Latest / Real Investor Radio Podcast / Ep 49 | Rising Delinquencies in Multifamily Market, & Self-Storage Sector with Jacob Vanderslice
Transcript
- Craig Fuhr (00:12) Hey, welcome everyone to real investor radio. I'm Craig Fure joined again by Jack Bevere. Jack, how are you? You're in a new location today. undisclosed. Jack BeVier (00:18) Doing great, sir. Great to see you. You know, we're kind of, you know, working on my Baltimore office on Coward street. So I got, I just, just saw I got a T sizzle up there on top of Ben Roffis burger, Terrell sucks. so as it should be, it's Roffis burgers on the ground getting sacked. So I'll be ice background. Craig Fuhr (00:39) It's, it's Orioles season, Jack, and they won last night. So it's all good in the hood. Hey, listen, got an awesome guest today. Can't wait to introduce him to everybody. He's going to jump in on this new story that you sent me earlier in the week, Jack. And so we've got a really great content for you all today. Looking forward to jumping in. So, Jack, you sent me an article sent Fred the article, a couple other folks in the company this past week from the real deal. News, which is a great source. The article was entitled Arbor modifies 1 .9 billion in loans as delinquencies keep rising. And this is Arbor Realty Trust. They're a prominent multifamily lender who works across the nation to supply essentially bridge loans, right, Jack, to multifamily investors. Jack BeVier (01:34) Yeah. One of their most popular products was a bridge loan. The kind of the classic one was a three year term with a one year extension variable rate loan for, for value add deals. Right. So like every multifamily syndicator from 2018 to 2022 was, was using Arbor three plus ones and they, they do CDOs collateralized debt obligations with them to finance that business. But they're the holder of the risk and the servicer as well. So when we're talking about when folks are talking about hey, you know, there's gonna be some multifamily distress coming up at some point in the future with this refi risk Arbor is one of the entities that is the ultimate bearer of a lot of that risk So this is a really interesting article because everyone's always wondered, you know, they've been talking like hey what's going on with Arbor's book because you expect them to You know, if there's gonna be the stress you'd expect them to be the ones, you know managing it Craig Fuhr (02:30) So the article quickly says that Arbor modified 39 multifamily bridge loans by extending the maturity dates and giving borrowers temporary rate rate relief in exchange, some borrowers agreed agreed to pay down principal, buy new rate caps and deposit more cash into reserves for renovation or future interest rate jumps. So it says on about $1 .1 billion in loans. borrowers put more cash into the deals, but only about 4 % of what they owed. And, you know, Jack, you're thinking like, well, it's 39 loans, right? Like, I mean, I'm sure they have a much larger pool. But, but I think, you know, the canary in the coal mine, you know, I'm, I'm harkening back to, you know, if you've listened to every episode of the podcast, you would have heard us speak about this in a couple of the initial podcasts where we kind of saw, a tremendous supply of multifamily units coming onto the market. We wondered about the demand for those. And we also wondered more specifically about what was going to happen when these rates continue to rise and guys are holding, you know, variable rate debt at 4%. And the the general consensus at the time, I think Fred was on that episode as well, and possibly even Ron Phillips was None of us saw a big foreclosure market coming, right? You guys were all of the mindset that it was gonna be like, you know, we're gonna work these things out and kick the can down the road. And that feels a little bit what Arbor's doing right now, would you agree? Jack BeVier (04:08) Yeah, yeah. There was a debate or I think there is still an ongoing debate as to, hey, when's the right time to time the multifamily market? Like when should you get back in and start buying multifamily deals again? And this impending distress that the rate resets are going to cause operators to have to toss the keys to their lenders. And as a result, the market's going to get flooded with inventory. That's one thesis, right? The other thesis that Craig Fuhr (04:22) Yeah. Yeah. Jack BeVier (04:37) I think we were kind of pushing, or I think is more realistic, is that lenders have no incentive to, or have every incentive not to foreclose on these properties and push a lot of inventory into the market, driving crisis down, right? Unless they have to, right? If the operator is just completely incompetent in mismanaging the property, yeah, sure, they may have to deal with those situations. But if it's just, But if it's just an operator who didn't get the rent increases that he projected and now can't afford the rate