The Self-Storage Renaissance With Fernando Angelucci, Real Finds Podcast #18 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, the podcast series where we interview key entrepreneurs, scientists, and activists shaping the real estate industry and, as a result, our world. On today’s podcast, we’ll be speaking with Fernando Angelucci. We learn what it’s like to be a self-storage renaissance man. Fernando walks us through self-storage deal making, his investment theses, and why self-storage is one of the most recession-proof real estate investments. It’s well worth a listen. Hey Fernando, thanks for hopping on the podcast today.
Fernando Angelucci: Thanks for having me, Gordon.
Gordon Lamphere: Could you tell me a little bit about yourself, for any of our viewers who might not know you?
Fernando Angelucci: I’m the son of an immigrant who came to the United States with the American dream. They wanted me to go to school, get good grades, retire from the same company after forty years, and take a pension. When I was sixteen, that all changed. I read Rich Dad Poor Dad, and from there my real estate journey continued. I did get a degree in ag bioengineering, but shortly after, I started investing in single family, then multifamily, and now I focus one hundred percent of my time on self-storage.
Why Self-Storage
Gordon Lamphere: We’re a company founded by folks with that same immigrant mentality, just a hundred and forty years back. Why commercial real estate? A lot of people have that push to succeed. Why did you choose commercial real estate as the venue?
Fernando Angelucci: I found commercial real estate to be one of the easier avenues to financial freedom, especially compared to other types of real estate. In residential, it was like pulling teeth trying to get fifty to a hundred and fifty thousand dollar loans. Raising capital for that was even more difficult, and it was hard to scale. Once we switched to self-storage, our business took off. In the last four and a half years, we’ve done $220 million in storage. It really is easier when you start adding zeros to your deals. Within commercial real estate, I like self-storage specifically because it’s non-habitation real estate. Nobody’s living inside my asset. I don’t have to go through evictions. It’s just a much easier way to financial freedom.
Gordon Lamphere: That’s something most people don’t understand about real estate: sometimes bigger deals are easier than smaller deals. I’m a fourth-generation broker and developer, and I certainly learned that. But why self-storage in particular? There are a lot of asset classes even in the commercial world, and this seems like one a lot of folks aren’t familiar with.
Fernando Angelucci: A few reasons. I’m an engineer by training, a numbers guy, so I looked at the last forty or forty-five years and compared self-storage to other real estate assets. There was a study by the National Association of Real Estate Investment Trusts over roughly thirty to thirty-five years. During that time, the average annual return of the S&P 500 was seven and a half to eight percent. Multifamily and residential did a little better at about thirteen percent. Self-storage came in at a whopping 17.5% average annual return. That four to four and a half percent may not seem like much, but compounding is one of the miracles of the world. If you’d invested a hundred thousand dollars at the start of that period, the S&P would have turned into about half a million. Apartments and residential, about $1.7 or $1.8 million. Storage, about $4.1 million. Over twice the return, just from that extra four percent compounding.
People then say, if it’s a high return, it must be high risk. What we found is the opposite. Self-storage has a very asymmetric risk-return profile. Look at the last two tough recessions in recent memory. In the 2007 to 2009 financial crisis, the S&P 500 dropped about twenty-two percent, and I knew a lot of investors who completely lost their shirts on residential and multifamily. From that same Nareit study, self-storage dropped only about 3.5% to 3.8% in value. Fast forward to the pandemic. According to Trepp, the commercial mortgage-backed securities research firm, of the seventeen hundred CMBS loans made to self-storage investors in the first three quarters after the pandemic went into full shutdown, only three were more than thirty days delinquent. That’s a 0.17% delinquency rate. During the same period, multifamily was defaulting at eighteen times the rate of self-storage. They call it a recession-resilient asset, and the data over the last five or six cycles has proven it.
Those are the numbers reasons. The headache reasons are that, as a Midwesterner living in Chicago, I first started buying residential in more challenging C and D neighborhoods, chasing yield, and the eviction process on some of those properties was ridiculous. Doing everything right, it still took me eight months to get out a tenant who hadn’t paid once since we bought the building. Then when they leave, they cost twenty-five thousand dollars in damages from pouring quick-set concrete down the plumbing. There’s none of that in storage. Instead of tenant-landlord law, it’s property law, or lien law. The second you put your possessions in one of my facilities, you’re de facto giving me a lien against them. If you don’t pay, I overlock your unit. If you still don’t pay within thirty to forty-five days after being overlocked, we auction off your possessions, and usually we have a tenant in line ready to enter the unit as soon as it’s cleaned out. It’s all steel and concrete, so there’s not much damage you can do. Everything is access controlled, so if you’re late on rent, you can’t even get into the facility. Much more safety in the rights afforded to us as owners and developers, on top of the risk-return profile.
