Successful Closing in Atlanta
Hey everyone,
I'm really excited to announce our first multi-tenant industrial acquisition, a 21k sqft property just 1.5 miles from a storage facility we own in a great market in Atlanta.
We collected our first month's rent, and all of it came in on time by the 1st of the month - this is a refreshing "first" for us being in the storage business where 5-10% of tenants pay late.
The hardest part about this deal was finding it; it is incredibly rare to find an industrial property in the Atlanta MSA priced below $150/sqft and we snagged this at a 7.5% cap rate at $115/sqft. Many comps on market traded at $180-200 during the '21/22 bubble and we're happy to have such a discount to that.
The second hardest part of this deal was the debt. I talked to every regional bank I had a relationship with, and every one within 5 miles of this property, and the best debt I could get at 50% LTC was in the mid 7-s range. Most were quoting mid 8-s. We elected to work with a life insurance company who offered 6.95% debt and didn't force us into any exorbitant prepayment terms. I would probably not do this again in the future; not because the debt is bad or anything, but working with them reminded me of working with a New Yorker-friend who insisted we add a 21 page "rider" to a 1 page letter of intent. The seller saw the LOI and decided he wasn't interested anymore. We just do things a bit differently down South!
So here we are: the debt is in place, the lawyers have been paid, we're cash flowing, and we're in control of a great property. We have 4 below market leases expiring in the next 24 months, and we're excited to capitalize on market rent adjustments soon!
Wall Street Journal Self-Storage Feature
I had to sneak this article into this email. It's pretty incredible that of all people the Wall Street Journal interviewed for a cover-page article, they chose a 27 year old with 4 self storage facilities. But that's the benefit of building in public on Twitter :)
Thanks to everyone who read the article or reached out, and especially to Ryan Dezember, the author of the article. If you're reading this Ryan, tell Mike Wagner he owes you 50% of every course he sold after that article launched :)
If you've recently found me through the WSJ article - give me a follow on Twitter!
What are we seeing in the self-storage market?
Back to what you came here for: the self-storage market remains irrational. I'm seeing properties trade for 2-3x replacement cost in towns with 1200 people.
No joke - there is a deal trading for $130/sqft in a town of 1,234 people right now with debt how it is today. No seller financing. My friend has a mountain house there, I've visited their town square (the dollar general parking lot).
Separately, we were recently outbid on a deal by 66% by Midgard Self Storage. We offered $6.4m (and this was a real stretch), they paid over $10m. Over $200/sqft for a property that is literally surrounded by forests and farmland in a poor tertiary market in NC.
I'm sure the acquisition and AUM fees were great on that one though.
I honestly have no idea what's going on in self-storage. Many big investors are betting on just being able to jack rents on current tenants to hit above market rent levels. This can account for some rent growth, but most of these properties need to hit 30% above market rents to hit positive leverage, which seems like quite the gamble. When I plug in the purchase prices, I'm projecting negative 8 to negative 15% IRRs over 5 year holds.
Funds have to spend money, so until those funds are spent, nothing will change. We're going to have to see significant amounts of capital flow out of self-storage over the next few years to provide a buying opportunity. I don't see any signs of this happening.
What about self-storage development? I think it's very, very, very risky today. Assuming land is $12/sqft, you need to hit around $160/mo for a climate controlled 10x10 to hit a 9% yield on cost (with 10% bridge debt, might I add). And that is some cheap land. Costs are around double what they were pre-pandemic, and interest reserves required have ballooned. Market rents are coming down, housing is slowing... I just don't love the risk/reward profile of a development deal today. If you're interested in investing in a development, make sure the developer isn't loading up his unit mix with tiny units to skew his rent/sqft upwards. Make sure their exit cap rates and refinance rates are realistic. Make sure it's in a great market with great rents, not oversupplied, and the rents have been strong the last 24 months. Development can definitely work, but I've seen a few decks that make me want to throw up recently. Make sure you understand every assumption, because those required to build today may make you uncomfortable.
What about your self storage facilities? So far, everything we own is crushing projections today. We didn't buy a single property during the '22 bubble (although we worked very hard), so we don't have anything costing us sleep at night. We have large reserves - about $400k across 100k sqft. We haven't underwritten anything above 85% occupancy. No debt expiring within the next 3 years. Our first lease up deal, acquired in January, has already hit our projected stabilized occupancy levels which we modeled to achieve this time next year. Our second is getting close and way ahead of projections. We're ripping rent increases across the board. Our small (but mighty) portfolio is doing well.
What's the plan moving forward?
As I mentioned earlier in this email, I don't see any signs of self-storage re-rationalizing. So, I'm taking the advice self-storage wunderkind Steven Stein graced me with a few months ago: "Welcome to capitalism. Adapt."
We're taking some notes from Fort Capital and building out an internal & proprietary database for tracking every lease we ever learn about. We're paying for data. We're doing everything we can to get more data so we can underwrite more deals, more accurately.
My goal is to be the most accurate real estate investor in the Charlotte - Greenville - Atlanta I85 corridor in the next decade. That means batting 100% on the swings we take and not taking a strike by failing to swing when the right deal flies right into our strike zone. I don't see any reason we can't do that.
When to expect to learn about our next deal?
We're pushing harder than ever for our next acquisition. Refreshing every offer on deals that haven't sold so far. The holidays get slow, but I believe that we will at least have something under contract by the end of the year.
Want to See Deals and Potentially Invest?
If you'd like to learn about our deals as they come out, let's set up a time to meet over a 15-30 minute video call whenever you're available: https://calendarbridge.com/book/q5LjGOm. Once we've had the chance to connect, you'll be added to the official deal distribution list ("deal list") where you will receive a link to our deal room (full 5y financial projections, offering memorandum, site images, video deal walkthrough, etc..) and all deal rooms going forward. Accredited investors only (am I an accredited investor?).
Thanks for reading. If you have any comments or would like for me to discuss anything in particular, please let me know! I love hearing your feedback.
Ryan Auger
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