reset, but he can, but there is cashflow from the property. You know, my thought was they're going to kick the can, you know, blend and extend the loan, kick the can down and take what, you know, take what income they have. And essentially the, you know, the asset manager is just working for the bank. The equity holders aren't going to get distributions, but we're not going to see a foreclosure. The lender is just going to take what the property produces. And this Arbor article really kind of speaks to that narrative as what they're doing. So. Craig Fuhr (05:51) I think, Chuck, I think the more alarming data point in this thing, which which they kind of gloss over is that their delinquencies are up 70 % since last December. That's, they may not be foreclosing, but they're kind of on the verge of it with 70 % delinquencies, wouldn't you think? Jack BeVier (06:01) Yeah. Well, not 70 % delinquencies. Delinquencies are up 70 % percent, right? So that could be five going to eight and a half. That would be up 70%. So I don't think that they're flooded with delinquent. I don't think that most projects are underwater, but certainly there's an uptick in operators not being able to make their full mortgage payment. So I think that it's... Craig Fuhr (06:17) Okay. Jack BeVier (06:35) You know, in other conversations we've had with multifamily that I've had with multifamily operators, their view is that now I've talked to a bunch of guys who think that now is the right time to be buying multifamily because because the no other buyers are that because most of the buyers aren't that optimistic about big rent increases or decreases in decreases in operating expenses. So you're buying it on. the real cap rate. And there's not a lot of like exuberance in the market to bid those deals way up. And you on the other side of their thesis is in an inventory isn't coming, you know, and we're not building more right now. And there's not going to be a bunch of distress. The market is not going to get flooded with inventory from Arbor. Arbor is just going to work it out. And so it's the prices aren't going to keep going down. And we've just gotten to a stabilized cap rate place. And if you're still bullish to American housing, now is the right time to be getting back into the multifamily side of things. And I hear that. I think that that idea holds water. Craig Fuhr (07:45) Interesting. Well, we'll keep an eye on it. So let's jump into a different asset class, Jack. Introduce our guest for today, Jacob van der Slice from Van West Partners. Jake, how come you couldn't get your name, your whole name in the name of the company, just half of your name? It really presents. It makes my mind hurt a little bit. So welcome to the show. I'll introduce you fully in a second. But man, it's great to have you on. Thank you for taking the time. Jake is a principal at Van West and gonna hear all about the company and so welcome to the show. Jacob Vanderslice (08:25) Well, don't get me started on fitting our third partner's last name in the name. Craig Fuhr (08:29) You Jacob Vanderslice (08:31) and just couldn't get in there. But he deals with it every day. Yeah. Craig Fuhr (08:36) Yeah. And I was reading about you last night, obviously from your website. So how does a guy go from being a firefighter to being a principal of, you know, a very large self storage company that you've built? Jacob Vanderslice (08:56) Yeah, it's, it's really just repetitive failure, over, over and over and over again. we, we, we got into the, the single family business back in 2006 and, had a bunch of time on my hands because only worked 10 days a month, early twenties knew nothing about finance. I was a history major, got my pilot's license, firefighter, and just started buying rentals and, got busy doing that and quit my job and. been unemployed ever since then, I guess going back to 2006 now. You know, we did a lot of fix and flips rentals, we were buying deals at the trustee sales. Gotten a commercial real estate in 13 and 14 with some adaptive reuse retail projects. Did some town of development, some multifamily. And we looked at storage for a while and we liked the fact that it's been historically downside protected. Craig Fuhr (09:49) Mm. Jacob Vanderslice (09:49) And one of the main problems with our business at the time, it was, it was overly transactional. We were buying and selling too often and too quickly, kind of an eat, what you kill model. And we thought that storage might be a good vehicle to kind of shift that thesis to cashflow and kind of long -term wealth creation. so we did our first deal in 15 and it wasn't really, an intentional. pivot to a new strategy. It was more just kind of try to deal out and see what happens. And it went okay. So we did some more and this over time, we evolved to being primarily a self storage owner operator. Craig Fuhr (10:20) Yeah. And so obviously you've you've blown that up to a pretty large