Why Institutions Haven’t Taken Over
Gordon Lamphere: As an investor who’s seen horror stories even in the commercial space, small industrial and office, I understand some of the legal concepts. But what makes me curious is why large funds haven’t come into the asset class and dominated it if you get that rate of return. We’re starting to see large funds come into Class B and C industrial, less than other asset classes because of the level of friction. What makes self-storage so unique?
Fernando Angelucci: That’s actually what’s happening right now. You’re seeing a ton of money pumped into our industry over the last ten or so years. Self-storage used to be the ugly stepchild nobody wanted to talk to, and if you weren’t buying at a fifteen percent cap rate day one, it wasn’t a good deal. Then the REITs, private equity companies, and hedge funds started to see the risk-return profile and aggressively pursue the space. But they still have a long way to go before they dominate.
A 2018 study looked at the fragmented self-storage market. At the time, there were roughly 52,000 to 55,000 facilities; that number is now between sixty and seventy thousand, depending on the research. The ownership breakdown shows a lot of opportunity for aggregation and roll-ups, which is one of the things we do. About 18% to 20% of all facilities in the United States are owned by the six largest publicly traded REITs. You know their names and their colors. The next nine to ten percent are owned by the next hundred largest operators, which I’m part of. That means over 70% of the entire space is still owned by mom-and-pop operators.
The way we do business tries to take advantage of each piece of that feeding chain. We go to the mom-and-pops, buy their facilities, do value-add and turnaround, maybe some expansion, and aggregate them into larger portfolios of 10 to 20 properties. Then we sell to second-level aggregators, who put together portfolios of 50 to 200 properties and sell to the top six REITs. That was one vertical. But we noticed quickly, and this is some of the friction you asked about, that unlike a multifamily property where you can build a half-billion-dollar asset by adding units, you can’t really do that in self-storage. On the mom-and-pop side, facilities are 10,000 to 50,000 square feet. The second you cross 50,000, cap rates drop by almost half, because now the transaction is large enough that a publicly traded company or institutional investor is willing to spend the time on due diligence. Cap rates go from eight or nine percent in the mom-and-pop space down to four or five percent in institutional territory.
Our goal is an eight to nine million square foot portfolio. We can’t get there buying 20,000-square-foot facilities, and we can’t afford to buy the larger ones, so we have to build them. That’s when we opened our development arm, building Class A, REIT-grade institutional facilities of 80,000 to 120,000 net rentable square feet, which can also be aggregated and sold to the top twenty operators. That was the second vertical. Then when COVID hit, there were supply chain issues. Steel went up almost five hundred percent, and if you could even get it, wait times were eight to eighteen months depending on the material. That’s when we created our third vertical, going after big box retail stores that had gone dormant and converting them through adaptive reuse into Class A stores. Those are our three main verticals. The only area where you really see the institutional and private equity players is at the very top of the market, where if a property is under twenty million dollars, they’re not interested.
What an Ideal Deal Looks Like
Gordon Lamphere: That’s similar to what we’ve seen in Class B and C industrial, where we’ve made a lot of money over the years. Without getting into anything proprietary, what does an ideal deal look like? When you’re looking at a development or redevelopment, are there metrics that stand out?
Fernando Angelucci: Number one, demographics drive everything. This is real estate: location, location, location. Right now, looking at my pipeline at our all-hands call last week, we had about a hundred and forty million in developments, and people say, Fernando, you’re crazy to do developments with all these articles about an imminent recession. But self-storage is recession resilient, and it operates really well in locations benefiting from recession. The Southeast, for example. We have seven projects between the Tampa and Orlando corridor, where people are moving in droves and home builders can’t put up homes fast enough.
