Often, we are dealing directly with the owner of a self-storage facility we are looking at buying.
It is hard to get financials, unit mix, or anything to go on in the first few meetings or conversations to help us see a potential value or where any upside is.
So, when the owner of the facility says, “I don’t have a price…” after you ask what they want for it, the next words are usually “Make an offer.”
This can be dicey because we are negotiating with ourselves.
Many of us just won’t make an offer and walk away.
I usually ask for a random daily close from their operating system and tell them I’ll get back tomorrow.
A random daily close form from the past month is a non-invasive, non-threatening form to ask for, and I can get a lot of information from it.
Now, when I developed my chops using this technique, the Site Link operating system had a lot of market share.
Today, there are a lot of new and good operating systems out there. Not all of the daily closes have the same amount of information as a daily close or “Management Summary Report” (what a daily close report in Site Link is called). It is automatically printed every day with a close.
Often, if the owner is using another operating system, I have to ask for a couple more to get the same info. You will know what to ask for by the time this episode is over.
I thought I would show you a couple of daily closes from two projects I have looked at.
They are amazingly awful.
But many facilities like this are out there.
The last one I will show you is from a well-run facility.
I really can’t remember the first two because I look at so many, but you will be amazed at how much actual information you can retrieve from this report and how you can see the upside.
Facility One
This was a daily close on a project from Oct 31, 2018, on the Site Link form.
The first place I go is on the top right side (1).
I see this is a 62,200-square-foot facility.
I see 82.1% of the square feet are “occupied.”
Ok. I quickly go to (2) right under this.
Wow! 20.4% of the units are overlocked. But as you will see, that is just the tip of the iceberg.
My guess is that this is all non-climate controlled, or there is parking included in the square footage in (1). Most likely cheap, non-climate-controlled space.
I am also guessing that the trade area is over saturated and this is an older project, or just not very well located.
The next place I go is the GPI (gross potential income). It is $37,389 per month. In other words, if every unit was rented at the street rate and everyone paid, the maximum rent would be $37,389 per month or $448,668 per year.
I next glance over to the first column under “receipts’ (4) to see what they have actually taken in.
Given this is the end of October or 10 months of business, I take the monthly income of $ 37,389 and multiply it by 10 to get $373,890.
But the receipts tell me they have received $243,370.
That’s a 65.1% actual economic occupancy. So, if physical occupancy is 82.1% and economic is 65.1%, what’s going on?
The next item tells me.
Unpaid charges (5).
In the eBook I wrote called Key Performance Indicators (KPIs) we use, one of them we track is called “delinquency ratio.”
I divide the total unpaid charges by the monthly gross potential income.
In this case, it is $21,597 divided by $37,389, or 57.8%.
In a well-run facility, this is 5% or less.
Incredible.
They obviously have payment plans with customers. They have money trickling in on probably 90 to 97 units ( I am taking out 1-20 days on the unpaid charges units).
This is gumming up at least 17% of their cash flow, if not more, over a full year.
Never, never do payment plans.
You are better off letting tenants go collecting nothing (although that is not what we do) than making it impossible to ever get ahead with units occupied by non-paying or slow-paying customers. I also bet there are now auctions going on.
That is the potential upside if the market is just not totally over-saturated. That is my next job to look at the market and get a feel for the saturation.
I look for discounting, square feet per capita, and where the rents for this facility are compared to the rest.
I use Radius Plus, but there are a lot of subscription services. Just Google your competitors and try to figure that out.
Let’s estimate the “As Is” value of the project.
Without having seen the facility and having no idea of deferred maintenance, if you take their current income it could look like this:
I take the total of $273,216 they have collected, back out the taxes and rent taxes (probably in Florida or a state that charges taxes on services and/or rent), to come up with $255,047.
That is 10 months’ worth of income, so I divide by 10 to get $25,504, then multiply that by 12 to get $306,056.
Then I take out what percentage I think I could run a 62,200 square foot facility at as the operating expenses.
Let’s be aggressive and say 38%.
