JF2331: Self Storage During COVID-19 With Kris Benson
Kris is the Chief Investment Officer for Reliant Investments a subsidiary of Reliant Real Estate Management. Reliant was one of the top 25 commercial self-storage operators in the U.S. in 2019. Kris shares some insight on how the impact of COVID-19 has impacted the self-storage asset class.
Kris Benson Real Estate Background:
- Chief Investment Officer for Reliant Investments a subsidiary of Reliant Real Estate Management
- Reliant was one of the top 25 commercial self-storage operators in the U.S. in 2019
- Reliant has completed over $650 Mil in self-storage acquisitions and disposition in the past 5 years
- Based in Roswell, GA
- Say hi to him at: www.reliantinvestments.com
- Best Ever Book: Calvin and Hobbes box set
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Best Ever Tweet:
“You need to think about how the world is changing around us and where that may impact your strategy moving forward ” – Kris Benson
Theo Hicks: Hello Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Kris Benson. Kris, how are you doing today?
Kristopher Benson: I’m doing great, Theo.
Theo Hicks: Great. Thank you for joining us today. Let’s go over Kris’ background. So he is the Chief Investment Officer for Reliant Investments, which is a subsidiary of Reliant Real Estate Management. Reliant was one of the top 25 commercial self-storage operators in the US in 2019, and has completed over 650 million in self-storage acquisitions and disposition in the past five years. He is based in Roswell, Georgia, and the website is reliantinvestments.com. Alright Kris, do you mind telling us some more about your background and what you’re focused on today?
Kristopher Benson: Sure, be happy to. So, Theo my background depends on how far listeners want to hear. But from a professional standpoint, my background really is in sales. I came out of college and did a number of corporate sales jobs, medical device. Most recently my last real job was with Intuitive Surgical, which manufactures the Da Vinci robot. A lot of people know what that is. Incredible company, incredible technology.
I got into real estate about 10 years ago, probably not too dissimilarly than many of us have. I know Joe kind of did the same thing. We bought some duplexes in the town that he lived in, in the county surrounding us. And very quickly realized that that was going to be challenging to scale.
So one, it wasn’t necessarily the management of it, it was more of the people part of it. I really hated it and despised the soul-sucking nature of managing people. So we had just over 20 units at the time, and we ended up making a decision to sell them. And I looked for what was next, and for us we ended up developing a 64-unit apartment complex, just kind of a random call, Theo, that I made to a guy that I hadn’t talked to in 15 years, who owned a construction company, and said, “Hey, I got a little bit of money. I want to get into multi-family. What do you got? Let’s build some apartments.” And that led to a much broader discussion. And we were very fortunate to build out a 64-unit apartment complex in Central New York, not too far from where I grew up. And that was sort of when the light bulbs went off for me, Theo, in regards to understanding the scale of commercial real estate and the potential opportunities that existed there.
So I invested in a number of multi-family projects along the way, and then about four years ago I started looking at self-storage as an alternative investment strategy for us. As cap rates compressed in multi-family, I thought that there was probably another cycle to be had in another asset class… And I started as an investor in Reliant. Then about three years ago, we had a relationship with Todd Allen, who’s the managing partner here at Reliant, and we structured a partnership as they needed some help structuring their equity raising platform.
So as the Chief Investment Officer at Reliant, essentially, I’m managing the equity portion of our business, and then also sit on the investment committee and work with our acquisitions team to find properties and add those to our portfolio. So that’s how I got here today. I’m talking to you from our office in Roswell, Georgia, which is just north of Atlanta, about 20 miles.
Theo Hicks: Awesome. Thanks for sharing that. I definitely want to ask some questions about your role as the chief investment officer… But I do have some questions about self-storage, especially now with… We’re recording this at the end of September, so COVID is still around… I’m just curious, from your experience, from your knowledge of self-storage, is this an asset class that you expect to remain the same? Is it going to go down? Or is it going to be an even more attractive asset class in the next six to 12 months, and then the years ahead?
