Vertical Integration In The Self Storage Sector, With Ryan Gibson

What would happen if you took a “boring but profitable” real estate sector, like self storage, and applied a consistent, “checklist-driven” approach to vertical integration over a significant period of time?

Ryan Gibson, president and CIO at Spartan Investment Group, joins the show to discuss the self storage real estate sector, rollup strategies, multiple arbitrage, and a whole lot more.

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Episode Highlights

  • The story of how Spartan Investment Group became involved in the self storage sector.
  • How Spartan is able to find value in the self storage sector, even while competing with REITs and other buyers who have a very low cost of capital.
  • The value of scale when operating multiple assets in an MSA.
  • Why cap rates are not the only thing to consider when determining the value of a self storage asset.
  • Whether self storage assets should be considered as primarily real estate assets, or where they could be considered as operating businesses in their own right.
  • The value of optionality when planning a long term exit for any real estate business (but especially a “roll-up” play).

Today’s Guest: Ryan Gibson, Spartan Investment Group

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to the “Alternative Investment Podcast.” I am your host, Andy Hagans. And today, we’re going to ask the question, “What would happen if you took a boring real estate sector, like self-storage, and you applied a consistent and checklist-driven approach over a significant period of time?”

And to answer that question, I have Ryan Gibson, who is president and CIO of Spartan Investment Group. Ryan, welcome to the show.

Ryan: Thanks, Andy. Appreciate you having me on to talk about the most boring thing we can talk about, so…

Andy: Well, you know, self-storage is…it’s honestly not boring. Actually, hosting this show, I get to talk with so many Alt sponsors, and family office executives, and RIAs. And I’d say self-storage, multi-family, and industrial seem like the three sector…anytime you mention those sectors, it, like, gets people’s attention.

So it’s funny, self-storage, like, it’s kind of like having a moment. How did you fall into this sector? Did you choose it because of its characteristics, or did you just fall into it by accident?

Ryan: I invested as an LP in somebody else’s self-storage development deal, and I learned as much as I could about it through that operator. And then my business partner and I decided to just completely pivot away from residential development and just do 100% self-storage based on, really, the three Es, easy to own, easy to evict, easy to maintain. So, yeah.

Andy: So instead of the three Ts, toilets, tenants, and trash, you still have tenants, right? I guess you have a little bit of trash, but you can just send the crew there and empty out a unit, and then, 30 minutes later, you’re done, right?

Ryan: Yeah. You know, one thing, it’s kind of funny, one person asked me, you know, “Why don’t you have a dumpster on the property?” And I was like, “Because people will use it.

Andy: Yeah.

Ryan: So we don’t typically have to deal with that. Sometimes, on takeovers, when we buy a really run-down, nasty, neglected facility, there might be 30, 40 dumpsters coming in to clear out all that trash, but really the nice thing about self-storage is we don’t have…you know, I think we have about 25,000 units and maybe about 20 toilets total across the whole portfolio. So one of the really nice benefits is we don’t have those plumbing expenditures and a lot of the CapEx that these other investments have.

Andy: Right. I guess you just have to make sure your CEO doesn’t drink three cups of coffee before doing the site visits, right?

Ryan: Exactly.

Andy: So let’s zoom out. So Spartan Investment Group, you mentioned number of units, and I know you’re a pretty big operation. So, do you have multiple funds, or is it all in one big fund? How is your company structured?

Ryan: Yeah. So we are the 40th largest owner and operator of self-storage in the United States, and the way we’ve structured our deals in the past is we’ve done single asset syndications. But now, we’re doing a fund. So we just did our first fund, Spartan Storage Fund 1, and the way that people can invest with us is through the fund, and then we go out and identify value-add self-storage facilities in the United States.

Our fund is kind of at its…first fund is kind of at the tail end. We set up a fund, and we have all the assets identified, and we’re closing the last eight properties inside of that fund. But we’re buying a typical mom-and-pop single owner or maybe a portfolio owner of self-storage facilities, and we look for very specific market demographics, 2% population growth, usually 6-figure income household growth.

And then the facility has some type of potential for increasing market rents to what the market is currently commanding for that quality of the asset, or we can expand that facility, and we use our in-house construction team to add on additional units in a market that’s underserved by self-storage.

Andy: So, would you call that, like, light value add? I mean, you’re not buying a dump, but you’re buying a business where there’s some low-hanging fruit, essentially.

Ryan: Sometimes they’re really nasty, and sometimes they’re multi-story, glass, really nice class A facilities, and everything in between. So I would say we stretch the curve of core plus to opportunistic and value-add. So I think we’re really kind of hitting the high notes. You know, we’re not buying a downtown, you know, eight-story building in L.A., but we’re likely to buy a multi-story facility in a county or city like Bonita Springs, Florida, where it’s not kind of a primary market.

It’s sort of, like, a secondary or tertiary market by definition. And so that’s kind of represents the highest class A quality we would buy. And then the lowest quality we would buy is, like, a bedroom community around DFW Metroplex where it is just completely run down, doors don’t work, dumpsters need to be hauled in to move out trash, and we need to give the whole property a deep facelift.