scale. It's a website says that you've deployed over 250 million in capital for value added self storage investments throughout the United States. So obviously, you know, have have taken this on as your your primary source of of fun these days. So can't wait to hear more about it. Jack wants to jump in and let's kick this thing off. Jack BeVier (10:47) Yeah, so I've had the pleasure of hanging out with Jake and he's in the mastermind, the real investor round table mastermind for a bunch of years. And I remember when you guys were still, you know, still at that point where you were doing deals in the single family real estate side of things, trying some commercial out, but, you know, and I think that that's a common story, you know, folks who are flippers. after a while they get kind of tired, right? Cause it's, you're always chasing the next deal. You're only as good as your last flip. You're paying ordinary income taxes on everything and scaling those operations is challenging, right? Like there's a really tough maneuver, I guess, to, to try to, if you want to grow your business, building a, building a pipeline that's continued. continually feed the machine while it pays for itself and that there's enough leftover that after taxes, you're moving the needle for yourself. and so getting into more kind of like, you know, larger deals with more passive income, is, is I, I guess, you know, a path that I think a lot of folks have taken and self storage is really blown up. I think over the past five years, like in terms of the amount of investors who have gotten into that. Craig Fuhr (12:00) Yeah. Jack BeVier (12:04) And frankly, a amount of investors who have pivoted from single family into that space. So how did you guys have staff at the time that you guys were flipping a bunch of houses? And if so, how did you move? Did you repurpose that staff or did you build the platform over from scratch? How did that go? Jacob Vanderslice (12:22) Yeah, we, I mean, I cut my teeth in the single family residential space and I, no one loved it. I just like you guys, I can't tell you how many, you know, flooded basements I've waded through at two o 'clock in the morning with burst pipes and, you know, shining a flashlight into a vacant house window at 10 o 'clock at night before the trustee sale. it's a, I mean, we've all, we've all been there, right? We're, we're street guys in real estate. we had a. It was real easy for a while. As we all recall, there was a ton of deal flow with the trustee sales. we'd show up. We're in Denver. Yeah. Yeah. And we were, we were mainly doing deals in Colorado, but we did them all over the country. We, we set up operations in, Vegas, Phoenix, Kansas city. we did quite a bit in central Valley, California. most of it was in the Colorado front range though. And back then deal flow was easy. Jack BeVier (12:56) And you're in Denver, right? That's where you're buying cars. Jacob Vanderslice (13:17) there was such a deviation from the mean, right? This massive price declines, tons of deal flow, and we didn't have to be marketers. You would just show up, max bid, stack of cashier's checks. So we had a bidding team, a driving team, we'd be underwriting deals up until the last minute, checking our title work, making sure we're buying a first lien. And as that kind of got more constricted and values went up and our big, our biggest years were probably 13 and 14. We did a JV with Starwood capital, back when the institutional players entered the single family space. And that was a lot of fun. I mean, we just bought maybe about like 400 houses over 18 months or something like that. Craig Fuhr (13:46) Yeah. Jacob Vanderslice (13:58) and then, as the years went by, the market tightened up, obviously, trustee sale activity really diminished and we started having to do a lot more direct to seller marketing. And as you guys well know, that's really expensive. And if you're spending, you know, 50 or a hundred grand a month on your team and on marketing, and you're only getting a couple of deals a month, you're, you're lucky to break even. So we've, we kept the business going really sort of on the side and we got into storage in 15, but we were still doing our single family deals. fairly actively, you know, really right up until COVID. And we didn't stop because of COVID. It just kind of was, we're looking at the P and L and kind of the distraction. It kind of became more of a labor of love than it was a profit center. And there's plenty of guys just like you and many, many around the country who have stayed in the business and figured out and are making money. And for whatever reason, we just couldn't, we couldn't figure it out. We couldn't figure out how to make money on this massive marketing spend, load up enough inventory to justify it. So reluctantly, at least for me, I think my partners are more supportive of it. We shut it down. I call it paused, but we paused it, you