Kristopher Benson: So I’ll take that in a couple of pieces, Theo. Let’s talk about how the asset class has been impacted from COVID to date. And like you said, we’re recording this at the end of September; hopefully, by the time listeners are listening to this, COVID is headed in a different direction… But as an asset class, we’ve been very fortunate in how we’ve been affected. So I would say the first three months of COVID, the uncertainty in March, April, maybe the beginning of May, nobody was doing anything, right? So if you think about what was happening at the consumer level, people weren’t out, they weren’t essentially renting units; in the self-storage facilities, we saw a drastic decrease in just overall leasing activity. Everyone was just kind of holding tight. And then I think, early May, what’s been interesting is the demand metrics for self-storage didn’t necessarily change. So people still needed it. And what I think we saw is a little bit of pent up demand as we came into the early summer, and July through September have been really strong months. Not only in our own portfolio, Theo; we have 50 properties across eight states, so we’re relatively small in the scale of things. But when you look at the REITs data, the national REITs, they saw very similar trends.
And I think when you look at storage, there are really — we call them the four D’s of demand, D as in demands. So divorce, dislocation, downsizing, and death. Typically, if those things are happening in your life, they’re creating a need for self-storage. And fortunately, I guess for the asset class, pandemics typically create more of that. And then I think you have something else going on, Theo, which no one understands the impact of yet… But the transition where people are going to a remote work environment; we don’t have enough data yet to make this statement, but it seems as if maybe we’re creating some additional demand for people as they say, “Hey, look, I’m going to be working out of my home for the next two to three years. I’m going to clear some stuff and make a home office.” So we don’t know what that trend is long-term, but in the short term, it looks as if that may be a demand driver for the asset class.
And then the second part of your question of what’s the kind of short term to long term outlook… Short term, I think our biggest risk in the market has been new supply. There’s been a lot of new development in self-storage in the last five years. COVID has not really been the impact. I would say if we’re struggling in specific markets or if there are properties that are struggling, it’s typically new supply coming to market. And then I think long term, from an asset class standpoint, we’ve seen cap rates compressing now, but as more capital comes into the market — right now, at the end of September, Theo, the Fed has created an extraordinary amount of liquidity in the marketplace, so there’s a lot of capital chasing deals. And for many of your listeners who are multi-family guys, and Ashcroft and Joe Fairless obviously have a significant portfolio there, there’s a lot of money chasing those deals and pushing down cap rates. And my personal belief is that’s going to continue to happen.
I think for stabilized assets and self-storage, cap rates are going to continue to compress, because it’s performed so well through, now two downturns, right? 2007, 2008, 2009 storage did really well, and it looks like through COVID it’s also going to be relatively recession-resilient.
So I personally think cap rates will continue to compress, there’ll be more capital chasing deals. It’s good if you’re selling. If you’re trying to acquire and buy, it makes it a bit more challenging, but time will tell on that one, Theo.
Theo Hicks: And that’s what I was going to ask you next… Are you guys actively still buying deals? And you kind of already mentioned this, but is it harder and harder to find deals? Or is the hard part not necessarily finding them, but getting them at the right price, and not necessarily having a lot of certainty in the underwriting?
Kristopher Benson: Well, to your first question, are we still buying deals – yes, we’re raising equity right now for a fund. We just closed on the second property two weeks ago. I would say that the gap between sellers’ expectations and buyers’ expectations is growing. So sellers believe they can sell these properties for much more than what we would be willing to underwrite to. Our strategy, Theo, has been built around secondary and tertiary markets. What’s interesting about self-storage is we don’t look at NSA level data, total market level, it’s really what is happening in the one, three, and five-mile radius around that particular facility. It’s a very micro-market game, so we’re focusing on those secondary and tertiary markets and trying to find specific assets that fit our underwriting criteria… But certainly in the last – let’s call it 12 months, it’s become more challenging to acquire properties at prices that we can safely underwrite.
