Storage funds keep selling me the word "defensive." Is that worth paying up for?

Basic one from me since I'm starting from nothing. When you say "going in at low 6s," is that the yield you actually receive, or is that the property's income divided by the price before any of the fund's costs? Those feel like very different numbers and I don't think the pitch decks distinguish them.

@ember they're different, and the gap is bigger than people expect. The going-in cap rate is the property's net operating income over the purchase price. Your distribution comes after debt service, after asset management fees, and after whatever they hold back for capex and lease-up. On my own small stuff the spread between "the building's yield" and "what hits my account" runs several points. At fund scale you also have the fund-level expenses on top.

Marlow, the thing I'd want before voting is whether the defensiveness they're selling is the sector's or that particular portfolio's. Storage in a market that just absorbed a hundred thousand new square feet is not defensive in any useful sense.

I've hit the ceiling on doing things myself, so I've been looking at exactly this trade. My honest reaction to the low-6s entry is that it isn't a crazy price for storage, it's a crazy price for storage bought with expensive debt. Ask what the debt costs. If the coupon is above the going-in cap you are paying today so that operations can bail you out later, and you're relying on the operator's rate management to close that gap.

A few definitions, since the thread is using them fast.

Going-in cap rate is the first year's net operating income divided by the purchase price. It describes the property, not your return. Your return also depends on the loan, the fees, and what happens to income over the hold.

"Defensive" in this sector means demand tends to come from life events, moving, downsizing, a death in the family, a business needing overflow space, rather than from discretionary spending. That demand doesn't disappear in a downturn the way some other sectors' does. Storage also has relatively low ongoing capital needs compared with, say, apartments.

What that word doesn't do is tell you anything about supply, which is the sector's main historical way of hurting owners, or about what you paid. A defensive asset bought at a price that assumes rapid income growth is still exposed.

One current mechanic worth understanding: a large share of move-in demand is tied to housing turnover. When people aren't moving houses, that source of new tenants slows. Existing tenants tend to stay, so occupancy holds better than move-in volume suggests, and operators lean on rate increases to existing customers instead.

At capital scale the argument for paying up is that a large operator can run revenue management, centralized call handling, and pricing across many facilities in ways a single owner can't. Whether a given sponsor actually does that is a question for their historical same-store numbers, not their deck.

Keystone's point about the relationship between the debt coupon and the going-in cap is the right first check.

So the fund is basically saying "we'll raise rents on the people already in there." How much room is there in that before people just move their boxes home?

@wren more than you'd think, and less than the pitch assumes. Moving a unit's contents is a real Saturday and a truck. That's why existing-customer rate increases work. But every operator I know has a churn number attached to those increases and the good ones can tell you it by market. Ask for it. If they can't produce it, they aren't running revenue management, they're just sending letters.

I'm trying to learn how private capital actually moves rather than pick a deal, and this thread is a good example of why the word defensive matters at the allocator level. Institutions aren't paying for storage because they expect it to shoot the lights out. They're paying because it behaves when other things don't, and that behavior is worth something inside a big portfolio. If you're one person with one allocation, you don't get that diversification benefit in the same way. You just get the lower yield.

That pushed me toward the second poll option, though I haven't voted yet.

Numbers, since nobody's put any down.

Take a facility at a 6.25 going in. Debt at, call it, whatever your lender actually quotes this month, on maybe 55 to 60 percent of cost. If the coupon lands near or above the cap rate you have negative or negligible leverage on day one, and the equity return in year one is thin regardless of how defensive the tenant base is. Everything then depends on NOI growth.

So the real question isn't the poll's question exactly. It's how much NOI growth is embedded in the model. If the sponsor has 4 to 5 percent same-store revenue growth in years two and three and the sector is presently running flat to negative same-store in a lot of markets, they are underwriting a recovery. That may happen. It's a forecast, and you're paying for it up front.

Marlow, the single page I'd ask for is their trailing same-store revenue and occupancy by facility for the last eight quarters. Not the fund average. By facility. The average hides the two that are dragging.

Sextant's last line is the one I'd steal. I've been trying to work out which strategy fits me and I've noticed every sponsor gives you portfolio averages and nobody volunteers the distribution.

What makes me twitchy about storage at any scale is how fast supply arrives. Flat site, steel building, no complicated utilities, entitlement in a lot of jurisdictions is easier than for housing. That's the whole reason storage overbuilt in the boom. Defensive demand, undefended supply. Zoning treatment varies a lot by municipality, so it's genuinely a market-by-market question.

I voted for the fourth option.

