Today’s newsletter is a look at how I communicate with our partners and investors. I’m including an edited version – mostly formatting to make this more readable — it was sent out as a PDF on company letterhead.
A lot has changed since we did our very first deal in Ithaca. In the early days, I wasn’t writing letters to partners reporting on a large, multi-million dollar portfolio. But now we have over 275 active investors and have raised over $25 million to acquire 52 properties.
This is how I communicate to the people who have entrusted us with their money. I don’t take this lightly and drafted this carefully over several days.
Study this, and if there are any questions or gaps in your knowledge — do some research.
Any feedback (or blindspots I could be missing, especially negative) is greatly appreciated – simply reply to this email.
Let’s get to the letter.
To our partners,
Several months have passed since my last update and a lot has changed.
- 2021 was a growth year as we acquired 32 properties totaling 862,654 square feet at a basis of $56.3 million.
- So far in 2022 we’ve acquired 8 properties totaling 243,546 square feet at a basis of $17.7 million.
Our team has grown to 40 individuals, from acquisitions to closing to management and maintenance. Our systems have vastly improved and our marketing, revenue management, leasing and customer experience has drastically improved. I strongly believe our team is the best in the business at driving revenue and managing costs.
We’ve taken what we’ve learned and started scaling our systems. It’s been exciting. And challenging.
We were hoping for more acquisitions in the early 2022. This hasn’t panned out. But we are investing significant resources in our bottleneck — deal flow. We now have:
- 5 full time acquisitions employees
- 2 data analysts
- 2 underwriters
- We underwrite 20+ deals per week
- We make an offer on ~half of these deals
Two areas have been particularly difficult:
- Finding sellers with reasonable expectations
- Winning off-market deals
We’ve struggled in both areas.
A portion of this failure stems from the current economic environment, and the landscape could worsen in the near future. The volatile economic environment and the debt terms for bridge and permanent financing have become much worse.
Our bridge product floats over WSJP (+30 bps) and we are underwriting 5.50-6.00% rates throughout the term. At ReFi (month 24) we are underwriting fully amortizing debt with rates north of 5.50%.
Our discipline has been a blessing because we don’t have any deals in our ecosystem we’re worried about placing with a debt product after our initial value add. On the other hand, this is why we continue to lose out on deal after deal. Our disciplined approach is the reason our pipeline has been dry.
This, accompanied with what we believe to be poor operating economics being underwritten by our main competitors (low expense ratios, loss leading management fees) has made it difficult to compete on larger acquisitions north of $10 million. There is just too much capital chasing self-storage exposure and our competitors have been seizing the opportunity and getting super aggressive with their assumptions.
But we still have cards to play. Ultimately, our shortage of secured deals also falls on my shoulders. The majority of my energy is spent working to increase our acquisition pipeline.
Our banking relationships are strong and we continue to devote a lot of time and energy to building new relationships in the industry. We spend a great deal of time making sure Bolt Storage has access to the best debt terms on the market.
Our management team is a massive strength and my partner—along with several new hires—keep our properties leasing units at a better than expected pace. Our buildings are clean and inviting to customers. Our customer service is now 24/7, which is only offered by a few operators in our industry.
Portfolio Update
Over the last two weeks the deal flow has picked up as other operators have begun to ease off purchase offers. More sellers are scared of rising rates and a possible market downturn and are deciding to list. We do have a few exciting deals under agreement that we will be sending out in the coming weeks.
The performance of our acquired assets has exceeded expectations across the board. We instituted a 13% rent increase, effective April 1st, across our entire portfolio and had a POSITIVE net rental month in both March and April.
Revenue at our flagship property in Ithaca, NY is up 50% year over year in our 5th full year of operations. We have driven revenue 25-40% on all of our acquisitions within 6 months of purchase.
NOI has grown significantly and most of our assets are worth 50-100% more than what we paid for them less than 12 months later. We are thrilled with this performance. We’re working on a number of refinances right now and will be announcing them as they come — many well beyond our pro forma estimates and all of them with full return of capital.
Key Questions and Honest Answers
1. Is this rent growth sustainable?
No. There is no way rent growth continues at this pace.
2. Will the performance of our industry bail out the aggressors?
Probably. The folks who are coming in with more leverage and more aggressive assumptions will probably skate by.
3. How is Bolt combating these trends?
While business is good, our partners don’t pay us the big bucks to speculate and ride the waves. I spend the majority of my time thinking about the downside and how to protect against it.
4. Speaking of downsides: What if there is a debt crunch when our loan term expires? What if demand slows and we can’t hit our pro forma? What if interest rates continue to rise and we can’t refinance or sell at the value we need? What if we need to absorb 8% rates on an amortizing loan?
We’re working to secure longer-term debt to reduce term risk. We’re making sure our underwriting assumptions are disciplined and we aren’t counting on being able to repeat our average revenue driving results at all of our new acquisitions. Our management company actually makes a profit so we have a sustainable business and can attract top talent if things get tough and we have to stop doing deals for a while. We’ve decreased our going-in leverage to 60% LTV on all new acquisitions. We’re keeping significant capital reserves on hand for each deal and as a company. I don’t think our competitors are doing any of these things and that’s why they are outbidding us on many recent acquisitions.