Your question around uncertainty around underwriting assumptions… If anybody predicted COVID in their underwriting — because certainly it was challenging to understand how that would affect self-storage or any asset class.
Theo Hicks: Yeah. So you mentioned that you just closed out a fund, so I was wondering if you could talk to us about the differences between raising money to buy deals via a fund, as opposed to raising money for a specific deal.
Kristopher Benson: Are you talk specifically, Theo, about the technical nature of it as far as structure is concerned? Or how investors view it? Or a little bit of both?
Theo Hicks: I would say from the operator’s perspective. So from your perspective, how is your approach different? I guess structurally, what are the structural differences that we need to know about?
Kristopher Benson: Look, there are some advantages and disadvantages to funds. So we closed fund one in March of 2020, and we launched fund two at the beginning of the summer. And I think the reason we looked at a fund, at least the first one we did, was we were late cycle; we believed that there was going to be some correction in the marketplace. And we were right on that. So kudos to us. But the idea of a fund is to create a little bit more protection for an investor. And that’s the advantage, right? So if you think of a mutual fund versus an individual stock, the fund — like fund one has 11 properties and it spread across four states, so you’re an owner in all 11 properties; you have multiple markets, multiple properties, multiple business plans… So if one gets crushed, let’s say a whole bunch of new supply comes to market, or a big employer leaves that town, you have the other properties to essentially buoy your returns.
And the downside to that, Theo, is it flattens returns in a positive direction as well. So if you have one property that absolutely is a screamer and crushing it, the other properties are going to bring the performance of that down. So from an investor standpoint, definitely advantages and disadvantages. And then I think from an investor, you have to think about – you’re trusting the operator much more, especially if you’re early money in.
For example, if you invest in our fund two right now, we only have two properties in the fund. We expect to build it out to a $50 million equity fund, so there may be another eight to 10 properties that we purchase, and you’re really trusting our business plan and our experience to underwrite the right deals to get into that fund. So advantages, disadvantages to both.
I think structurally, what you’re talking about from a syndication standpoint, it’s a lot easier to do a fund, because you have one set of documents, you have one PPM, one administrative piece of information that you’re sending out to investors for potentially multiple deals. One K1 at the end of the year; if you have 10 properties you put in a fund, you’re sending one K1. So administratively, there are definitely some advantages as an operator.
Theo Hicks: So how long is my capital tied up into a fund? I know you mentioned it depends on earlier or late, but let’s say from when the fund starts to when it closes, what’s the typical timeframe? And you can talk about it specifically for you in self-storage.
Kristopher Benson: Theo, as you are alluding to, everybody structures their funds differently. So there’s a number of different ways that you can do it. There are what’s called evergreen funds, that literally go on forever, and they just give you opportunities to take your money out along the way. Ours is projected to be a six-year hold. And that’s one thing that you hit the nail right on the head – ostensibly, your money is illiquid for that hold period. It could be sooner, but it also could be longer. If we came in this year six this year, let’s say it was June of 2020, we would have looked at our investors and said, “Hey, now’s not the time. We have no idea what’s happening to values. We have to wait for the marketplace to stabilize before we try to take this thing out and maximize value.”
So how the structure is set up is we are incentivized — we make money when you make money. So you want to make sure those incentives are aligned. And typically, that also means we’re going to try to either dispose of the property or hang on to it to maximize value for both parties involved.
Theo Hicks: And then is the way that I get paid as an investor the same as it would be for an individual deal? Am I getting monthly or quarterly distributions? And then on the back end, am I participating in any equity upside? Or is it just the ongoing cash flow? Or is it both? Or does it depend?
