I’m of the opinion that investor relations is one of the most important things you can focus your time on in real estate. You have two important customers in this business: those renting your property, and the investors who have the expectation that you grow and protect their money. The way you treat your investors and communicate with them is critical. Below is the word-for-word investor update that I shared with our 290 active investors and over 1400 total people on our mailing list.
To our partners, The last 4 months have been a difficult time to navigate. We made the decision to fix all of our floating rate bridge debt with our primary lender (Keybank) at 5.94% with no fees and no prepayment penalties. We’ve also successfully closed 4 refinances off of our bridge product over the past 60 days and several more are in the works right now. The debt market is still active and bankers are working hard to win business, and luckily we’re in a position of low leverage, high debt yields and in-place cashflow on all of our assets. The self-storage market is in a period of price discovery. Brokers aren’t moving deals and most deals that went under contract within the past 3 months are either re-trading or dropping out of contract. It will take time for sellers to meet the market after coming to terms with the fact they missed the top in early 2022. Finding deals over the past 6 months that pencil has been incredibly challenging. To put it in perspective with numbers: We closed $50.01 million worth of storage in 2021 across 16 deals, 32 properties, and 929,682 square feet. The original basis with capital expenses and closing costs came out to $56.3 million of which we used $34.1 million of debt and $20.9 million of cash ($1.54 million of co-invest from us). This year, if we don’t find any new deals in the next few weeks, we will have closed $34.8 million worth of storage across 12 deals, 17 properties, and 569,941 square feet. The original basis with capital expenses and closing costs came out to $39.6 million of which we used $20.5 million of debt and $18.9 million of cash ($1 million of co-invest from us). This decrease in volume is the reality despite doubling our investment in deal flow (acquisitions and cold outreach) and an eager investor base. The last 4 months have been particularly frustrating as we missed out on deal after deal. Other groups continued to buy despite rising interest rates and we came up empty-handed on 99% of marketed deals. I have Kevin Wickham largely to thank for our conservative and disciplined approach. To put a long story short, this has been incredibly frustrating for me. If you would have told me at the end of 2021 that we would acquire 30% LESS storage in 2022 I’m not sure if I would have believed you. But the landscape made the decision to take a step back easier – as once you’re dealing with other people’s money and have something to lose you take managing risk more seriously. Investors don’t pay us the big bucks to be bulls, buy everything and take unnecessary risk. They pay us the big bucks to make sure we don’t lose their money while generating appropriate risk-adjusted returns. It is a crazy environment and I do not believe that rates will drop materially in the short term. There is an increasing chance that the real estate market sees serious distress. The decisions that we are tasked with making are not easy ones – what deals to buy, when to refinance, when to lock rates, and at what terms, etc. But I take risk management very seriously. I’m sure we will make some mistakes and some poor decisions. I’m sure some of our deals will underwhelm in the near term. But I will continue to do everything in my power to prevent anything from sinking us. – The big Extra Space acquisition that took place a month ago is fresh in our minds and remains a north star for our business. Storage Express, a remotely operated portfolio based out of Indiana with stores in Ohio, Indiana, Illinois, and Kentucky was acquired for $590 million. The portfolio consisted of 107 storage facilities and about 3 million square feet of storage. We knew this would happen, and I have discussed it extensively, but I did not anticipate it happening this quickly. We will see how aggressive Extra Space is in acquiring additional stores on the back of the platform. Overall, we are more tech-forward than Storage Express. Less traveling maintenance reps, a wider footprint, and more aggressive revenue management. Our goal is to continue to grow and fine-tune our operations until a similar opportunity arises in our business! – The portfolio is performing well despite an uptick in delinquency and a slow-down in new rentals. A seasonal slow-down in storage demand in the fall and winter months is normal and this could simply be that. However, some slow-down could also be attributed to the housing market cooling off (fewer moves) and continued inflationary pressure on the consumer. Time will tell here. Our revenue on a same-store basis is still up 25% year-over-year and we’re about to institute another serious rent increase at some of our better-performing stores heading into winter. We have one property in Springfield IL that was very poorly managed by the previous owner and we’ve struggled to get new rental traction. The lull in new acquisitions has been a blessing for our management team as we’ve been able to focus on hiring and improving our systems for customer service, collections, and property improvements. We’re doing exciting things on this front and our ability to operate self-storage facilities continues to get better and better. – The financial performance related to our debt levels and maturities is data we are closely tracking. We have $22.8 million of debt maturing between April 2024 and December 2024. We have $3.15 million of annual NOI supporting this debt (13.8% debt yield). We have term sheets in place to refinance $11.7 million of this debt with 5-year products from local banks and credit unions that we hope to close in the next 45 days. We have placed $19.6 million in new debt on owned properties over the past 6 months (refinances of current properties) at sub 5.75% interest rates fixed for 5 years. We are in a really good spot with all of our short-term debt and feel confident we can place it all over the next 6-9 months despite the rising rate environment. On all of our properties acquired in 2021, we have $4.9 million of NOI supporting $37.9 million of current debt (12.93% debt yield) and an 8.71% yield on total cost. – Where do we go from here? Good deals worth buying are beginning to show up and we think 2023 will be a big year of closing great deals. We have reduced our promote from 50% to 35% in light of the added risk in the market today. We are considering closing deals with all-cash and lowering IRR expectations to 10-12% with conservative underwriting. This is a crazy time, and like I said before, I take managing risk very seriously. We are not willing to do deals that put our investor capital at risk. We continue to focus on operations. Renting units and keeping our properties clean and approachable is our #1 priority. Our team has grown fast and the lull in acquisitions has allowed us to devote more time and energy into improving this area – which we do and always have believed is the most important job we do and the key to our success.
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