All the things that make sense for multifamily or retail are what we look for: high traffic counts and visibility, next to dense residential, because that’s where my customers come from, in an area with an increasing and diverse population and job growth. The interesting thing about self-storage is that it’s hyper-localized. Typically 65% to 90% of your customers come from a three-to-five-mile radius, or a five-to-fifteen-minute drive time. So you can’t say Chicago is great or Tampa is great. You can’t even say the West Side of Chicago or the east side of Tampa. You have to drill down to what the supply and demand is in that area and whether it can absorb new units. When I’m building or converting a big box, I’m secret-shopping the competitors to make sure they’re all at stabilization or better. In our industry, ninety percent occupancy is considered good stabilization. Above that, you’re not pushing rents high enough. Below it, either your rents are too high or the market is oversupplied.
Gordon Lamphere: On adaptive reuse, we occasionally have large industrial properties come available, and self-storage is probably the highest-volume call we get. What makes a good building for effective adaptive reuse?
Fernando Angelucci: There’s a back-of-the-napkin rule of thumb. For my type of redevelopment, I don’t go into a project unless I can put up an institutional-grade amount of storage, because I’m always thinking with the exit in mind. Our goal is a ten-figure exit in ten years to one of the top eight or ten publicly traded companies. So I won’t look at anything where I can’t get at least 65,000 net rentable square feet. Our typical efficiency, based on pillar locations and the layout of the envelope, is 73% to 78%, so I’m looking at big box stores of at least 85,000 gross square feet. I want good bones. Sears buildings are a perfect example, Walmarts too, and old grocery stores. I stay away from businesses known to beat up their facilities. Kmarts are a perfect example; every time we’ve walked a Kmart, everything was shot, the roof, all the MEP. On the demographic side, these buildings are already located where self-storage works: dense residential, high median incomes, major thoroughfares, high traffic counts and visibility, because retail needed those things too.
Depending on pricing, I also look at clear heights. Typically we buy these buildings at eight to twenty dollars a foot, but some sellers are asking almost double for vacant boxes, and I’m willing to pay that if I can put in a mezzanine level. Say it’s only 50,000 gross square feet, but the clear height is twenty-four feet to the rafters. That lets me build a second floor inside that single-story building, double my footprint, and make the metrics work, both financially and on size for exiting to an institutional player.
Leasing Up
Gordon Lamphere: You keep mentioning exits, and we’ll come back to that. But how do you lease these up? Is it predominantly web advertising, boots on the ground? On the commercial side there are many ways we reach B2B. How do you reach the consumer?
Fernando Angelucci: It’s a mix of marketing campaigns and the type of people you hire. When we hire a property manager, the profile we want is really a salesperson, because we want them to get people in, convert, and upsell. Even though all our facilities are built to run completely remotely, during lease-up we typically have one or two full-time sales people pushing. They do grassroots marketing, creating partnerships with apartment buildings, pizza companies, assisted living facilities: send people our way and we’ll cut you an Amazon gift card or some bonus. They also have to convert on the paid marketing: SEO, PPC, and aggregator sites like SpareFoot. But the biggest thing, even in the information age, is that when you ask customers why they chose your facility, most say they saw it on the way home or on the way to work. That’s why visibility is so important. We’ve been brought a lot of industrial properties to convert, but they’re hidden back in industrial parks where no consumer would ever drive past, only people who work there, so we always pass on those. We put in a pretty hefty monthly marketing budget during lease-up, but once we hit ninety percent occupancy, we can take our foot off the gas, and the rest is organic.
Gordon Lamphere: That makes sense. We probably do digital marketing better than anybody in our area, and I’d still say thirty-five to forty percent of our business comes from signage alone. On the exit: what does an exit look like compared to a lease-and-hold investor?
The Exit
Fernando Angelucci: I’ve run the numbers on lease-and-hold, and the problem is that because we’re forcing so much equity into these deals, that model doesn’t make sense from the long view. I’ll always have properties I hold as a retirement portfolio, picked off as I go, where I don’t need debt or investors. But the majority of deals I do, I bring in accredited investors and family offices, and they want a return on their capital as fast as possible. They want velocity of money.
There are two styles of investors. Some are willing to take risk and go into more opportunistic investments. Others are coupon clippers who want their five or six percent cash-on-cash return every year. For adaptive reuse, ground-up development, or heavy value-add, we use the opportunistic investors who want higher yield for the risk. The second the facility is stabilized and at peak value, we move it into a separate income-based fund, which can be a DST structure or a pure income play. The goal is reaching the critical mass to exit and get real cap rate compression based on portfolio size. You get a premium on size. This just came out in the news: we’re here in May, and this happened in April. Public Storage, the number one publicly traded REIT, made an offer to buy Life Storage, and it was too low. Extra Space saw the opportunity and bought Life Storage for $12.7 billion. All three are in the top six. So you’re seeing the further aggregation we talked about at the start. To get that kind of multiple, you need critical mass. At about eighty to ninety Class A, fairly homogeneous facilities, I’d be able to exit to one of those top six at a multiple well above what the facilities are worth individually, because of the premium on portfolio size.