know, whatever, four years ago now. So I'm not sure if that'll ever reemerge. Craig Fuhr (15:09) It's like it's like being laid off from a job that you never get called back to, you know, just paused. Jacob Vanderslice (15:12) Yeah, right. Right. Yeah. I mean, we miss the trustee sales and the thrill of the chase and the auction bidding, but it's just not there anymore. And frankly, when and if it does come back, there is so much money out there that's smarter with a cheaper and lower return target than we have that there's a big decline at some point. They're going to jump back in and pay pricing that we never could. So we miss it, but that was kind of the longer version of the pivot. And we've retained some of our staff back from those years. Others have moved on. You guys own a business, you get it. And today we've got about 90 employees around the country, about 20 of them in Denver here, and the rest of our staff are our various onsite managers at our storage facilities. Jack BeVier (16:00) So how do you make that pivot? Right? Because I feel like a lot of guys feel that pain, right? Like in the flipping businesses is work, right? It's just, it's work. It tastes, some people love it. And so they love producing the product. Some people are really into design. And so they pour themselves into their projects and they take a tremendous amount of pride in it. But I agree with you. I think that building a platform that just flips and does that year in and year out. as the market continues to change, right? And competition happens, you know, more competition comes in and out and cost of capital goes up and you have to deal with fluctuations in the market. And frankly, like, and constantly staying ahead of the rest of the market from a deal sourcing point of view, I think is one of the hardest parts of it, right? Like we buy about a hundred houses a year and it's a grind. Like it is a grind every year and you get one step ahead of everybody and then they, and then six months later they catch up. and they're doing the same thing and bidding the margin back out of the deals. And then you got to come up with the next thing to like get in front of, you know, to get in front of the pack again. And that's a grind that just, I think, wears on people over time. Like, and I think that's a pretty common story. But making that transition though is easier said than done. Like you're like, and so we started doing some self -storage deals. How did you learn that space? How did you? wind down flipping operations and transition your mental energy and capital and team's energy into a completely different asset class. Like that's a hard transition to do. Craig Fuhr (17:36) Yeah, maybe, maybe you could talk about the sort of the first deal and learning how to underwrite that asset. You know, how, how did you pick the market? You know, I'm sure you're not on some major corner where extra space is, you know, my guess is that it was kind of tertiary, you know, talk about that first deal and really learning how to underwrite a brand new asset class after you had had so much success in the single family space. Jacob Vanderslice (17:36) Yeah. Yeah. So I've got, I've got two partners, Westfall and Wade Buxton and Wade many years ago, he graduated from DU, you know, within the timing of the financial crisis with the real estate MBA couldn't find a job. So he was mowing the grass on our rentals and our fix and flips. And, we're like, Hey, you want to come work in the office and help us bid at the auctions? And he said, great. So he came in, And then, so he left to go work for, this, this retail kind of strip mall investment shop called baseline. He was underwriting deals for them and we reconnected with them at about probably 13. And we're like, Hey, we're looking at this commercial deal. can you help us underwrite it? You know, whatever pay you a thousand bucks. And then, and we're like, Hey, you want to put some money into it. And so he called up grandma and, you know, got a hundred grand and we partnered together on our first deal back in, back in, I think early. 14 and I have a point in this story but his family built a storage facility. They're kind of self -made entrepreneurs out of Southern California. They built a storage facility when he was in high school and they still own it and they still obviously owned it at the time and Wade's like, hey we should we should do self -storage. I don't know so you know we don't know anything about that. So we started studying it more and our first deal... I'm sure you guys have been there many years ago, but our first deal, we got this development project and our contract in central Denver, basically the central business district of Denver and didn't have any money to buy it. So we road show this all over town and we had raised a ton of money for our residential program. We've done a lot of volume. But if you're doing a new asset class, right? Nobody cares