And sometimes portfolios that we purchase will have those, and they’ll have maybe some more class B+ or A- facilities mixed in with them, but that’s kind of our sweet spot that we play in. But what I love, the facilities that we love that I like the most are those that are very highly occupied, because I think what you have to realize in the storage business is that 70% of these properties are owned by mom-and-pop operators, and they have one focus, occupancy.

Physical occupancy. There is no revenue growth. It’s just, “I want to be full with a wait list, I have a low-cost basis in the property, and I’m cash flowing, and I don’t want to do any work.” So people kind of try to achieve that, and we love buying those because they’re typically in markets where their competitor rates have really taken off, and that owner hasn’t focused on raising their rents to where the market is.

So we can buy a property and increase collections 20% to 30% in the first year just bringing the value up to market. So we like identifying those types of assets, and then we love it when they have expansion potential and we can build additional units so that we can increase the NOI that way and, thereby, increase the overall value of the property.

Andy: So, then, you do build sometimes where you acquire an asset and you build it out. So, why buy an existing asset versus building? Is it just a way to cut the risk because you already have that rent roll, you already have tenants? Is it faster?

Ryan: Yeah. So I mean, I think, buy versus build, sometimes properties just don’t have that option, and that’s okay. Sometimes the opportunities to increase the number of units is fantastic because the market is really well underserved, and so we can buy. So I would say we build about half a million to a million square feet of self-storage every year, and that’s through, you know, ground-up facilities and then the facilities that we buy and add on to.

So we’re very active. Right now, I would say, we have two projects going vertical in Texas right now, one is 54,000 square feet, the other we wrapped up last year was 40,000 square feet. And then we have projects going on in Georgia, Florida, Tennessee. We just finished a 50,000-square foot ground up just outside of the Portland MSA.

And you know, so we’re building, you know, hundreds of thousands of square feet per year, but most of those facilities that we purchase do exist and have some type of expansion potential or deep value add through increasing rates to market.

Andy: And do you have, like, an in-house brand, then, that these are branded? Are these all Spartan self-storage, or do they keep the old sign of Billy Bob’s storage, owned and operated by Spartan Investment Group?

Ryan: Yeah. I would say that’s one of the strong benefits that we have is that we do have our own brand, and we do brand these under what’s called FreeUp Storage national brand.

Andy: Okay.

Ryan: And we’ve done property management since we started the company in 2013, but we’ve recently rebranded our national brand to FreeUp Storage. We think that provides a lot of value to our investors and to the potential future exit that we have and our optionality in selling, because we can sell these and be the operator and be the branded company that continues to operate these if we do, like, an institutional equity recap, or you know, we can sell the property with our third-party management in place even if it’s a mom-and-pop.

And so the branding really helps with SEO and recognition and just efficiencies when you roll out multiple store locations like that.

Andy: Yeah. And so this is a really…you mentioned SEO, and you know, I got my start as a marketing guy and very familiar with search engine optimization and lead generation, and kind of ended up in finance by accident. But that’s a really interesting aspect to me. Some of these real estate sectors, self-storage is one, definitely, hospitality is another, where marketing can enhance value so much, it can enhance NOI, and therefore, you know…

So, do you look at self-storage…is this an operating business that happens to be involved with real estate, or is this a real estate business that happens to own an operating business on, you know, all of the assets that you own?

Which is it, primarily?

Ryan: Yeah. So, undoubtedly, we have a piece of property, and we have, you know, real estate, right? We have a piece of real estate that generates NOI through leases and through tenants and occupancy, and that has applicability of a cap rate to derive the value. So 100%, we’re in the real estate business. What’s different is we’re very much kind of like retail where, if you’re thinking about opening up a Subway or a national retail chain, you’re going to have research that goes into the best places to place a location and the demand that you’re expected to get and your competition that’s in the market, right?

So self-storage is very much a retail business from that standpoint, is you’ve got to be well marketed, you’ve got to be well branded, and you have to pick locations that are underserved where you can really hit it out of the park, and that’s probably the number one most important thing in self-storage. And so, to optimize revenue, we want to control the whole value chain through our operations and our marketing and branding.

And so we’re able to do that with FreeUp Storage, and we’re able to identify the markets that are underserved so that we can figure out where to put these locations and have the most success in a market.

Andy: Okay. Yeah, that makes a lot of sense. So I want to go back to the idea of this roll-up. So, do you mind sharing how much assets under management Spartan has right now?

Ryan: Absolutely. Yeah, we have about half a billion, and by the end of the year, we’ll be close to 750, and next year, we hope to have a billion of self-storage under management. That makes up about 3.5 million square feet, spread across 13 states. We have about 25,000 units comprised of mostly self-storage, again, but there’s some RV parking and storage in there, there’s some retail and office that sort of come with the portfolios that we purchase.

