BIGGEST RISK with Fernando Angelucci

J Darrin Gross

I'd like to ask you Fernando Angelucci, what is the BIGGEST RISK?

Fernando Angelucci  

So I would answer that with actually there being three things that we look at in our business. So the first being compressed cap rates, the second being oversaturation of given markets, and the third being reconnaissance competition are basically competitors, they have unlimited capital. So let's let's dissect each one of those press cap rates, has been an issue in the storage space for the last 10 to 15 years. That's partially because of just the easy money policies that we've been in for last 10 years, and that capital needing a home that has yield, but then also the fact that self storage used to be kind of this ugly asset. And if you weren't getting a 15% cap rate, day one, you know, what were you doing, then all of a sudden fortune and Money Magazine start talking about it as an attractive alternative asset, and that cause this floodgate of institutional capital come in compressing all the cap rates. So because of that, it creates a very competitive acquisition environment. And it also creates an environment in which middlemen can strip a lot of upside, aka brokers, right. So one of the ways that we decided to mitigate that was to shift our business from retail, aka buying on market to off market acquisition strategies, where we're the only one at the table. And then to switch from acquiring stabilized assets to only buying value add or building self storage, where we can force a ton of appreciation. So that was one of the ways that we were able to mitigate the compressed cap rate environment. Now, recently, with interest rates, increasing at such a high velocity, we've had this mismatch between sellers and buyers, or sellers still think their facilities are worth what they were in 2021. And buyers looking ahead and and saying, hey, well, you know, my debt service coverage ratios are not gonna allow me to Buy at your price. So one of the ways that we've gotten around this is by saying, basically getting creative. If you want the price from March 2021, I want you to carry the financing at rates and terms similar to what was available to me in March 2021. So that's one of the ways that we get around the compressed cap rates. A lot of people don't realize that the price is only half of the equation, the financing around. That asset is also a huge component that basically no one ever looks at, I'm willing to buy your property at twice the going rate if you give me a 0% 30 year loan, because then I'm still paying the same amount I would have if I bought it at the going market rate with the going market capital or financing structures. So that's how we overcome compressed cap rates. The second piece is the problem of oversaturation. Because of this rush of institutional capital, you see these land grabs occurring where larger operators are trying to basically stick a flag in a market. The other piece of this is that you're seeing a lot of investors switch asset classes because of the construction costs, you know, storage produces roughly the same rent per square foot that multifamily gets. However, to build a Class A multifamily facility you're at 400 $450 a foot were to build a Class A self storage facility that gets similar rents. You're at 100 In 20, to 150 bucks per foot. So you have this, this transfer of capital and investing pressure coming from different asset classes. And that's causing a drop year over year and in the sort of supply index numbers. So the one way to mitigate this is the importance of underwriting and getting third party feasibility studies to make sure that you're not wearing rose colored glasses, and to truly deep dive into hyper specific markets where you're looking at all of the competition and a five mile radius and seeing if this area is saturated, versus the five mile plot down the road. And then the last piece, of course, is is the REIT competition, they have basically unlimited capital that is needed deployed, they've raised a lot of equity, a very cheap cost, they've raised a lot of debt that is long term at very cheap costs. And typically, they have a longer investment timeline than some of the smaller counterparts, you know, when they're investing in 30 year horizons, I'm usually investing on five to 10 year horizons. So that means that they can usually stick it out and drop flags in a market that right now doesn't make sense. And they're willing to lose money on because when the population moves in, they can take and be the first ones to take advantage of that. So there's a few ways to get around this, you know, the first is to avoid, you know, downtown primary markets, you know, don't build in downtown Miami. And as opposed to doing that, go to secondary or tertiary markets, or go to the, you know, the suburbs, or the exurbs of some of these primary markets, or even some of the rural areas around these primary markets like we are. So that's one piece. And then the second piece of the competition is if you can't beat them, join them. So that's one of the strategies that we employ, in which these REITs they do not have the bandwidth, nor do they want to waste the manpower on negotiating one deal. But if you do all that legwork, and you bring them a 20 property portfolio, now it makes sense for them to use all that manpower to underwrite and see the feasibility of that. So there's the, this, this aggregation that is occurring right now in our industry that's causing a lot of opportunity for those that are willing to play along bet that feeding chain, if you will.