Hey, I might as well sell to these guys,’” Mele said.
So, REITs can pick up properties before they hit the market—and before competitive bidding can drive up prices.
Still, Mele expects fewer off-market deals to happen in 2014.
“I think sellers are going to rely more on creating a marketing strategy to make sure they are getting multiple bids and the highest bids on their properties,” he said.