The Core Arrangement
Broad agreement was reached on the value of Capital Self Storage and the transaction was based entirely on the registered valuation, Pelorus accepting the valuations as the determining factor of value.
No adjustments were made to the values other than the passage of time and increase in revenues during the settlement process. A PDS (Product Disclosure Statement was prepared by Pelorus to attract investors to the investment and settlement occurred in October 2006. The key features of the deal are:
- 90% of valuation released to owners
- Owners share in the upside value (with Pelorus and its investors on an ongoing basis)
- Surplus profits at end of year are shared with Pelorus and its investors
- Day to day management is performed by Pelorus Storage Advantage members
- PSA deliver savings due to management which flow to owners
- The facilities still trade as Capital Self Storage with no interruption to trade
Why This Deal Is Better Than A Direct Sale
When offers were made to Capital, a number of factors were ignored. Through experience and good management. Capital's Management had been able to keep costs industry low and this factor was not taken into consideration by potential buyers. When buyers looked at the cost to run the sites they soon realized that they could not manage them for the same or lower cost. This point is not a comment on their costs structures or management style, but an observation that lead to offers being made substantially lower than acceptable. The cash flow implications are below:
Direct Sale: $M Offer PSA
Value 14.9 14.5
Sale Proceeds - Best offer 13.5
Costs inc CGT 3.2 2.9 .4*
Funds released to
pay back debt and invest 11.7 10.6 14.5
Retained 10% Equity 13.0
Continued ownership and substantial share (40%) in upside of surpluses and value.
No sale offer or other method can release as much cash/equity. * CGT Deferred to sale date.
As far as Capital is concerned we considered the alternatives and the Pelorus PIPES structure delivered the best deal for us to suit our circumstances. Given the continued growth of the Self Storage industry, combined with our increasing ages and a need to diversify and for the partners to provide for our retirement, we saw the deal being an effective one for us.
Capital Gains Tax will have to be paid when the sites are actually sell and we have more than made provision for that with our funds received. We will continue to share in the growth of our sites - an opportunity denied by a normal sale. We are protected from any “downside” - an important part of our needs as we get older.
We will share annually in surplus profits and we are very comfortable that the staff at PSA can run our sites to a high standard. They are well experienced and have our interest on board. PSA through their contacts have already made considerable savings in the area of Insurance and further savings are to be made with technology and many other areas. These savings flow to us as owners and Pelorus and its investors share as well.
Importantly, we are proud of our achievements in Self Storage. From our humble beginnings 20 years ago, we can continue to share in our original vision and will enjoy the fruits of our hard work. Overall we already have more money in our pockets than if we had sold out completely. Remember no one wanted to pay the asking price! After an independent operator has achieved success by developing a facility and perhaps progressed to multiple facilities, PSA offer participation in the next growth stage. Combined economies achieved by expanded sites and aggregation is providing a net cash flow well in excess of any sale , even if our properties had been sold at valuation.
Self Storage has a bright future and we will continue to share in the rewards for our 20 years of work to date. We would recommend this form of financing if your interested in maximising the returns from your Self Storage Investment.
Ian Oliver and Frank Timmer
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