An as-is value could look like this:
| Income: | $306,056 |
| Operating Expenses: | $116,301 |
| NOI: | $189,755 |
| Value at 7% CAP: | $2,710,785 |
| Value at 7.5% CAP: | $2,530,066 |
Now, this is perhaps a starting place. There is more upside in the fact they have no tenant insurance, no retail, no truck, and no auto pay.
But I can get all of this off a random daily close. A good starting place for having a conversation with the Owner on value.
Facility Two
Let’s move quickly.
If you go to (1), we see this is a 25,015-square-foot project with 81.8% of the square feet “occupied.”
They have 5.4% unrentable; not sure what that means. People use this for lots of reasons besides having to fix or replace doors. They are also letting three units go at no rent.
The GPI is $18,027 per month (2) or $216,324 per year.
The delinquency ratio is a whopping 80.1% (3). The math is $14,437 divided by $18,027.
Are we beginning to see a trend with how many mom-and-pop projects are run?
Now, the reason for these many unpaid charges is, again, payment plans.
I would bet almost any amount of money that is what is going on. When you see ratios like this, this is what is at play. Owners cock their heads when I say something like, “Oh, I see you have payment plans with many of your tenants.”
“How did you know.”
I just smile, but I can tell from this report.
So, given that this is the end of the year or the daily close on December 31st of the year, math is easy.
I look at what they have taken in in rent, or $152,638. The GPI is $216,324. So, economic occupancy is 70.6%. Physical at 81.8%, economic at 70.6%.
Potential upside.
They are getting tenant insurance income, and they only have 52 units out of 234 occupied on auto pay.
I have no idea of deferred maintenance and would Google satellite the facility to try and see. I would also analyze the market and/or trade area to take that into account to see if I think I could get the economic occupancy up to 85% or better.
But let’s quickly look at a value estimate.
Income for the year was $190,856 (less than $54.51 of taxes collected, I assume, are due). I will run operating expenses at 35% on this small facility.
| Income: | $190,856 |
| Operating Expenses: | $66,800 |
| NOI: | $124,057 |
| Value at 7% CAP: | $1,772,239 |
| Value at 7.5% CAP: | $1,654,090 |
Now, I am not saying you start here, but I can see what their income is and how well they run (or not run) a facility it is. I can also see there is at least a potential of $31,159 per year if I can get economic occupancy up to 85% ( I take GPI times 85% and then subtract actual rental income in (4).
I would not buy property if I didn’t think I could reasonably get to 85% economic occupancy.
Did you realize you could get all that off a daily close?
Let’s look at a well-run facility, and of course, it is one of mine. This was a couple of months before I sold it to a fund.
Facility Three
Now, this is a large facility, but the principle is the same. We looked at a 60,000-plus facility and a 25,000-plus facility. Here is a 100,000 plus.
I do know it had about 102,000 square feet of storage; the rest was parking.
We can see that the total square feet between storage and parking is 169,817 square feet, and it is 97% occupied.
GPI is $114,779 per month or $1,377,348 per year.
The delinquency ratio is 2.9%.
This daily close was dated June 30, so all I have to do is double the rental income received so far. The math is $636,445 time 2, or $1,272,890.
GPI is $1,377,348, so this was running at 92.4% economic occupancy.
When we sold it, there was a lot of room for tenant insurance income.
Let’s look at potential values:
Income is $1,309,156 (actual less taxes).
I also know this facility generated over $60,000 in U-Haul income.
Given I know this facility, the operating expenses were about 42% of income.
Potential Values today:
Income: $1,309,156
U-Haul: $ 60,000
Total Income: $1,369,156
Operating Expenses: $575,046
NOI $794,110
Value at 7% CAP: $11,344,435
Value at 7.5% CAP: $10,588,140
CAP rates were lower in 2020, so we sold it in the 5.7% CAP range.
Always use CAP rate ranges whenever you are looking at it.
Today, I at least try to buy at a 7% CAP before I do any value-added plays.
I can’t always do that, but that is my goal.
I hope this helps.
All of this came from one sheet of paper. Remember, if not a Site Link report, get the reports that have this information on it.
So, if you are looking at a project, and the Owner won’t give you the information you need to run a Proforma, a random daily close holds a lot of information you can use to get a glimpse into the performance of the project.
Good hunting and I look forward to seeing you down the road.