And you know, that reach really has triggered the need for a national brand and kind of our own value chain. We also do the construction of these facilities as well. So we handle all the construction in-house.

Andy: Okay. So I think I heard $750 million right now but growing very quickly. Is that equity under management, or is that total value of the assets?

Ryan: Value of the assets. Yeah, value of the assets, yeah.

Andy: Okay. So it’s really interesting to me, and this is, like, a decade ago. I was involved with a startup, and it was kind of…you’d almost call it virtual real estate. We’re acquiring assets that generated leads, and we were kind of creating a roll-up, I guess. So it was essentially a roll-up strategy where institutional buyers would be interested in these assets but only once they reached a certain size and a certain scale.

So that was a decade or longer, totally different world, but just the theory of a roll-up makes so much sense to me because there’s different pockets of the market, and especially the real estate market. When you think about institutional buyers, you think about CalPERS and pension funds and sovereign wealth funds, and it’s like, they go shopping, and if it’s not whatever, $100 million or $250 million, they don’t even look at it, and really they want to acquire assets $1 billion at a time, right?

Ryan: Sure.

Andy: So, is that essentially the plan, to roll these assets up into a certain size and then, does the multiple then…? Is it, like, multiple arbitrage where larger buyers will pay that premium to get this scaled-out collection of assets? Is that the plan? And if so, what does that look like, you know, five years in the future?

Who’s the buyer at that size? Or is it an IPO? I’m asking you a million questions. So tell me about the roll-up.

Ryan: You’re asking a lot of questions, and it’s probably the best question you can ask any operator, which is, what is your exit strategy, right, for each individual investment or the fund or all of these assets combined? And when I think about exit strategy, there’s one word that comes to mind, and that’s optionality. And so I think any operator that sets out with a singular exit strategy that’s, “This is what we’re going to do.

This is exactly what we’re going to do,” is set up for potential failure, especially in a market where there’s rising interest rates, there’s potentially expanding cap rates, there’s very bad predictions of where the yield curve is going to go by the end of the year. And so having multiple exit strategies is probably the most important thing you can do. But to validate what you said, absolutely, sovereign wealth funds, publicly-traded REITs, non-publicly traded REITs, other big private equity that has entered the space, such as Blackstone, who runs the Simply Self Storage brand now, have been in a position to want to buy a very large collection of assets in one transaction, and they’re willing to pay a compressed cap rate to do so, thereby, operators who have big, well-positioned portfolios are set up for more success than those that are buying just kind of one-off deals here and there.

Because what happens is when you look at a market, for example, we’re in Chattanooga, we have three facilities there, we’re adding a fourth, and in that market, public storage doesn’t want to go buy one property in a middle-of-nowhere market, right, or a smaller tertiary market.

Andy: Right.

Ryan: They want scale in that market, you know. They want to dedicate a regional or a district and have an area manager and really kind of be efficient with payroll. So we’re looking at really strong portfolio composition within our storage assets, and if you look at our map of facilities, you can see we have 30 surrounding the greater DFW Metroplex, we have 16 assets surrounding the greater Atlanta region, we have a handful in Chattanooga, and that not only allows us the economies of scale and the efficiencies within those markets, but it also positions us for a better exit strategy.

Now, having said that, we have facilities that we sell to individual owners or to larger groups, like Spartan Investment Group. We’re going through the sale of a couple of assets that way right now that just don’t meet our portfolio composition, and we don’t have any intention of going deeper in those markets.

So we have multiple exit strategies, and I think that’s really important for investors to consider. And, you know, target hold periods are just that, four to six years is our target hold period. And really, when people say, “That’s your plan to sell,” I think really the thinking should be, “That’s our plan for when we want to be recapitalized by.” And that could be the sale, that could be a refinance, that could be an institutional equity group that comes in and recaps our equity, that could be a number of different things, but at the end of the day, we’re going to do what’s best for our investors to perform at the best level in the shortest period of time, right?

So we really want…

Andy: Understood.

Ryan: Yeah, we really want to be positioned for multiple exit strategies, which we’ve done.

Andy: Is an IPO in the realm of possibility, or is that not an option that you even want to consider?

Ryan: Absolutely. It’s absolutely a consideration. It’s not what we’re planning, but it absolutely could be something that we do in the future. And if it makes sense, we could go that way. A lot of groups do, so…

Andy: Well, let’s talk about if it makes sense, because one thing that I’ve covered on the show is there’s a trend, especially in 2022, and this is something that I asked Michael Episcope, the co-CEO of Origin Investments, about valuations, and I’d sort of memorized this internal script that publicly traded REITs tended to be overvalued, right, because, you know, people want liquidity, and so they’ll kind of overpay for that liquidity.

And he really pushed back, Michael, to his credit, and by the way, believe him, don’t believe me, especially in 2022, that right now so many publicly traded REITs are trading at heavy discounts just because the market is in a slump. Number one, do you think that that’s, I don’t want to say permanent, but do you think that that could last for the foreseeable future?

