Multiple Assets, Maximum Exposure: Spartan Storage Fund 1
In the spring of 2022, Spartan Investment Group offered investors a new approach to self-storage investing. For years, we observed many investors placing capital in all of our offerings or spending a lot of time vetting specific investments.
We introduced Spartan Storage Fund 1 to streamline this process. The Fund provided a platform to capture multiple well-vetted opportunities with a singular investment. Doing so allowed investors to spread out risk, achieve better exposure to high-growth markets and benefit from the potential for higher returns.
Seizing the Moment
Spartan Storage Fund 1 opened at a key moment for both our company and the market. Self storage — always an in-demand asset — recorded record-breaking spikes in rent and occupancy during the pandemic.
Spartan was also experiencing significant growth. Since founding in 2015, we had raised $200M in private equity and paid out more than $15M in returns. Between 2018 and 2021, we experienced a 3,539% increase in revenue, earning us a place in Inc. 5000's list of fastest-growing companies for three consecutive years.
Having scaled to over 100 employees, we could manage every aspect of a transaction, from syndication and development to asset management, acquisitions and property management. As a vertically-integrated company, this presented the ideal moment to capitalize on our in-house expertise by introducing our first fund.
When launching a multi-property fund, much is dependent upon assets available in the market. Our team had initially planned to purchase $400M in facilities. However, as new economic realities unfolded, we tempered our approach.
On top of a tighter-than-anticipated acquisitions market, rising inflation was pushing interest rates up, creating a tumultuous landscape for securing financing. Spartan was committed, first and foremost, to acquiring well-located facilities in high-growth areas that could offer value to our investors.
Consequently, we slowed our acquisition rate, honing in on the properties we knew could produce the returns we sought despite headwinds.
We applied our proven formula to identify value-add self-storage assets that were producing cash flow, targeting:
Properties that were 40,000 sq. ft. or greater;
Opportunities to expand;
Underperforming facilities; and
Deals that allowed us to leverage economies of scale within our existing portfolio.
Realizing New Benefits
Financing self-storage can be challenging, especially in a rising interest rate environment. Approaching the process on a deal-by-deal basis adds further complications, making it tough to secure competitive terms.
The flexibility of the Fund put our investors in a much stronger position. Because we could purchase assets in all cash, our team could negotiate to place more advantageous debt on the property at a future date. Meanwhile, the facilities were already putting our investor's money to work. The first asset purchased by the Fund — FreeUp Storage Havelock — was a great example of this.
By having an all-cash purchase of $15.5M ready to execute, we secured a heavily discounted property with below-market rents. This gave our financing team the capacity to find attractive terms at a later date, and investors benefited from a timely rate-to-close, allowing the property to begin generating income.
When we designed Spartan Storage Fund 1, we knew it would have many advantages over deal-by-deal syndications. As we moved forward with transactions, we were able to deliver additional benefits, including:
- Better financing. Banks prefer the fund model, leading to superior terms for our investors. All the financing secured on the portfolio has been at a fixed rate and included an interest-only period and 25-year amortizing debt.
- A more stringent buy box. Anything we purchased through the Fund — which functioned as an income fund — had to fit inside our return requirements for both cash flow and upside. This put pressure on our team to hone in on the most desirable opportunities.
- More Productive Use of Capital. Thanks to the structure of the Fund, we were able to make the most efficient use of capital and eliminate cash drag.
- Steep Discounts. The Fund provided access to significantly discounted acquisitions. When we purchased the Havelock facility, we were able to secure a 40% discount rate.
- More expeditious closings. Since we weren't relying on financing constraints, we were guaranteed to close on each transaction. This accelerated the process, providing more consistent cash flow out of the gate.
- Streamlined investor reporting. Clients received consolidated monthly webinars and updates, rolled-up financials and one K-1.
- Risk mitigation. Over the first year of the Fund, we strategically grew our team, bringing in a regional manager from a real estate investment trust (REIT) and, most recently, a managing director of FreeUp with 15+ years of industry experience. This infusion of high-caliber talent has challenged our operation to be the best it can be.
As we continue to face elevated interest rates, funds allow us to pick up property at a steep discount, benefitting our investors. This is the core reason we will continue to utilize the model moving forward.
Six Properties, Hot Markets
In total, Spartan purchased $64M of assets for the Fund. The six properties are spread across booming markets: Bonita Springs, Florida; Havelock, North Carolina; Chattanooga, Tennessee; and Louisville, Kentucky, where three separate facilities allow us to capitalize on economies of scale.
Despite a difficult financing environment, our team secured favorable funding, with an average interest rate of 5.58% across our portfolio. All six facilities — which comprise over 500,000 sq. ft. of prime real estate — are in markets where the appetite for storage is outpacing supply.
Much of this is down to demographics. The area surrounding our Louisville facility is experiencing eight times the national population growth. Florida is the fastest-growing state, and Lee County, where our Bonita Springs facility is located, is its second-fastest-growing county.
As people migrate to these areas, the increasing population density translates to high facility occupancy rates. This pushes demand and rent through the roof, boosting the bottom line.
The Value-add Approach
As we closed on each asset, our team immediately began transitioning the facility to optimize returns. We rebranded each property under the FreeUp Storage banner, implemented facility automation, added ancillary revenue streams, enhanced staff training and made property improvements.
This allowed us to lease up the properties at an impressive rate. As a result, the Fund is already producing cash flow for investors.
At Spartan, delivering results for our clients is our number one priority. Even against the backdrop of high inflation and a volatile market, Spartan Storage Fund 1 allowed us to realize that promise. As the self-storage industry underwent rapid consolidation, the Fund allowed us to remain competitive and continue to offer the best opportunities — and the highest value — to our investors.
Having successfully closed the Fund at the end of 2022, we're now setting our sights on even more ambitious goals with the launch of three new funds: the Spartan Income, Growth and Debt Funds.