Rates are going up. The equity markets are volatile. Growth stocks are getting hammered. A lot of uncertainty and fear in the markets. What does it mean for self-storage and real estate as a whole?
I see this playing out one of two ways. But before we dive in, a quick plug…
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Back to the state of the market.
As you know, we’ve raised over $20m of outside capital over the past 12 months to buy 43 self-storage facilities.
I’ve had a lot of Bolt Storage’s active investors reach out to me with questions on the current state of the market. These are folks who have invested capital with me and my team to buy self-storage deals. This email was written with them in mind.
I have no idea where the economy will be in 6, 12, or even 36 months. I don’t know where interest rates will be.
Investors don’t pay me to speculate with their capital. They pay me to protect the downside and operate these assets really well.
So these are just wild guesses and these are the scenarios I’m making sure I can steer our company through:
1: My bull case (65% probability):
Rates go up moderately (+ 100 bps of where they are now) and inflation continues to run. We continue to drive revenue very effectively, our buildings increase in value quickly, we do very well.
The economy slows slightly but growth/inflation continues.
Storage asset values remain constant from a cap rate perspective and NOI industry-wide continues to rise quickly. Real estate investors continue to do really well – supported by inflation and high demand for space of all kinds in the United States.
We continue to acquire storage with moderate leverage and secure loans with 4+ year terms to protect the downside.
Business as usual.
2: My bear case (35% probability):
Rates go significantly higher (200-500 bps higher than now ~5-8% rates for amortizing loans) and it triggers volatility and fear in the commercial real estate markets.
Growth comes to a halt and we enter a recession.
Development slows, heavy value add deals without cash flow come under pressure. Some over-levered operators and developers with expiring loan terms default but not at the level of 2009. The speculators with low cash reserves and the folks who bought 3.5 cap value add multi get burned and need to sell at a loss when they can’t afford the debt service.
We drive revenue to the extent we can but our recent acquisitions miss projections over the next 24 months due to rising debt costs. Self-storage becomes a tough business and only the best operators do well and generate excess cash flow in the near term.
At Bolt Storage, we’re well-positioned for this scenario. We’re securing longer-term loans right now. All of our deals are cash flowing well and we have a portfolio-wide debt yield of 14.8%.
If you aren’t sure what debt yield means – take this free quiz.
Debt becomes a bit tougher to secure (especially on non-cash flowing assets) and cap rates widen for new acquisitions of all types.
Really good deals appear. To buy them we have to bring a lot of equity – 50% or more – which we’re prepared to do (we already bring 45%).
We turn on the burners and invest heavily in our own management infrastructure and acquisitions pipeline. We begin to buy a lot of deals. If you’re accredited and want to get notified, sign up here.
We go full speed and acquire as much storage as possible at great prices.
This scenario would probably be better for the American public over time. Asset prices have been rising fast and the rich just keep getting richer.
But will our government administrators allow this kind of short-term pain for long-term gain? I’m not so sure.
Neither of these scenarios scare me.
My vision over the next 10 years is clear:
Buy $100m per year of self-storage and manage the assets better than anyone in the business.
Equities go up and down in value. Self-storage will go up and down in value – it’s a matter of when, not if. We don’t know what the value of our portfolio will be 6, 12, or even 36 months from now. Frankly – since we don’t plan to sell any of our assets at a particular time – we don’t really care what they are worth at any given time.
We’ll be buying in all environments and dollar-cost-averaging into what will become one of the largest and most efficiently managed privately-held self-storage portfolios in the country.
If we do that, with reasonable leverage and in-place cash flow, we’ll get to the same place 10 years from now in either of the two scenarios above.
Our 10-year bull case on self-storage remains, and will remain, strong. So we’ll keep buying and take whatever the market gives us.
That’s all for now – talk soon.
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