And then, secondly, if so, does it even make sense to IPO at that point? I mean, if Mr. Market is going to give you a worse valuation than your internal valuation, it’s like, why? I’d rather just hold these assets.

Ryan: Yeah. So that’s a great question. I think, you know, the way that I would answer that is how we’re responding to it. Because when a publicly traded REIT people call their equity out, and they use that liquidity, that takes away their buying power. And that really has presented a lot of opportunities for us this quarter to buy some assets where the REITs would be competing for those assets, but right now, they’re sort of hitting the snooze button because of cash.

And so we see a tremendous opportunity there. But I think, in general, you know, that’s not our number one strategy to IPO.

Andy: Why is that? Dumb question, why is that a worse option?

Ryan: Yeah. So I look at our vision, you know. Our vision at Spartan Investment Group is to provide the best opportunities for both our team, and that’s to be personal and professional, and our vision is to serve our people and our team members. And so we want to maintain that control. I mean, we were voted best places to work.

We’ve been on Inc. 500 the last 3 years in a row. We have tremendous growth. We have a great team in place. And I think what we want to do is, you know, when Scott and I originally founded the company, we wanted to have a place where people wanted to come grow and work and be entrepreneurial in a very structured environment. And you know, going public, we lose that, you know, and I don’t know…

Andy: You know, it sounds like so soft, but I know, as an entrepreneur, as a co-founder, it is anything but. I mean, because it’s like, anybody…you raise some capital, anybody can go out and buy self-storage assets and operate them, right? I’m not saying they don’t perform the same, but, like, anybody can do that.

So really, what makes Spartan Spartan or what makes you you is your unique DNA, your unique company culture, your unique values, way of doing things, philosophy. Could you talk a little bit about that company culture? I mean, what is it that you want to cultivate? You mentioned being entrepreneurial.

That’s actually pretty hard to pull off for a lot of institutions and corporations. But talk about your company culture.

Ryan: Yeah. So I think we have a strong focus on our mission, which is to improve lives through real estate, and we are a very big values-driven organization. So when it comes to values, it’s not something that we just throw up on the wall and talk about. Every week, we have a meeting, and we specifically have the whole team, the whole company, talk about how they’ve served our mission this week and how they’ve implemented the values.

And we say our values are defined by our GRITT. And GRITT at Spartan is an acronym that actually has two Ts, and that stands for growth, respect, integrity, tenacity, and transparency. And those are values that we stand behind and adhere to. And you know, all of our team members have their own vision board where we can see where our employees want to go, want to get to.

And we’re very transparent with folks. We have weekly one-on-ones with our team, and we’re a fun company to work for, but we also work really hard. And so we give our employees a lot of freedom and responsibility to make decisions, to learn, to fail, to grow, and we even celebrate our mistakes. So we have a weekly call every week, for example, and we have a section of the call that says, “Hey, who wants to talk about how they failed this week?”

And we openly embrace that because, you know, why we don’t want people to make the same mistakes or be negligent. We realized that people aren’t always going to be perfect, and we have to foster an environment where we’re focused on process improvement, and how can we get better and just kind of recognizing those mistakes.

Andy: Yeah. Learning opportunities, right?

Ryan: Yeah.

Andy: I think, what’s the Japanese word? I’m sure I’ll butcher the pronunciation. Kaizen, or something, which is that idea of continuous process improvement. And honestly, it is kind of anti-corporate, just that entrepreneurial ethos of doing that. Okay. So I want to talk about… going back to the roll-up thing.

I just love roll…I do. I mean, it’s so simple. We were talking, before we clicked the record button, a little bit about there’s this weightlifting strength training program. I’ve never done it, by the way. I think I’ve probably done similar programs.

It’s called Boring But Big, and I think it’s like you squat, you bench press, and you dead lift. And it’s really hard work, and you do it consistently, you know, three to five times, whatever. It’s that type of program. It’s called Boring But Big, and I just love that concept of, like, “Hey, we know what we’re good at, and we’re going to make it scalable and repeatable,” and then the thing that you mentioned, the continuous improvement aspect.

If you get 1% better every week, at the end of the week, you’re not going to notice a big difference, right? But if you get 1% better at your process every week, at the end of a year, you’re going to notice a big difference.

Ryan: Big time.

Andy: At the end of three years or five years, you’re going to be so far ahead of competitors, and you know, they’re going to look at it like, “I don’t understand. How are they so fast, or how can they do this more cost-effectively? We’re doing the same darn thing.” Because it’s this consecutive building of all those little things. So you know, I got this from your website, I forget the exact verbiage, but it was something like a checklist-driven approach to what you do.

So, could you basically give me the blueprint so that…no, I’m kidding.

Ryan: No. We share it.

Andy: Actually, yeah, you know what, give us the blueprint.

Ryan: No, we’re transparent.

Andy: How does that change things? How is that different?

Ryan: Yeah, transparency is in our value, and you know, any investor or anybody who has got a question about what we do, we share it. It’s not a problem at all. So I would say that due diligence is an important thing. You’re never going to fully mitigate all the risk on an investment. But having a process that you follow the same time every time is super important, and we have a 700+ checklist that we share.

