Rich Kids of the SEC - fin

[continued from part 2]

We got through sitework. The cost of taking all that dirt out was substantial, but would’ve been worse if we didn’t have someone practically across the street who needed a ton of dirt for their own sitework challenges. We had spent almost every penny of my budgeted construction contingency.

Two other annoying things happened during construction that were the fault of the architect employed by the “design-build” firm. One was that we were forced to do an exposed ceiling in the leasing office because of a giant fucking beam that the architect had jutting through it. Another was that I’d approved a rendering of the required shutters that looked dark unless you zoomed in, but they turned out bright white. Looked awful against the brick when everything else was forest green; fortunately, they repainted them after I complained.

But a GOOD thing that happened after starting construction: I discovered not one but two market rate apartment complexes (not student housing) getting built on the same road within a mile or two.

This was a location and project I loved. I wanted to add my own special touch to the leasing office and I wanted it to suggest absolutely nothing about a college. I named the place Bent Creek Storage as it was right off Bent Creek Road. One of the nicest golf clubs in town, Saugahatchee, was on Bent Creek, so I went down the road to Saugahatchee and got an old painting of the 13th green and some antique golf clubs (1930s) for free. Then I went to the next-closest country club, Moores Mill, and was given some framed photos of one of their winning youth teams and a trophy that nobody wanted. Lastly, I made sure to mount a magazine cover signed by PGA Tour player Jason Dufner, an Auburn resident. I have never since put that much effort into decorating a storage leasing office.

We blew doors. We hit 100% occupancy our first summer, partly thanks to some crazy-ass lady with a few furniture stores who rented like 40 units – and wanted to pay $45,000 up front by the way.

We had locked in a 4.25% rate near the beginning of covid and were charging strong rents. We appeared to have filled up without needing the vast majority of our reserve for operating deficit and loan interest, so we were under budget despite “torching” our contingency (my partner’s words) on bad dirt. I was invincible.

I wanted to own something forever, even if my percentage resulting from my promoted equity was relatively small. I still think that’s a respectable thing and would still like to own some stuff in that way.

I was so proud of this thing, but the summer rush was almost half students, so occupancy plummeted to 57% after they moved out. We had brought in a bunch of cash and had cheap debt, and if my goal was to own this thing for 10 years, then I could try to be known as the best-looking and best-located facility in town with quality tenants and NOT drop my rents. Right?

Dumb. I bitched at the management company for lowering my rents in the winter, and they brought them back up. This avoided kowtowing to cheapskate prospects, but my occupancy sat and sat in the winter.

But I didn’t care; this thing wasn’t supposed to stabilize in one or two years anyway. In my first storage lease-up, my partner and I were stubborn about keeping our rents high, and by the time we’d exited they ended up being way too low. Why not take the high road on this one if I was going to have it 10 years?

Here’s why not: that interest rate was only locked for 5 years and interest rates didn’t stay low forever. At 80% LTC, that higher-interest construction loan payment can become quite a burden. The first fall, occupancy fell to 56. The next fall (2022), fell to 69 after hitting 100 again in the summer.

I wasn’t retaining nearly as many of my summer renters as I expected, and just because you brought in $72,000 in July doesn’t mean the rest of the year is spoken for. Especially when your operating expenses are like $350,000 a year, a good bit above your original underwriting from 3.5 years before.

I found out my backer was by no means married to the opportunity zone benefits of holding long-term, so it could make sense to sell. I had an “unofficial broker” arrange a sale to NY-based Prime Storage, who’d raised the largest fund ever for a single asset type.

That dealmaker told me not to fuck with their contract terms; they were stretching on price to get to the $10m I wanted and they were making an exception to their rule of not dipping into college towns. That contract gave them a 30-day “financial and property DD period” followed by a more generic DD period lasting another 60 days followed by a 30-day closing.

Idiotically, I had given them a free look at the ENTIRE summer including move-outs as the PSA was executed 5/30.

Having my signature block next to a billionaire’s signature block was a point of pride, but little did I know … It ended up making me merely the 200th person he’d retraded in his career. They were notorious for retrading, and had 0 issue walking when the kids moved out. Totally wasted everyone’s time. We dusted ourselves off and decided to hire a proper broker.

Around this time we discovered a 110,000+ square foot facility breaking ground about a mile east on the same road, in Opelika.

Inferior location, but still, god damn. Anyway, I got a couple different BOVs and one, at a low-$10m to low-$11m price range, was far more aggressive than the other. I put the less aggressive broker on another disposition in Florida and wanted to see what it would be like to hire the aggressive guy for this one. So, we cut him loose to round up offers, and he found an experienced buyer that I was familiar with and had read about years ago, and they were not worried about the new competitor. They closed at $9.35m.

This was about a 5.25-cap on T12 and they were hiring Extraspace to rebrand and chase better performance.

I hadn’t underwritten such an early sale but looking back at my model, a 9-point-something million dollar value at that point in the schedule was about right, and we were hitting a 25% IRR and a 2.1x equity multiple. This was a tough time for the whole industry in both fundamental operating performance and valuations.

Not bad for stepping off a collegetown rollercoaster. And certainly not bad for a mid-2024 exit. (Thanks Austin.)