After making Canada’s largest self-storage portfolio sale thus far in 2023, the CEO of NYX Capital Corp. says his company is not completely exiting the sector.
NYX, a Toronto-based private equity real estate investment firm with over $1 billion assets under management, sold its $310-million self-storage portfolio last month. The income-producing properties were sold to Ladera Ranch, Calif.-based SmartStop Self Storage REIT – a $300-million acquisition of eight Ontario properties.
The properties in the Greater Toronto Area (GTA), Hamilton area and Montréal make up over 7,500 rentable units and 758,000 square feet of rentable space, with over 3,000 units under construction.
“We decided to sell our portfolio because, basically, we executed our business plan and it was time to sell," Yashar Fatehi, NYX’s president, CEO and founder, told RENX. "We felt it was the right time in the market potentially, because increasing interest rates will eventually increase the cap rates and increase costs."
“A niche asset class”
Fatehi said NYX remains interested in self-storage because it is a “niche asset class.”
The main commercial real estate asset classes – industrial, commercial, retail and multiresidential – are mature in almost every North American market, he continued, meaning returns and cap rates tend to be tight unless there are efficiencies in a submarket.
The niche asset classes – such as self-storage, student housing and health-care facilities – offer the potential to make high returns for investors.
NYX conducted research and found good returns potential on self-storage properties, which led it to forge strategic partnerships in the sector five years ago.
NYX became the co-developer and asset manager of the portfolio and oversaw 1.4 million square feet of planned and developed self-storage.
It concentrated on class-A facilities in dense residential and retail neighbourhoods with high demand for self-storage.
NYX got the lay of the land and recognized it is a “fragmented” business in Canada, unlike the U.S. which has big players with multi-billion-dollar REITs in self-storage.
“During the past five years, our strategy was to buy and build and convert and increase our portfolio size as fast as we can. And by doing so, we became one of the top-10 self-storage owners in Canada.”
However, Fatehi said the market presented challenges.
The GTA market is especially active, which makes it difficult to find a property to build a new class-A self-storage facility that checks all the boxes for conditions such as demand and population.
There is also the lengthy and costly process of finding the right spot, building and leasing, which is why transactions of this scale are uncommon, Fatehi said.
NYX’s efforts created a self-storage portfolio “that is difficult to come by,” which helped net a good premium from the transaction.
Making the sale
The intent for the self-storage portfolio from the beginning, Fatehi said, was to increase its size and exit under the optimal time and market conditions. NYX began talks with potential buyers last year and deemed SmartStop the most suitable candidate for the operating portfolio.
Debt was not an issue for NYX in this sale. Fatehi said NYX's portfolio was not highly leveraged and most were stabilized with “very healthy cash flows.”
NYX expected interest rates to continue to increase – which means cap rates follow behind with some lag – so it made the decision last year to sell the self-storage properties due to inflationary pressure.
“We just felt it was the right time and the peak of the market,” Fatehi said.
Staying in self-storage
Despite the sale, Fatehi noted NYX is not exiting the business – it is hoping to continue developing new assets.
“We are actively chasing self-storage sites and we have one on contract right now that we will hopefully start building in the next year or two.”
NYX also remains actively involved in residential real estate such as condos and apartments, as well as industrial real estate and self-storage, which together comprise 90 per cent of its assets, Fatehi said.
Rapid interest rate increases make it a good time for cash-rich businesses to buy because some highly-leveraged landowners might need to dispose of properties at lower prices.
Also, building purchases and adding value in the GTA takes at least three to five years, according to Fatehi.
This time period can outlive the ebb and flow of the economy, so Fatehi said a longer-term view is needed for such a strategy.