It’s on our website. If you look at the Invest in Our Values section, it’s right below that. You can download it. You can see all the things that we go through. And we have a due diligence team that focuses on making sure that those investment criteria are met through financial, physical.

Andy: So, Ryan, sorry. Yeah, sorry, I’m just going to pause right there. I’m thinking that through. I’m thinking, okay, so if I’m your competitor, I can download that checklist, but it’s really in the follow-through. It’s in a team member who actually does each item in the list, right? Sorry, go on.

Ryan: Yeah. And I encourage our competition to do the same thing, you know, and the reason why is because sometimes you see people buy stuff, and you’re like, “Geez, you know, do you realize you’ve got to do these things?” And maybe they were willing to pay a higher price, not knowing that there was diligence to do that they didn’t do, and they move forward, and then they lose money.

And I, you know, hate to see that happen to anybody. So, yeah, use it. I think we could all benefit from a little bit more due diligence. And, you know, that checklist is really important to follow because you can measure its successful execution and efficiency because you can see what happens and you can have a feedback loop every time you buy a property, “Hey, we missed this on the checklist,” or “This checklist needs to add these things that we didn’t know…”

Andy: So that checklist is…it’s like the reflection of the 300 mistakes you’ve made in your 300 previous acquisitions, and every time you step in a land mine, you’re like, “Oh, record that landmine on the checklist.

Ryan: Right. Yeah, exactly. And it’s a way to grow kind of institutional knowledge in our company and just really have a good team. And we’re actually refining it quite a bit. We’re doing a lot of big changes to our due diligence checklist and just the kind of the way we roll it all out. And you know, it’s been great. It’s actually been driven by one of our team members, one of our transaction coordinators, who’s been at the forefront of all this.

So I’m excited to see where it goes and what the team has really learned, you know, for the last couple of years and what they’re going to do with the Due Diligence program. As executives, we were just briefed on some ideas, and I was really excited about where the team wanted to take it. And I think it’s just such an important thing that’s overlooked in real estate is just doing enough due diligence on an investment, and we share all of our reporting with our investors.

So you know, if you want to see phase one, or environmental, or a property inspection report, or anything that you might look at, you know, that’s really important. But I think, you know, people try to do all their own due diligence on an investment, you know. We rolled out our first fund earlier this year, and a lot of our original investors from a long time ago were like, “I don’t like your fund because I like really evaluating every deal you guys do.”

And my encouragement to them is…

Andy: Those sound like the LPs from hell. No, I’m kidding. I’m kidding.

Ryan: No, they’re great. They’re great. Yeah. But they just want to look at every single deal, and I totally agree with that. I think they should. I think you should do your due diligence on an investment. But I think, as LPs, we have to realize that we cannot do enough due diligence on a singular investment and really pick them because you’ve got…rather, I would say, understand the company’s due diligence process and then know that it’s consistent and repeatable, and then pick an operator who can make good investment selection and do good investment due diligence.

I think that’s more important than trying to figure out. Because here’s the reality, you know, as an LP or even as a GP, when you look at an investment, you can’t possibly understand every single risk and mitigate every risk. You know, ask yourself as an LP, “Have you ever asked for a title report or the exceptions on a title report or the title insurance policy? Do you review those things?”

Because those things can really create a lot of headaches down the road, especially…

Andy: I mean, most LPs don’t even read the PPM, right? I mean…

Ryan: Right. Yeah.

Andy: Being honest.

Ryan: Exactly. So you know, I think it’s really important just to understand, you know, the operator’s process for due diligence more than it is on that particular investment. Now, you got to make sure that they’ve done their diligence on that investment, but I think that’s a really important part of it, so…

Andy: Yeah. And I should clarify, I do want to reiterate, LPs should read those PPMs. Certainly, RIAs, advisors, family offices should be reading them. But if you’re going to be self-directed as an LP, you definitely need to be willing to embrace that responsibility. So I’m still really intrigued by the idea of the checklist because, you know, so many successful businesses, it’s really that process knowledge and then scaling it out, right?

Because maybe you can own and operate one asset, and you’ve like squeezed every ounce of value that you possibly can, every enhanced revenue stream and bells and whistles. It’s another thing entirely to be in that constant cycle of acquisition and value-add and stabilization. And so I kind of look at it like…it’s almost like you’re sending in your elite squad, and they’re coming in, and they’re like, “We know how to triage this. Number one, Billy Bob only took cash. We got to get the credit card machine going ASAP.”

You know what, I don’t even know what the things are because I’ve never owned or operated self-storage, but let’s talk about that. How do you stabilize, you know? So you’ve acquired a value-add facility. What happens next?

Ryan: Yeah. So I think that the first thing you’ve got to get your arms around is just transition checklists. So when we take a property over, we have to transition into our revenue management software, we’ve got to re-hire the front line staff, and then we have to deploy our initial improvements, paints, drive aisles, cameras, security systems, getting everybody switched over to our revenue management platform, things like that.