what you've done before in the other asset class. First time in storage. Well, my partners did one, you know, 20 years ago. Call us on number 10. So this last group that we took it to was the first group that said yes. And they're a multifamily and industrial shop here out of Denver. And they're backed by a number of Lifeco's and you know, Craig Fuhr (19:47) You're brand new. Jack BeVier (19:51) Yeah. Craig Fuhr (19:53) Let us know how the first one goes. Maybe we'll come around for the second one. Jacob Vanderslice (20:12) friends and family equity, they're a pretty good size. And they're like, we'll do this deal with you guys and we'll bring you in as a minority partner in the GP, you know, participate in the promote and the fee income streams. And you guys will kind of be the lead, but we're going to do this with you and kind of learn this business with you. And on the first deal, they're like, you guys can use this to springboard at some point, you know, you're not taking great economics, but build your track record up. And I'm like, great. So we did our first deal with them. And it was a roughly a $15 million development project in Denver. And we didn't know, we didn't know, right? I mean, they've, they've developed big projects. We had to, but we didn't know storage and we didn't appreciate the impacts of new supply. The, the future impacts of our homeless issues in Denver. That was a major problem on this deal. So we did our first one in 15 with this group and we ended up doing a total of nine projects with them. Four of them were in Denver and five were in Milwaukee. And we being the bootstrap and young bucks that we were, we're like, Hey, we're going to manage these. We'll figure out a way to manage these. And they're like, we've got life insurance money in these deals. You guys are a bunch of real estate hacks. We're going to hire the REITs to manage this portfolio. So we said, okay. So we hired a extra space. And they managed the portfolio initially. And again, you don't know what you don't know, but we learned over time, you know, big surprise, I guess, that third parties don't care about your deal like you do, right? There's an inherent misalignment in expense load allocations, ancillary income streams. So we had one small deal in Wisconsin and we couldn't get extra space to manage it. And it was too small. They wouldn't do it. Craig Fuhr (21:54) interest. Jacob Vanderslice (22:08) So we're like, I guess we have to do it. So like, okay, well, good luck, go ahead and figure this out. So that was the first deal that we actually property managed in the storage space. And that was back in, I think 18. And, we kind of built our management platform around that. And then, and then eventually, as we learned the business and this partnership reached their allocation, we did our nine deals. They didn't want to do anymore. That was kind of their storage allocation. We want to keep going. So we started doing our own direct to investor single assets indications and building our management company kind of deal by deal. And then once we reached some scale and we demonstrated some performance, we convinced our original partners to allow us to take a number of these deals back from the REITs and manage them under our management flag, which is clear home self storage. and then if you kind of round trip the whole thing, we ended up firing the REIT. We had a regional operator manage some of the deals in Denver and we managed the deals in Milwaukee. And then in mid 22, we sold the portfolio back to the same REIT at a 2 .8 cap. So there's been a lot of signage changes on these deals over the years, but that's how we learned the business. And as you guys, I'm sure agree, so much of value creation and real estate is driven by your ability to effectively operate. And... every year we get less crappy that property management. We'll never be good enough, but we control it. We control the operating expenses. We control the revenue streams and we're not relying on someone to give us a report once a month on kind of how things went. So that was kind of the evolution of learning the business and then, We kind of in between all this, we did our first fund in 19, our second fund was in 21 and we're winding down our third fund right now. Jack BeVier (24:02) So let me rewind a little bit. So this first deal that you got these folks to give you a shot with, they basically said, hey, I'm taking part of your GP economics. So you worked for real cheap, but you're building the resume at that point. Did those, that fair to say? Craig Fuhr (24:04) Yeah, yeah. Jacob Vanderslice (24:20) Yeah, absolutely. I mean, they were, they were, so these guys, it's very difficult for two sponsors to partner together. Right. I mean, the way, the way we all make money is, is we get some fees along the way, obviously, but we make most of our wealth in our promoted interest, right. After you pay all the prep, return all