As rates continue to rise, which we know they will, some of the deals in tertiary markets from more aggressive sponsors (our competitors) will undoubtedly go under pressure – but with very little new development taking place and rent growth stifled I do not envision these reaching the point of a distressed sale.
Bankers are still eager to lend on storage, despite the worsening terms. Storage is still viewed as a solid asset class. We will see if that changes over the coming months. Self storage in major metros (vs rural and tertiary) has still seen the majority of capital flow and new development has picked back up. Customer acquisition costs are rising rapidly and industry earning reports are starting to point to some seasonality in occupancy.
We may face some challenges
There’s a lot of talk of recession. Inflation and interest rates are rising. People are getting nervous and may start tightening their belts. This will certainly have an impact on my portfolio, and I am planning accordingly.
Currently, our industry is still on-fire, with record occupancy and rent growth and thus the earnings from all of the big REITs for the last 4 quarters. These deals in major metros still trade at insane cap rates. I could see a world where some of these deals go under pressure if there is a lending crunch and bankers aren’t eager to take on the debt when the bridge financing terms run out. Interest-only loans at 3% won’t last forever, and I worry about sponsors counting on that cost of debt to make deals with tens of millions on the line.
When we look at rural and tertiary markets, one of our strongest sectors, I see longer term trends that are both exciting and concerning.
The exciting stuff:
Operators we compete with are not doing a very good job running their businesses. None utilize overseas labor, most use a full time manager, marketing and customer acquisition strategies are not data driven or structured, and they aren’t doing as good of a job driving revenue as we are.
Many of our markets are still operating on pricing from 10 years ago and we’re discovering the market rent is much, much higher. We purchased an asset in Ellijay, GA in November with 10×10 units renting at $60 a month. We’re now renting units at $129 per month and increasing monthly. No other operators have done the work to find true market rent and we are being handsomely rewarded for doing that work.
We still don’t have any REITs with low cost of capital who have adopted the remote management model like ours. Whether it takes 5 years or 10 years or we have to pave the way ourselves, this model will eventually extend to our markets because the technology is available and the institutional capital will eventually find the yield.
We are still in the early innings.
Opportunity is still everywhere
There are 30,000+ mom and pop self storage facilities in the United States. Almost all of them are dramatically under-managed from a revenue and leasing standpoint. Our model works and we have an increasing amount of data to prove it. If we stay disciplined and keep our heads down amazing things will happen in the coming years.
We haven’t seen much new supply, if any, in our markets. Self storage developers largely focus on major cities. The development that is coming on-line is operated by smaller players without sophisticated platforms.
Despite the narrative around the younger generations buying less stuff, I don’t see demand for storage decreasing. There are 300 container ships sitting off the coast of Los Angeles right now waiting to unload. In the event of a recession, people will definitely buy less stuff and I expect the retail sectors, especially e-commerce, to take a hit over the next year or two.
But people are living longer and the Amazon van still shows up at every house in my neighborhood several times a week. Steel prices are going up and construction costs are skyrocketing. This bodes well for our portfolio of in-place assets.
We have the lowest WALT (weighted-average length of contract lease) of any real estate asset class so we can drive rents quickly in response to inflation. Most real estate in America right now is encumbered with sub-market leases. This is why vacant property is trading at a higher price than property with a long-term lease.
What makes me nervous:
The buyers of the $50-100m portfolios are working on the same model we are. They plan to buy, raise rents and optimize NOI, and then sell to another player at a 4 cap. Where is this buyer? Public Storage with their 3% debt isn’t playing in this field right now.
The cheap debt hasn’t reached the type of facilities we buy, yet. The publicly traded companies can’t operate them. Even the companies rolling these up right now aren’t doing the best job of it…
So where does that leave everyone at year 5 when it’s time to sell the asset? Time will tell. Our goal is to have cracked this code through superb and scalable management solutions and institutional equity/debt partners who trust our model and want to work with us. I would like to be that buyer someday.
But for now we’re staying disciplined and chasing the deals where we know we can work with local banks for the long haul. We’re pursuing deals that return capital and promise long-term, tax efficient cashflow.
Interest rates and inflation also scare me. I fear a massive pullback in the commercial real estate markets if debt normalizes near a 6% interest rate. Bankers always lead the way and when they get nervous and start dropping deals a domino effect could ensue. Will self-storage be hit the hardest? I don’t see how that is possible with the revenue growth we’ve been seeing. But we’re certainly prepared to navigate a tough stretch in the coming years after an 11 year bull run.
We are built to last
Overall, I’m excited and optimistic about what the future, even with all the uncertainty. I’m proud of the team we have assembled and I’m supremely confident in our ability to manage a great deal more storage. I’m working hard to make good, data-driven decisions while protecting the downside and earning positive risk-adjusted returns.
My partner and I wake up every day very thankful that we have an amazing group of employees around us and partners who have and continue to invest their hard earned capital in us and our mission.
Thank you.
Nick