Interest Rates and Creative Financing
Gordon Lamphere: The biggest thing everyone in real estate is talking about is the high interest rate environment. This podcast will come out in a couple of weeks, and I think we’ll still be in it. How have high interest rates changed the deal-making process, or have they?
Fernando Angelucci: It’s interesting that you say high interest rates, because we’re still historically at some of the lowest rates this country has had in the last hundred years. It’s a return to normal rates, not high rates. If you want high rates, talk about the eighties and the Paul Volcker years, when we had eighteen percent. If people are convinced these “high” rates change deals or slow them down, they don’t. To say real estate investment and development stopped in the eighties is ludicrous.
Two things matter. First, interest rates don’t matter. What matters is your real rate, interest rate versus inflation. Today, May of 2023, we can still borrow at a rate lower than inflation, which means we’re literally getting paid to borrow money. People talk about interest rates but never the other piece of the story. Hoarding cash right now is dumb, because inflation is eating your purchasing power while you can borrow for free. Second, yes, higher rates have squeezed debt service requirements, which I see as a good thing. In the last ten years, in my industry and in all real estate, a lot of people who had no business being in the business are getting pushed out because they don’t know how to do or structure deals. They came in with super high leverage, and that worked for a while because the market winds were behind them. Now we’re returning to reality. You can’t be the gunslinging, shoot-from-the-hip, it’ll-work-out-if-we-hold-long-enough investor. It’s been fantastic for us. Our deal flow has increased substantially as rates have risen, because we’re competing against fewer people.
We get deals done two ways. One, appropriate leverage so debt service is in check. Two, the forgotten art of creative financing and deal structuring. Seller financing and mortgage assumptions were common in the eighties and early nineties, and people forgot how to do them because you could go to a bank and get a sub-three-percent mortgage. We have a lot of deals structured creatively where sellers carry the paper at rates half of what banks offer. Sellers still want their pricing. When rates change this fast, buyers are twelve months in the future and sellers are twelve months in the past. The seller says a broker told them the facility was worth X eighteen months ago. I say it was worth X eighteen months ago when I had eighteen-months-ago financing. So either you come down to my price, or I’ll go to your price if you offer me the financing that was available when your facility was valued at that number.
People are fixated on cap rate and purchase price, and that doesn’t matter alone. The other side of the equation is financing. At a five percent rate on a twenty-five-year amortization, you’re basically buying the asset twice: once at the purchase price, and again in interest over the term. So I’d rather say, Mr. Seller, you’re asking twenty percent above what I think market value is using bank leverage available today, but I’ll pay your price if you give me four percent interest, ten years interest-only, no principal payments, and a ten-year balloon. If they say yes, I’ll pay a substantial amount, because I know how to use a financial calculator and an amortization table. We’ve done step-up rates: a fifteen-year term where every four years the rate goes up three percent, but I start at zero percent, so in the first eight years I’ve nearly cleared the principal.
For bigger value-add deals where we need a major construction loan, no construction lender will be in second position, and most won’t allow a second position behind them. So how do you get around that with a seller? Move them from the debt side to the equity side. You come into the deal as a JV partner and contribute your property to the venture, and I make you a preferred equity partner, paid before everyone except the bank. Then the bank lets me use all the equity in that property as my down payment, which juices returns for investors and for the seller now in a pref equity position. That lets us do deals at prices that wouldn’t work if I had to use debt for the whole piece. Now I’m walking into a property with three million dollars of equity in the land alone, used as the down payment toward construction.
The Final Four
Gordon Lamphere: We’ve generally been fans of the higher rate world, because in a world without tailwinds, the cream rises to the top, and it forces creativity. It’s fascinating to hear how you’re getting creative. Sadly, we’re at our Final Four. First, a favorite of mine: what’s changed most about commercial real estate, and how do you see self-storage moving forward?
