Creating Value by Consolidating Independently-Owned CRE Assets
February 8, 2019 | James Sprow | Blue Vault
There have been many successful examples in the past of large-scale investments in sectors that began as many independently-owned businesses that were then purchased and professionally managed under a single banner. Historically, professional management, taking advantage of economies of scale, organized and eventually dominated the oil business and the steel industry. In the process Standard Oil and U.S. Steel created two of America’s greatest fortunes (John D. Rockefeller and Andrew Carnegie). The pattern has been repeated in many other sectors of the U.S. economy. As examples in more recent history, Wayne Huizenga made his fortune by buying up independent garbage haulers and creating Waste Management Systems. Then he moved on to buy up video rental stores and create Blockbuster Video. (Selling the company for streaming video made video rental stores obsolete.)
One of the more successful nontraded REIT sponsors is SmartStop Asset Management. SmartStop has prospered in the self-storage industry. Not unlike the examples cited above, the self-storage industry had been typified by many small, single-site operators. By purchasing existing or developing their own self-storage facilities, public companies like Public Storage, ExtraSpace and CubeSmart have used professional management and economies of scale to create valuable portfolios in the sector. Creating value following this basic business strategy has been demonstrated repeatedly. SmartStop has had two very successful full-cycle events in the nontraded REIT industry, most recently with the merger of Strategic Storage Growth Trust, Inc. into Strategic Storage Trust II, Inc. in a cash transaction.
A recent announcement by Saratoga Group appears to bring together the strategy of putting together a portfolio of currently independently owned properties and building value through professional management, along with tax incentives provided by the recently adopted Opportunity Zone legislation.
Saratoga Group’s strategy involves investments in Mobile Home Communities (MHCs) located in Opportunity Zones. Currently, they have 12 communities under management with plans to purchase another 15-20 in 2019. As in the examples cited above, this sector has been historically owned by non-institutional owners.
According to their February 7 press release, Saratoga Group has announced that they will be launching a yield-oriented Opportunity Zone (OZ) Fund in February 2019. “Almost exclusively, OZ funds are oriented towards ground up or major redevelopment projects,” says Sam Hales, CEO of Saratoga Group. “The advantages of an Opportunity Zone investment for shielding a capital gains windfall are tremendous. However, most development projects are accompanied with significant idiosyncratic risk relative to construction costs, timelines, and economic cycles. These risks are difficult to quantify, even for sophisticated real estate investors.”
Sam Hales continued, “Asset prices are universally near record highs and real estate is no exception. Although there has been some CAP rate compression for mobile home communities, over 90% of MHCs are owned by non-institutional owners. This is one sector where true ‘value-add’ opportunities are still available.” MHCs help fill the under-served affordable housing market. Unlike other forms of real estate, these communities typically experience consistent demand during recessionary cycles.
About Saratoga Group
Saratoga Group was established in 2011 with the launch of investment funds focused on the acquisition of single-family homes. Other projects include land subdivisions, in-fill urban residential projects, office buildings and a boutique hotel. Since 2017, Saratoga Group has been almost exclusively focused on the acquisition and improvement of Mobile Home Communities.
For additional information regarding Saratoga Group or its upcoming OZ fund, please contact them at firstname.lastname@example.org or 916 596-9000. These investments are only available to accredited investors per Reg D 506(c).
Sources: www.prnewswire.com, Blue Vault
Best Due Diligence meeting in the industry. No sales pitches, senior level decision makers, meaningful discussions and the Broker Dealer networking sessions were especially useful. Thanks to Blue Vault for raising the bar!