Real estate fund Pegasus Group has found a new partner for financing self-storage deals—the more than 500,000 state employees who belong to the Arizona State Retirement System.
Walnut Creek, CA-based Pegasus formed a joint venture with the Arizona system to invest in self-storage facilities across the country. During the fourth quarter of 2013, Pegasus bought the first eight properties through the Arizona partnership for $59.5 million. Pegasus operates 45 facilities under the Central Self Storage brand.
Phil Jones, director of acquisitions at Pegasus, said that only a small portion of the more than $30 billion Arizona retirement fund is invested in real estate and that none of it had been earmarked for the self-storage sector.
“They have several hundred million dollars they are looking to invest in self-storage,” Jones said. “We still have a long way to go to fulfill the fund’s criteria.”
Jones said it could take until sometime in 2015 to spend the Arizona fund’s full investment. Neither Jones nor the Arizona fund would reveal the exact dollar amount.
Just Getting Started
The first round of Arizona-backed transactions consisted of two deals.
One was the purchase of Pearl Self Storage, a 68,646-square-foot facility in Portland, OR, that went for $18 million, or $262 per square foot.
“It was very high-priced, obviously, but it is a real trophy asset. In my opinion, it is probably the best self-storage asset in Oregon,” Jones said.
The Portland facility benefits from being in an up-and-coming downtown neighborhood, where competition is limited and the opportunity to develop new properties is next to impossible, he said.
The other deal was a seven-facility portfolio in Minnesota. Pegasus bought the portfolio for $41.5 million from Hopkins, MN-based Jacobs Management Corp. The 442,239-square-foot portfolio features seven locations in the Twin Cities area. After the deal, Jacobs Management held onto a single facility in Minneapolis.
Jones said Pegasus beat a field of about 10 to 15 bidders, including some REITs, to purchase the Minnesota portfolio.
For future acquisitions with the Arizona system, Pegasus is concentrating on the top 50 metro areas, with an eye toward both portfolio and one-off deals, Jones said.
Investing in Partnerships
Gary Dokes, chief investment officer at the Arizona State Retirement System, said the pension fund decided to invest in self-storage as part of a shift in investment strategy. That strategy involves forging partnerships with asset-specific investment funds.
The Arizona system has allocated 8 percent of its entire fund for real estate investment. Dokes said the retirement fund plans to dole out investments in increments of $100 million or more for various asset classes, including medical, apartments and senior housing.
Dokes said the Arizona system interviewed several firms before settling on Pegasus as its investment partner in the self-storage sector.
“We want to establish long-term relationships. We look at this as a buy-and-hold, and we look at this as cash flow-generating,” Dokes said of the retirement fund’s self-storage investments.
“This is an area where there is growing investor activity,” Dokes added. “The fundamentals appear to be positive in self-storage. That is the rationale.”