All of those things have to go into a transition. So we have a transition team that does that. And then I think the really important thing kind of right out of the gates is just to make sure that you can collect revenue, and I think that’s a really… I know it’s kind of a funny comment but you got to make sure that you’re getting everything set up. So we’ve got that really dialed in.

Andy: So I was right about the credit card thing. Is that…

Ryan: Yeah, absolutely. Yeah.

Andy: Okay.

Ryan: Yeah. We’re a cashless business. So a lot of mom-and-pops are cash-only, in a lot of cases. So that’s a big transition item is to get everybody up on our payments. And you know, it’s funny, every mom-and-pop tells us, you know, “Oh, you know, Johnny, really? He’s only going to pay cash.” And so we’re like, “Okay, well, Johnny’s not going to rent here, or he’s going to pay with a credit card, or he’s going to get on automatic reoccurring monthly payments.”

So, and it’s been fine, overall. So I think, really, for us, it’s just coming in. And I know this sounds very basic, but it’s just holding people to the standard that’s in their lease, and the lease in self-storage is one of the most powerful leases in commercial real estate, because the second paragraph that you land on in a self-storage lease is that the owner reserves the right to lean the occupant’s belongings in the event of non-payment for 30 days, and that allows us to kick a tenant out every 30 to 45 days through the auction process.

And we don’t have eviction moratoriums or rent control, or things like that that you see in multifamily, because we’re not overseeing somebody’s housing, you know. We’re not kicking a family out of their homes. We’re dealing with grandma’s dresser, right? So it’s not as important to the masses.

So it’s a very, very powerful lease, and just to get everybody on the correct lease and everybody held to a standard by our store managers is really the number one priority when we take over.

Andy: Yeah. I mean, it sounds like basic professionalism, but you know, you can kind of see how, you know, mom-and-pop businesses and renting units to friends, sounds like there’s a lot of low-hanging fruit and just getting the basics right.

And again, back to the Boring But Big strength training program, you know, sometimes that boring fundamental process, just done well and consistently, boy, can that build value over time? So let’s talk about the current market, because I think we’re in a very interesting market, and I don’t have a crystal ball. Honestly, the more this year goes on, the less certain I am about anything.

But I want to pick your brain what you’re seeing. So we’ve seen interest rates go up, obviously. First off, how has this affected pricing in the self-storage market? Because it seemed to me, last year, assets were just priced in extreme. Would you agree with that statement that cap rates were just crazy?

Ryan: Yeah, anything you bought in quarter 4 last year is going to be a great investment, in my opinion. Anything that you bought in Q1 or Q2 of last year is going to be phenomenal. We saw cap rates compress 85 basis points in quarter 4 and quarter 3 of last year.

Andy: Wow.

Ryan: Quarter 1, quarter 2, we saw the same type of compressing cap rates, increasing prices. We are seeing a couple of investments or bigger portfolios start to re-trade based on interest rates, and we’re starting to see a little bit of price softening, but rental rates continue to increase. For example…

Andy: I’m sorry. So, am I hearing that correctly, that the cap rates have barely expanded at all? They’re still pretty much at their…are they pretty much at the all-time, what’s the word?

Ryan: All-time low.

Andy: Nadir.

Ryan: Yeah.

Andy: Nadir, is that my technical term?

Ryan: Yeah.

Andy: Wow.

Ryan: Yeah. No, cap rates have not moved all that much. Now, we have seen some portfolios kind of swing back around or get represented to us, but the competition is still pretty strong at the buying front, and it’s really due to the fact that, yeah, interest rates are up, but rental rates are skyrocketing, you know. Specifically, you know, we studied the publicly traded REIT data across the major REITs, and most NOI is up 20%year-over-year on the same…

Andy: Twenty percent?

Ryan: Twenty percent.

Andy: So that basically has to be 20% top-line growth, just flowing right through to the bottom. Is that…I mean…?

Ryan: Right to the bottom, yeah. And so we’ve seen double-digit rental increases in self-storage year over year, and we’re still experiencing it. In fact, we just raised rents on our portfolio, on average, 25% across all of our facilities.

Andy: So you know, Ryan, this sounds to me almost…when I read Barron’s, I always kind of laugh when analysts talk about forward P/E. I’m like, “What the heck is a forward P/E?” You know, like, I just, like, can’t roll my eyes hard enough in regards to stock. But if rents are going up 15%, 17% year over year, you almost have to value an asset based on the forward year, right?

So, is that really…I guess, is that kind of how you see value? Because if I’m just looking at it as a static cap rate, it’s hard for me to see value in this space.

Ryan: Yeah. So the REITs are really aggressive, and they’re very predictive in what they’re going to value the revenue, the market rates to go up.

Andy: Sure.

Ryan: At Spartan, we can’t play in that game where we’re predicting market rents to continue to increase like that. The space that we really operate in is finding those facilities that are already priced well below the market on their rental rates, on their total collections, and then moving them up to market. We predict very light, single-digit market rate increases over the course of, like, a five-year hold.