Kristopher Benson: Let’s start with it depends, Theo… Because, as you know, in the syndication world there are no hard and fast rules, right? So each operator has the ability to structure their particular deal for whatever works for their particular property. And I would say for us, we do a preferred return, and then [unintelligible [00:16:33].23] equity waterfall on anything above that preferred return, up to a specific IRR hurdle. And then the waterfall changes where it’s more advantageous for the operator, right? So if we outperform, we want to take more of the upside and share that with the sponsor. So the answer is it depends, but typically, it’s very similar to what the market [unintelligible [00:16:51].00]
Theo Hicks: Another question about the fund from your perspective… So I kind of understand, since you’re not buying a particular deal — because if you’re doing that particular deal, you get the deal under contract, and then you start collecting money… And so at what point in the process is money getting put into this fund? Do you have a deal bought already? Is the deal under contract already? Is it before you start putting deals under contract? How does that work from your perspective?
Kristopher Benson: It’s a good question. So generally, you’re raising capital… And again, depends, some people will raise capital and they’ll have an acquisition period of two or three years, right? So they’re raising capital the whole time and saying, “Look, we’re going to deploy this in increments when we find deals over the next three years.” For us, our fund is set up where we’re ostensibly raising capital and deploying it right away. Fund one, Theo, for us – we basically raised and bought properties in about 11 months. So we deployed $47 million over 11 months of equity, right? So we’re raising capital, as long as we have properties to close on. We do not want to take equity from investors unless there’s somewhere to deploy it. Otherwise, you’re starting to accrue your preferred return.
So you as an investor don’t want money sitting idle. And we, as an operator, don’t want to take your money if we can’t deploy it, because then we have to pay you money on money that’s sitting idle. So for us, what happens is, if we have more properties than equity, we’re raising capital. If we get to that point where the balance has shifted, and we have more equity than properties, we stop collecting capital and say to investors, “Theo, the next property that we get closed, you’re on the list. We’ll call you, you’ll get your subscription documents done, you’ll fund from there.” And then we move forward. So it’s always kind of a balance, depending on where you are on the acquisition side versus the equity raising side.
Theo Hicks: And then for your fund, at the 11-month mark is when you stopped raising equity?
Kristopher Benson: In fund one we did that, just because it was targeted to be a $50 million fund, so we were right there.
Theo Hicks: Okay, that makes sense. Okay, Kris, what is your best real estate investing advice ever?
Kristopher Benson: Now, or what I thought of previously?
Theo Hicks: Let’s go with now.
Kristopher Benson: Look, I think if you are experienced in real estate, there’s going to be some opportunities that come with this… And I think you need to think about how the world is changing around us and where that may impact strategy moving forward. And I’m just going to use one quick example; and this isn’t to look down on apartments, but everybody would say Class B and C apartments were the way to go, right? That $900 to $1,200 a month apartment, always I would say conventional wisdom was that’s always going to be rented. Well, in this particular cycle, typically, that tenant base was who got hit the hardest from an unemployment standpoint. And I can tell you from my own portfolio, the properties that have gotten affected the most are the ones where the labor force has been affected. So if I had a lot of service industry workers, they were typically the ones not paying rent.
So I think you just need to be really dynamic in your thoughts [unintelligible [00:19:59].21] what I used to believe, and take in the data that’s happening now and come together with a new strategy. And I’d say generally, Theo, you have to do something, you have to get started and jump in. If you’re on the sidelines, doing your analytics – great. But at some point, the best way to learn is to jump in and get involved, and that’s where you’re going to get the most experience.
Theo Hicks: Alright, Kris, are you ready for the Best Ever lightning round?
Kristopher Benson: Sure am.
Theo Hicks: Alright. First, a quick word from our sponsor.
Theo Hicks: Okay, Kris, what is the Best Ever book you’ve recently read?
Kristopher Benson: I’m going to go against the grain here, Theo… I’m reading the Calvin and Hobbes box set from Bill Watterson. So for your older listeners who actually knew what a comic strip is, Calvin and Hobbes are kind of a comic classic. And my dad was always a huge fan and got me the three-book box set. It’s pretty substantial. But I have to tell you, I’m enjoying it thoroughly.