the capital, you get a minority shake. So it's inherently tough for two sponsors to do deals together. So we did this with them and we were, they didn't so much take part of our GP. we made a general partnership with them and we took a minority shake of that GP. So they were getting promoted interest as well. But yeah, it was diminished economics, which we were fine with to kind of build a track record up and learn the business. And we went into this with them together. learning the business together along the way and we applied a lot of the mistakes that we made to future deals. And the outcome of the partnership was positive in the end. We made money, we made a really good return. But we didn't know what we didn't know. Craig Fuhr (25:21) I want to get back to the MBA in real estate who's cutting grass for you. You know, he turns the lawnmower off and he says, Yeah, I can underwrite that deal. It's just the greatest kismet of all time. And now he's a principal in the company, correct? Jacob Vanderslice (25:37) Yeah, we've been partners now for almost 10 years and with Wade and Aaron collectively been partners for almost 10 years, I think 10 years in June. And then Westphal and I have been partners together. We go back to junior high, you know, high school, college roommates, but he joined me as a partner in 2008. So it's been a long road for better or for worse. I'm sure both of them, many days wish they turned left instead of turning right, but it's neither here nor there. Craig Fuhr (26:04) You know, I'm guessing that I know the answer to the question, but I'll ask it anyway. If you had to go back and sort of take on that first deal again, you know, I remember the first single family flip that I ever did. I had no money, you know, went to my girlfriend's father. He said, I'll put up all the money. You, you do the work and we'll split the profits 50 50. And I'm thinking, well, 50 50 % is better than 0%. And I got to learn so much. from that very first deal and wound up marrying the girl. So things I guess worked out pretty well. But the crazy thing is, is, you know, here you've got such an incredible amount of operational knowledge, transactional knowledge in single family. And a lot of people, I think would be really reluctant to walk away from that after having such success, you know, raising the tremendous amount of capital that you did. But would you have had it any other way? on this first deal, very, you know, not a whole lot of guys jump into self storage and go, I'm gonna, you know, I'm going to do a ground up construction development deal for 15 million. Right. And so like that alone, I think would have just catapulted your experiential knowledge just in that first deal alone. And so when you look back on it, would you have had it any other way? Jacob Vanderslice (27:07) Yeah, it wasn't a different though. And by any means. Yeah. You know, I, all the mistakes, all the failures, I mean, we've had deals go bad. I completely crashed and burned in 2008. never, never had to be K but didn't have a penny to my name. Right. I mean, I'm sure you guys were getting beat up. Yeah. No, it's in, and the mistakes that we've made over the years, we remember every day in the home runs, you can chalk up to luck market timing. I'm sure there's some execution there and some operational prowess. Craig Fuhr (27:34) Well, that makes one of us. So. Yeah. Jacob Vanderslice (27:50) but I, I really wouldn't change a thing. I, it's, it's all been an evolution and we've learned so much along the way. it's, it's, it's easy to look back and say, I would have done all these things differently. And I guess, I guess the one thing I would say that I would have done differently is I would have had the discipline to hang on to assets. just the discipline to hang on versus smoking the crack of that sale and that $50 ,000 cash to seller event on the settlement statement and plowing that in the next deal. But at the time, especially when we were just stealing deals relative to what they traded for previously, it was really hard to hang on to them. There wasn't financing out there. Everybody was terrified. you're trying to rotate capital as fast as you can. but, yeah, that, you know, thematically, we would have, we would have been more disciplined to hang on to more of our asset base. That's, that's one thing that I would have changed. Craig Fuhr (28:49) Interesting. Jack BeVier (28:51) Did you did your economics did your cut of the GP economics improve over those nine deals or did you cut a single set of economics for all nine of those deals? Jacob Vanderslice (29:02) It was slightly, this has been a while, it's slightly varied from deal to deal, but we had roughly, we would co -invest and we had between I think 25 to 30 % of the GP and a similar percentage of the fee income streams. They were development fees, asset management fees, dispo fees. So it was more or less the same throughout all of