How to Evaluate a Self-Storage Deal
Last October my boss, Ryan Gibson, texted me on a Saturday. Frankly, it’s not uncommon for our whole Investor Relations team to be texting each other at any time during the weekend. Even though I am in my 50’s with two teenagers in high school, I feel like a kid in a candy store when it comes to work — and the whole team feels that way. (Nerds!) Anyway — Ryan had caught wind that Melinda & Bill Gates had put a truckload of cash into a self-storage investment. How much is a truckload? I’m not entirely sure. The Gates and a Sovereign Wealth Fund (SWF) invested in the privately held International Storage Company “StorageMart” that was started in 1999. The investment by the Gates and the SWF brought the current market value to a cool $2.7 billion as of October 2020. Suffice it to say, syndicating and investing in self-storage is a thing.
But, either as a passive investor or a syndicator, how do you know if a self-storage asset is worth purchasing? Allow me to throw a few ideas at the wall. Spartan Investment Group is a syndicator of self-storage assets. These are some of the items we keep an eye on and I hope they provide some perspective as you evaluate opportunities that may come across your desk.
Part of our process in deciding to buy an asset is product mix. What’s that? In storage, that is the available unit sizes and whether or not they make sense for a location. Late last year, we bought a 108,000 square-foot facility just outside Bentonville, AR where Walmart’s headquarters are located. Would you believe that of the 108,000 net rentable square feet, 48,000 was climate-controlled RV storage? What was really astounding was that the occupancy of the RV spaces was a whopping 20%! Not an ideal situation for the former owners, but what appears to be a sweet deal for Spartan’s investors.
In rural areas, we have found that typically you will find larger product mixes. Lots of 10 x 10s or 10 x 20s, and generally not a lot of 5 x 5s or 5 x 8s. Urban areas tend to be the opposite. Just make sure the product mix seems to make sense for the market. In your mystery shopping, try to get a feel for the overall product mix of your competitors and the availability of each type. If it’s a value-add opportunity you’re evaluating, be sure to understand the demand six different ways from Sunday, so you nail the execution.
Contribution to Total Revenue
Another piece to the puzzle is the contribution to total revenue for each product type. If you are looking at an asset in a warmer climate that has zero non-climate-controlled units available for rent, what does that tell you?
What if the competitors also have zero available non-climate-controlled units? Build, build, build!
Getting a little more granular, you may find that some of the competitors in any given market have zero units built for a given dimension. That’s a tell, as well. Saturation is one thing, but if there is no presence by your competition for a type of storage, that saturation number is soft and unreliable.
Let’s talk a little about saturation and what it does and does not tell you. In general, it is critical to understand your assumptions, and then stress test your assumptions to make sure they are correct. You may feel like you understand your market but is there a nuance to your market that may have eluded you — hard to imagine? Here’s an example.
Imagine a market where there are two competitors, and one is for sale. Both competitors are at relative maximum occupancy; there is 3% population growth in the county and the completed parts of your due diligence metrics are firing green. When using three-minute, five-minute, and seven-minute drive times for your competitor, you may find that the three-minute drive time is too clouded by the competition to pass due diligence, and you may initially feel you should pass on the opportunity.
However, with both assets on the eastern side of the city and the not-for-sale competitor further to the east, the for-sale asset may control 75% of the market. In this situation, the topography of the location dictated that most of the residences were to the west and south of the city and potential tenants would have to drive past the for-sale asset to access the competition. While saturation gives you a piece to the puzzle, be sure you understand the characteristics of the market you are pulling from and what the capabilities of your competitors are. Most of the time, drive time is the determiner of who gets the tenant.
Expenses as a Percentage of Maximum Economic Occupancy
Let’s take it a step further. When evaluating an asset, where would you like to see the expenses as a percentage of maximum economic occupancy? Spartan likes to see less than 40%. Playing off this number, when evaluating an asset, if an asset has a net operating income of $120,000 and a loan payment of $100,000, your debt service coverage ratio is 1.2. That’s not bad, but the higher this number, the better.
Ted Greene is part of the Investor Relations team at Spartan Investment Group. Spartan syndicates self-storage assets for investment. Ted has 24 years of experience in the financial services industry as an investment advisor and Chief Compliance Officer. Ted can be found on LinkedIn at www.linkedin.com/in/ted-greene-dontbeafraid or email@example.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.