Theo Hicks: I think it’s the first time on the Best Ever book, so there you go.
Kristopher Benson: Against the grain. I’m going against the grain.
Theo Hicks: Yeah. I like it. Alright, Kris, if your business were to collapse today, what would you do next? I guess by business, I mean the self-storage. Like, if for some reason no one wanted self-storage anymore, what would you do next?
Kristopher Benson: I keep a list, Theo. I call it the cool guy list. It’s the worst name ever, I know. But it’s basically everybody I’ve ever talked to that I think to myself, “Wow, that guy or girl is really impressive.” So the first thing I would do is call all of them and try to talk to each of them for a little bit about where they think an opportunity may lie. In my experience, that’s where I’ve had the best opportunities in my life, is kind of cold calls… And just saying like, “Hey, let’s be friends. Let’s figure out if we can do something together.” So that would be where I would start.
I have this vision, Theo, of taking a year and going to work for all the cool people that I like for a month for free. I don’t need to get paid, I just want to go experience it and see if there are opportunities that come with it. I haven’t done it yet, but it’s on the list.
Theo Hicks: That is fascinating. I like that idea. What is the Best Ever deal you’ve done?
Kristopher Benson: Probably that 64-unit apartment complex is going to be the Best Ever deal. That’s a buy and hold for me. I’m 40 years old, so I don’t see a reason we would sell that in the next 10 to 15 years, unless cap rates really get crazy. But that deal, just the basis that we’re going in at, will most likely be probably the best deal I’ve been a part of. And fortunately, I have a great partner who really taught me a lot going through it… Besides the financial, just the experience itself was super powerful.
Theo Hicks: What is the Best Ever way you like to give back?
Kristopher Benson: We do a lot of coaching, and not necessarily in real estate… But if my kids are involved in sports, usually, I’m trying to involve myself the best that I can, where I can bring value. And I think that’s the time that we have, is with the kids. It’s amazing how much you can impact kids’ perspective when you see him a few times a week for practice and games on the weekends.
Theo Hicks: And then lastly, what is the Best Ever place to reach you?
Kristopher Benson: I think you started the show off with it – our website, reliantinvestments.com is a good place. I’m fairly active on LinkedIn. That’s Kris Benson, fairly active there as well. If people are going to either of those places, they can certainly get a hold of me.
Theo Hicks: Perfect, Kris. Well, thank you for joining us today and giving us your Best Ever advice, specifically about self-storage, but I think a lot of the stuff we talked about can be applied to other things as well. We talked about some of your predictions, in a sense, for the future of self-storage and how it was impacted by COVID.
I liked how you talked about the four Ds of demand for self-storage: divorce, dislocation, downsizing, and death. So if those things are increasing, then the demand for self-storage will also increase. And then the thing that I got the most out of at least was the difference between the fund and raising money for individual deals. You gave us the differences from the perspective of an investor investing into a self-storage deal versus a fund, as well as some of the differences from the operators’ perspective, so from your perspective when it comes to raising money using a fund.
And then you gave your Best Ever advice about how to identify potential future opportunities and attempting to basically go over some of your old beliefs to make sure they still hold true, and you gave the class B, class C multi-family as an example. And then your second part of the Best Ever advice was that jumping in, doing it, taking action is one of the best way to get education. So reading, analyzing is good, but jumping in and doing it is even better.
And then I really liked the “if your business were to collapse” answer about the cool guy list. So you continuously keep a list of people that you’re impressed with, so if something were to happen and you didn’t have a job anymore, you would go to each of these individuals, and call them, ask them for advice on any future opportunities they see. And maybe even going to work with them for a month for free, to see firsthand if there are any opportunities. So very interesting. Thanks again for joining us, Kris. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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