So we’ll predict market rate increases to be, like, 3% to 7% over a 5-year hold, very, very low.

Andy: So, are you just sort of acquiring assets that, like, these REITs or maybe larger players aren’t willing to acquire because of their location or whatever other factor?

Ryan: Correct. Yeah. Just like I said earlier, though, like, the one-off stuff, right? They’re not interested in doing the one-off deal in that market, but now, all of a sudden, we’ll have six in that market, and they’ll now be interested in a bigger buy in that market. And the REITs are slowly coming out into the secondary and tertiary markets where the yield is. And so you’re seeing…

And private equity. So you’re seeing…

Andy: Did you see the light bulb go off? Like, kind of, I was like, “Oh, I get it now.”

Ryan: Yeah, yeah, yeah.

Andy: I get now what you guys are finding val… I still don’t necessarily get where the REITs are finding the value, but I get it now with you guys.

Ryan: Well, their cost of capital is so cheap. That’s really what’s been driving it. And their P/E ratio of 80%, 90%, I mean, they can buy stuff at a 2.5, 3 cap, and make it work. And so really it’s an interesting, interesting space. You know, for us, we’ve got to get yield for investors, you know, double your money in five years kind of stuff.

So we’ve really got to find really good, well-positioned assets. And eventually, you know, we’re kind of a medium-sized fish, I wouldn’t say a small fish, but we’re kind of going to get eaten up by the larger operators from an acquisition standpoint, which is going to be a great exit for us someday when the timing is right. You know, deal by deal, portfolio by portfolio, really positioned for good success in that respect.

Andy: Got it. So I want to talk a little bit more about the publicly traded REITs. So we’ve seen, you know, in some sectors, not in self-storage, obviously, but was it student housing or one of these, it was like the last publicly traded REIT in that sector went private, right, because it was like, “We’re tired of trading at a discount.”

And basically, there’s no reason to go public. There’s no reason to be public anymore because there’s costs associated with that, and there’s no arbitrage to be had. So, do you see that trend with the publicly traded REITs? You know, is it still…? You basically think there’s that arbitrage move for them.

As long as their P/Es are here, they can acquire at a three cap all day long, essentially, is that…?

Ryan: I think so, yeah. And you know, we saw that… During COVID, we saw the REITs buy billions of self-storage at low compressed cap rates, and I think we’re still going to continue to see that, especially with the same store revenue growth year over year being in the double digits.

I mean, I think their appetite is going to be very strong for that. And you know, not as many self-storage facilities are being built now because construction costs and timeline delays due to supply chain issues are continuing to drive rents, because you have a shriveling supply in some markets, and you have really underserved areas where you can’t really build because the build costs won’t justify the rents.

But then you start limiting how many facilities are within that given location, and that’s what we’re seeing in the tertiary markets right now, is our stores are increasing rents considerably because there’s just no competition, and the occupancies are just skyrocketing. So we’re able to really push revenue quite a bit, which again starts attracting the major players because our rent per square foot in smaller markets is going up, and the REITs see the value in that.

Andy: I love the roll-up. I just really do love the roll-up. So, when you’re analyzing the publicly traded REITs, what else do you look at that you know might affect your business?

Ryan: Yeah, great question. So what they’re doing with payroll and expenses, how they’re positioning their customer service strategy, are they unmanning properties more, are they going for more automation, what they’re forecasting in a given market for rent growth, we pay very close attention to that. We look at, you know, trends in occupancy data and economic occupancy data.

We track delinquencies. We track a variety of different things. As I mentioned earlier, we blog. We kind of collate all that data. We have it on our newsroom, on our website. And we blog about it. We talk about it.

And then, internally, we really pay attention to that because that’s really important to us to see. I mean, they’re basically the Big Brother in the industry. We want to know what they’re doing so we can kind of adapt and curate our strategy.

Andy: So you can kind of get the benefits of them being public and having to be transparent with their data and some of those best practices, essentially.

Ryan: Absolutely, yeah. And we also mastermind, you know. We talk with the publicly traded, non-publicly traded REITs, other operators, you know, on a regular basis, and we share information about, you know, share information that we can about where we see the market headed and what rates are doing and what our acquisition strategy is. So we’re pretty attuned to what’s going on just as one of the larger industry players, you know, as a medium-sized company, but we like to see what other people are doing and just to kind of learn from it.

So, absolutely.

Andy: Got it. Could you tell us about your capital base? I mean, is it mainly LPs who have made their money in real estate and they like to reinvest in real estate passively, or are there RIAs or wealth advisors who are, you know, showing their clients your product? Do you raise money from institutional investors at all? Where do you get your capital?

Ryan: Yeah. No VC, no institutional equity. We’ve steered clear of that for the time being. We have, primarily, just individual retail investors. Our minimums are $50k. And so I would say 90% of our investors are from that space. We do fund of funds.