them. Yeah, we weren't, we weren't kind of increasing that as we got to the last deal because you know, the GP is a relatively small pot. and you're splitting it with two shops and our partners with the guys bringing the money, bringing the debt, you know, bringing the name and the, you know, the gray hair, so to speak. so no, it didn't really go up over time. It varied between those ranges, but that's, that's about where it landed. Jack BeVier (29:48) So like, how did you afford, did you afford to build your platform inside of those smaller economics? Or did you have to wait until you got past that and that was all resume building before you could actually start building your shop? Jacob Vanderslice (30:05) Yeah, well, once we started, I mean, we had a, we have a bunch of, we sold some off, but we have some adaptive reuse retail assets here in Denver. We get a handful of single family. Jack BeVier (30:16) Hey, what's that mean? I always like what is adaptive reuse? What does that mean? Like? Jacob Vanderslice (30:20) Well, it's a really great way to sound intelligent when you're not intelligent. Craig Fuhr (30:23) Yeah. It's an old crappy Kmart jack that is sitting there vacant. I'm sorry, Jake. Jack BeVier (30:27) Heheheheh Jacob Vanderslice (30:31) Yeah. So it's your real estate rookie Jack. you know, I'll boil it down into, into simple terms for you. it's, it's buying, it's buying a 20 ,000 foot hundred year old brick warehouse bomb shelter. That's tired and busted. You put in demising walls, you make it beautiful. You update all the infrastructure and you put a brewery in a restaurant and a yoga studio. That's, that's, that's kind of the adaptive reuse, concept, but yeah, we've done a fair amount of those, but when we're. Jack BeVier (30:52) You got it. You got it. Jacob Vanderslice (31:00) As we were kind of getting close to making our last acquisition with them, we started, as I mentioned earlier, we started doing our own single asset syndications in the storage space and self -managing those. So we were kind of building our management platform in tandem with this partnership as it grew. And... As you guys know, property management is not a very high margin business. It's a very, very low margin business, but it's such a critical component to value creation. It's something you got to have. So yeah, we built it in tandem and eventually we took a number of these stores back and grew NOI and then blew out to EXR and kind of kept eyeing to the asset base. Jack BeVier (31:41) How much of like for the self storage assets that you bought that after the, after the first nine, how much of the profit as you look back on it today was attributable to buying it well or, vert versus adding value. Like you, you had a really creative idea and executed that plan, that business plan well. versus property management, you know, execution, operations execution versus the market. Like how, how, how did the value creation at the end of the day, how did that, how did the IRR that you were able to produce split between those four over the past, you know, whatever, if you look at self storage over the past six, seven years. Jacob Vanderslice (32:31) I would say answering that question depends on when the deal sales actually happened. So I would say when we sold that nine property portfolio in the middle of 22, we did not deserve a lot of the value creation and the upside that the deal saw. I think most of that was because of cap rate compression. We... We had so many management company experiments on those. You know, re -managed and a regional operator, then we took them back. There was a lot of friction with transitions and customer service when you're putting a new flag on something. And the last, we managed the Milwaukee properties for the prior year before we sold them. And I will give us credit there because we saw a substantial increase in NOI compared to the T12 when they were re -managed versus managed with us. Not to say that we're American heroes, but we just pay attention. We're not especially intelligent, but we watch the numbers really carefully and we care. So no doubt that was a big component to it. But these deals were just kind of, they were pillaged over the years with high operating expenses, big marketing allocations and one which may we can get into in a moment, but one big piece of revenue and self -storage is tenant insurance, which you guys might have heard of before. It's the same thing as renting a car at the airport. You'd probably decline the insurance coverage because you have it on your auto policy, but the margin on that insurance premium that you pay is enormous. In our case, we might pay our carrier two bucks a month per unit and charge our customers $20 a month. So the reason I mentioned that is depending on the read and how you're structured, Craig Fuhr (33:53) Yep. Jacob Vanderslice (34:17) Some of the REITs keep all of that top line revenue for insurance for