I was recently interviewed by Nathan Worden, a friend of mine who runs Commonstock, and we’re going to split it into a two-part episode. You can read a summarized transcript below, or listen to the podcast for full details.
What are the unit economics of self-storage look like?
They’re trading at anywhere from a sub-three and a half cap rate up to a six cap. We’re operating at a 35% expense ratio portfolio-wide in small markets. So for every dollar of revenue that we bring, again, we spend about $0.35. That includes management, property taxes is a big one, insurance, maintenance of the property, and so on.
And what kind of occupancy rates are needed to break even?
We generally operate about 80% to 85% economic occupancy and achieve those 35% expense ratios. So my math would be about 45% occupancy or break even.
After two years of just a fantastic operating environment, I’m sure there’s been a rush of additional capital. How has that impacted your ability to source deals?
The most challenging thing about what we do is source deals. You hear me talk on my podcast and Twitter about how easy and fun self-storage is, but sourcing deals isn’t. We have three full-time employees working solely on acquisitions. We invest hundreds of thousands of dollars a quarter into our pipeline. It’s the most challenging part because for every deal we win, there are four or five groups just like us that do exactly what we do that might be willing to pay a little more. So it’s tough.
And inflation is the topic that everybody talks about. If interest rates rise due to inflation, I presume it’s tough on your cost of capital. How do you think through that dynamic?
If interest rates go up, that means that inflation is running, and we can charge more, and revenue management is the key to the business. However, we’re still worried about interest rates rising, bankers getting cold feet, the cost of capital increasing, and we know we may see a bit of time where everything we own is worth a little less.
How much of your business model, though, is growing as fast as you can right now while rates are where they are given?
It’s hard to set goals in our business, but really, we have to take what the market gives us. We’re not willing to overpay for something or overextend our leverage. That kind of hurts our returns but reduces our risk, and real estate is all about risk-adjusted return. We don’t know where the market will be three years from now, but we’re confident about where it will be in ten years and think that the remote management that we incorporate is going to be the future of the industry.
And as you think about your sort of geographic footprint, are there any markets where you think it’s difficult for you to continue to grow given saturation levels?
We don’t really compete with a lot of new supply because no builder is going to come to develop a self-storage facility in these towns where we’re buying for $50 to $75 per square foot. So our wheelhouse is kind of finding these small towns where revenue and rents have not been managed, which the big players rarely touch.
I was actually wondering about these large publicly traded self-storage companies like Public Storage and Life Storage. One of the main ways that they grow is through acquisitions. So I was curious if you had ever been approached about being acquired, but it sounds like these companies are in such different markets and they are such different sizes.
I think it’s a totally different ballgame. Only one facility of ours has a lot of REIT competition, and we need to pay 25 cents per click on AdWords there as opposed to 3 or 4 cents in our other markets. I would rather compete with the group that doesn’t know what Google AdWords is and uses a Fax machine, big companies generally want nothing to do with our asset class.
I saw online that there are 40,000 storage units operated by mom and pops around the country. Is that accurate?
Yes, Our goal is to buy 100 of them this year, so there’s a lot to go around. We can’t possibly buy them all up, the average retail investor can go buy a $500,000 property and it can change your life if it’s worth $1 million a few years from now.
What are the average mom and pop demographics who owns self-storage facilities?
They own one or two properties, they’re obviously millionaires on paper because they have a self-storage facility worth a few million dollars in these small towns. The average age is probably 65 years old, which really highlights the opportunity.
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