Fernando Angelucci: I touched on this a bit. Self-storage is suddenly a sexy asset. After Time and Fortune started writing about it, we have all this money chasing it, but a lot of that money is unwilling to do the dirty work. So there’s a huge opportunity for aggregation, especially if you know what you’re doing and have the operations to back it up. I think we’ll see a lot more creative financing in the next five, maybe ten years, depending on rates. And the general appetite for this asset class is coming out of the shadows and becoming mainstream. Instead of people talking about what stocks they bought over Thanksgiving dinner, GameStop and all that, they’ll say, I invested in a self-storage REIT or a private syndication with Fernando. I think that’s going to help a lot of people beat the inflation trap we’re seeing.
Gordon Lamphere: There’s always money to be made if you’re willing to roll up your sleeves and get dirty. That’s always been our advantage, going after smaller, dirtier assets. Let’s travel back to the start of your career. Leaving high school, what career advice would you give young Fernando in one minute?
Fernando Angelucci: I’d tell a younger Fernando to start bigger. There’s only so much time in this life to invest and make money, and starting with twenty-five to fifty thousand dollar houses was almost a waste of my time, looking back. I’d tell him to go to a commercial real estate symposium or one of these large conferences and start walking around to see what opportunities are available. And realize you don’t have to do everything on your own. Real estate is a team sport. Even if you get into a huge deal with only two or five percent ownership, that’s how you learn while making money. You don’t have to keep a hundred percent. I’d rather have one percent of a watermelon than a hundred percent of a grape.
Gordon Lamphere: That’s been my life thus far, slivers of a lot of big deals. I’d highly recommend that to anyone dipping their toe in the real estate water. Not everybody can get to a symposium or meet somebody in the business overnight, and one way I always recommend learning is through books. Are there one or two books that have particularly influenced your career?
Fernando Angelucci: Absolutely. The first isn’t a real estate book specifically, but a book on running businesses, which real estate is: Traction by Gino Wickman. If you don’t have an operating system for your business, you’re always reactive and putting out fires instead of being proactive and scaling as fast as possible. The second also isn’t technically a business book. It’s about tactical empathy: Never Split the Difference by Chris Voss. It makes you a better partner, a better negotiator, a better family member, a better friend. If you’re starting out in the space, those two will pay back their cost in time and dollars many times over.
Gordon Lamphere: I have to read the first one, and Chris Voss is an excellent choice; I see it right there on my shelf. Now the most important question. The whole reason we created the Real Finds Podcast is to identify key voices influencing the real estate world and the world we live in, because real estate is fundamentally the way we interact with the world. Is there a person we should reach out to who’s influenced your career or is influencing the world right now?
Fernando Angelucci: I have a good buddy based in Phoenix who does self-storage as well, with a different approach. He has more of a Warren Buffett style, using a holding company that’s completely vertically integrated. They’ve bought the construction equipment company, the construction management company and GC, and the metal doors and divider supplier, which has helped them grow super fast. His name is Andrew Abernathy. The way he models his investments is very interesting. Instead of a traditional syndication with distributions and cash flow, there’s none of that. It’s like buying shares of Berkshire Hathaway. The value comes from the underlying assets and companies you own, and whenever there’s an event where shares are being sold, you have the option to sell out or not. It may not be the best style for everyone, but for those who don’t need distributions to live on and are just looking to put away value, maybe in a retirement account, it’s a really interesting model he’s created at Abernathy Holdings.
Gordon Lamphere: We have to reach out to Mr. Abernathy and learn about what he’s doing in the Southwest. The second most important question: how does someone reach out to you, whether they’re in our audience or want to invest?
Fernando Angelucci: I can give you the boilerplate answers: go to our website, SSSE.com, follow us on social media at Self Storage Syndicated Equities, or triple S E, and follow me at The Storage Stud. But I find that doesn’t really help people reach me. So what I usually do, which is a little unorthodox, is give out my cell phone number. This is my real number. If you text or call, I’ll answer pretty quickly: 630-408-8090. The interesting thing is I’ve been on over a hundred podcasts, given my number on every one, and I still barely get one or two people reaching out every couple of weeks. So be an action taker. If you want to learn more about our business or self-storage in general, I’m at your disposal.
Gordon Lamphere: Fernando, thank you so much for hopping on the podcast today, and we’ll have to have you on in the future.
Fernando Angelucci: Thanks for having me, Gordon.
Gordon Lamphere: Thanks again to Fernando. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions truly matter and help us continue to provide quality guests. You can follow us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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