So LPs organize funds for a better price of the shares, a better ownership in the deals. And I’d probably say 5% of our capital is from that space, and then I’d say the other 5% is kind of a mix. We have RIAs that are maybe smaller shops, you know, maybe half a billion or less of AUM and, you know, a handful of RIAs in that group, and they’ll send us clients.

They’ll do their due diligence on us. And then we do really good investor reporting so they can roll us into their platform. And so we have RIAs that we work with, several of those. But primarily, the retail investor, and I would say, I always say a joke, we have an avatar, so we have kind of four categories. We have the CEO who is, you know, a particular demographic that invests.

So we have a lot of that. We have, we call them, Exited Eric, which is a person who isn’t active in real estate, sold a company, sold a tech company, you know, super successful. That’s kind of another bucket of our investors. And then we have what I call Professional Services Simon, who is a doctor, a lawyer, an airline pilot, anesthesiologist, somebody who’s a doctor, somebody who’s, you know, high network, high net income, or high earner, and is really kind of interested in learning about real estate and wants to invest passively in syndications.

And then we have the emerging investor, you know, somebody who is risk taker, somebody who wants to invest in crypto and kind of the new trends and get really excited about something. So I would probably say those are kind of our four major food groups for retail investors that we really cater to, so…

Andy: Got it. Now, you know, I love a sponsor who understands retail investors. And, by the way, I mean, I think some LPs will amaze people because, you know, I see sponsors, they’ll publish their minimum investments. So really, you know, any investor, any LP talking to you after that point, you know, okay, they’re in that universe.

Ryan: Yeah.

Andy: And then, every once in a while, someone will surprise you by writing a check that’s an order of magnitude larger than you ever expected, but you have to be willing to talk about…you have to be legally able to talk about your product, number one, but then, you know, you have to be willing to kind of market it and exactly what you’re doing now, just be transparent. And not every sponsor gets that.

Ryan: Yeah. And also, understanding the different avatars is really important. Like, for example, our CEO Charles Avatar. We really studied who that person is and where they hang out, what they like to do, and it’s interesting, right? Some, like, professional services, investors, retail, doctors, lawyers, engineers, etc., they want the granular detail all the time.

They want to hear it every month. They want to hear it on a podcast. They want to be really engaged and educated in their investment. CEO Charles, he’s not going to pay attention, or she’s not going to pay attention, for a year, and then, all of a sudden, they’re going to text you, right, and say, “What’s going on?” And then you better respond with a thorough, to-the-point answer.

So it’s important to kind of understand that dynamic, and so I think you can kind of work more with your investors that way and kind of understand where they’re coming from a little bit more when you kind of expect, okay, this is the type of person that is going to want a phone call on a regular basis, and they’re going to want to go deep into the weeds. And so I have to be ready for that.

You know, my team has to be ready for that. Or,, this is an investor who’s going to check in with me once in a blue moon and just want to know what’s up. And they don’t want to know every little nook and cranny. They just want to know, “Is this heading in the right direction, or is it not?” And I think just hitting them with the truth and hitting them with transparency is really important.

Andy: Yeah. You know, I think that’s a really good summary, and intriguing how you all look at it internally. I mean, from a sponsor point of view, I almost look at it like you have to pick your poison. I mean, if you raise money from institutionals, there’s going to be all sorts of, you know, hooks or things that come along with that.

Same deal if you are working with a broker-dealer, there’s going to be, you know, all sorts of pros and cons to that. And same thing, soliciting directly to retail investors. So it sounds like that you all are kind of aware of, you know, ways you can add value with investor relations, and I think that’s really overlooked aspect of being a quality sponsor.

So on that note, it sounds like you all do a very good job with that. Are there any plans to expand beyond self-storage, or do you think that’s the sector that you’re in for life, baby?

Ryan: Not for life but for the next three years.

Andy: Okay.

Ryan: It’s something that we just want to get down really well and really focus on building the infrastructure correctly so that we can be good stewards of the investments that we have. I don’t think we’re really ready to move on yet to anything else.

Andy: Well, if it ain’t broke, don’t fix it, right?

Ryan: Exactly. Or if it’s broke, fix it before you move on, right?

Andy: Yeah, there you go. Either way, either way, you should…

Ryan: A little bit of both. A little bit of both. There’s definitely improvements that we need to make, but there’s also some really great things happening. So, yeah.

Andy: Ryan, I really appreciate your candor and transparency and all your insights today. So for our listeners and viewers, where can they go to learn more about Spartan Investment Group and your open offerings?

Ryan: Yeah. So is our website, and our open offerings are listed on there. And then, if you wanted to get in touch via email, my email is [email protected]. Also, hit me up on LinkedIn. So, yeah.

Andy: Great. And for our listeners, if you want links to all the resources we discussed in today’s episode, including a link to the Spartan Investment Group website, I’ll be sure to put that in the show notes at Ryan, thanks again for coming on the show today.

Ryan: Thanks, Andy. Appreciate it.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.