I'll bring the numbers and ask what's wrong with them.

If you accept a 6.25 going in versus a 7.5 somewhere noisier, you're giving up roughly 125 basis points of current yield at the property. Over a five year hold, unlevered, that's a bit over 6 points of cumulative income. For that to be worth it, the storage position has to either avoid a drawdown the other asset suffers, or exit at a lower cap rate.

The exit cap assumption is where I'd argue. Sponsors love to underwrite exit at or near entry on storage because the sector is institutionally favored. Fine in 2021. In a world where capital is available but selective, I want the exit modeled 25 to 50 wider than entry, and I want to see the deal still work.

What's wrong with that framing? Genuinely asking, because it treats a portfolio premium as zero and I suspect it isn't.

Nothing wrong with it except the portfolio premium is real and unpredictable. Aggregating twenty facilities and selling them as one lot has historically fetched a better price than selling them one at a time. That's a big part of why these funds exist. Whether that premium is there when you need to exit is the gamble.

@ledger the portfolio premium is the whole aggregation thesis, so if you zero it you're basically saying the strategy has no reason to exist. I'd rather haircut it than zero it. The industry is still very fragmented at the small end, which is what makes the roll-up possible, and buyers of scale do pay for scale.

Still undecided on the poll. I'm on the capital side and still figuring out where things go, and storage keeps landing in the "fine, never exciting" column for me, which is maybe exactly what defensive means in practice.

Watching this from the debt end of things. What I'd flag for Marlow is less about the equity math. A lot of the storage paper written in the boom went out as bridge loans, and a chunk of it has been extended rather than refinanced. That means there's a pipeline of assets that eventually need to clear at whatever the market is then. It constrains deal flow now, and it's a source of buying opportunity later for funds with dry powder.

So the timing of when a fund deploys matters as much as what it pays. A fund that's fully deployed already bought at last year's prices. Confirm the actual loan terms and extension tests in writing with whoever is lending, because those vary deal to deal.

Marlow, before you weigh defensiveness, read the distribution waterfall and the fee schedule. I've read storage fund documents where the asset management fee was charged on committed capital rather than invested capital, and others where it was on gross asset value, which grows when they lever up. On a low-6s entry, a 1.5 percent fee on gross assets is eating a meaningful slice of the property yield before you see anything.

The difference between those two fee bases can be worth more than the 125 basis points of cap rate everyone is arguing about.

Reading this and mostly lost, but warrant's point landed. So the defensive argument could be entirely true and I could still do badly because of the fee base? That's a slightly depressing thing to learn on a Tuesday.

@vellum yes, and it happens constantly. The sector performing as advertised and your slot of it performing are two separate questions joined by about forty pages of document.

The clause I always look for in these is the one governing what counts as a "capital event" for promote purposes. In storage aggregation funds, refinancings are common and frequent, because that's how the sponsor pulls capital back out after stabilizing a facility. If the promote crystallizes on a refi and the assets later underperform, you can end up having paid a performance fee on value that didn't survive. Some documents have a clawback, some have a clawback that's uncollectible in practice. Read which one you've got, and have a lawyer read it too.

Asking the thing I'd be embarrassed to ask out loud: if storage is so defensive and institutions love it, why is anyone selling? Who's on the other side of these portfolio trades?

@compass mostly people whose loans are coming due, developers who built and stabilized and always intended to sell, and older owners with no succession plan. That last group is a lot of the fragmented small end. It's not a case of everyone knowing something you don't.

On the poll, I went with the third option. I've done enough diligence on this sector to think the operating platform is the actual variable. Two funds buying at the same cap rate in the same market will produce different results based on whether the revenue management is real. Ask for a live walkthrough of their pricing system and see if anyone can actually drive it.

Coming back after reading the whole thread. I changed what I'd vote for. I came in thinking this was a price question and I now think it's a supply question plus an operator question, and the price is downstream of both. Arbor's point about how fast a steel building goes up did it.

The supply point deserves one more line. When I look at a market for anything, I pull the entitlement pipeline before I look at the rent comps, because the pipeline tells you about the next three years and the rent comps tell you about last quarter. Municipal records access varies by state and county, and some places make it easy while others make you show up in person.

A storage sponsor who can't hand you a current pipeline map for each market is telling you something.

I wanted the plain read on this, and here it is: the defensive story is real, it's already in the price, and the difference between a good outcome and a bad one is supply in the specific submarkets and the fee base you agreed to. That doesn't fit neatly into any of Marlow's four options, so I picked the fourth and grumbled about it.