themselves. They don't share that with their third party owners. So that was part of the value creation when we took over is suddenly all that insurance revenue that was going into their pocket was going into ours. So that was a big movement, but I would say on those deals, I don't know, I'd say 70, 30 kind of market tailwinds, cap rate compression to operational prowess and kind of buying it right. on the deals that we've sold. We've sold six deals in the last almost a year, about 10 or 11 months. And it's tough. Obviously you're not seeing cap rate compression today, right? You're seeing the opposite. And a number of those deals, our lowest return on those was, by the way, I hate IRR. It's a BS metric, but we still speak to it and quantify it. The worst of those six deals did a 7 % IRR and the best did a 33. And I would attribute those kind of the opposite ratio. I would say even more so. Maybe storage still has some cap rate compression. There's still more capital than there is inventory. But I would say 80 -20, you know, execution, operational excellence, and then, you know, 20 % on the... Just there's a lot of money out there. So cap rates are still fairly compressed depending on the market. So it kind of depends on when the sale occurred. But yeah. Jack BeVier (35:45) Like you've been, you still pay attention to the residential space, I gather. Jacob Vanderslice (35:51) yeah, absolutely. Yeah, as much as I can. Yeah. Jack BeVier (35:54) Like how have those like, is there a tale of two markets there or have they kind of gone together with interest rates being like the driver kind of pushing both of those forward? Or do you think that those are, or have those asset classes, those two asset classes experienced like two different curves over the past five, six years? Jacob Vanderslice (36:14) Market is so confusing. I guess it's always confusing, but I mean, we sold, first of all, Illinois may not be the number one market you're targeting to deploy capital into, right? It's kind of got a bad rap. There's good stuff happening in Illinois, but not everyone's like, let's go do Illinois. We sold two deals about three weeks ago in suburban kind of central Illinois at a T12 4 .8 cap. And... we viewed those deals as stabilized. We were 90 % unit occupancy. We were 100 % economic occupancy. And the buyer's a top 10 storage operator. And obviously their view was there was still some value creation. Maybe we're a bad management company and we're missing something there. But generally what's happening, so you still have some cap rate compression there, but in the storage space at least, you're seeing... distress, not necessarily distress, but it's hard to get C of O sales done. So if you're trying to sell a property like a merchant builder, you're trying to sell it new, but empty, those are really tough to execute on. And I would say if you're likening kind of the two asset classes together, especially on the debt side, and I think you guys might agree with this, but lenders are a lot more focused on the T12 or T3 or T6 than they've ever been before. All years ago, we were getting loan proceeds based on the dream. Like we're going to grow in a line year one by 15 % and they're going to size our loan accordingly. And they cared about the trailing performance, but not as much. Now all of your financing is sized to that trailing. So if you have a deal that's, that's very low performance or it's early stage lease up, those are tough to get financed. And, and you're, you're not seeing as many trades, And the second component that we're seeing a lot more now is buyers are wanting to solve to a much more believable, stabilized yield on cost than they were before, over a fairly short period. I think in storage, in many cases, guys are trying to get to a six or seven yield on cost and say year three, and a believable story to get there. But we haven't seen macro. devaluation in the storage space. We're not jumping on the table and saying everything's down 20 % or 15%, whatever the case might be. And it's just because deals aren't trading. There's not a lot of transaction data out there showing what deals are worth. And we follow the multifamily space. We have a lot of our LPs that are in various indications of multifamily funds. And we're hearing more and more stories now of duress. And that duress is not necessarily under performance. and the deal fundamentals, it's a distressed capital stack. As you mentioned earlier on the article, floating rate debt maturities, we can go on and on about that. But we're definitely seeing measurable increase in stabilized multifamily cap rates. But in storage, you could say it's gone up maybe 50 bips if you want to paint a broad brush on it. But there's still so much money out there, just classic supply and demand. There's a lot of equity that wants to be in the space and there's very little inventory to buy. Jack BeVier (39:28) So like, I've, you know, I feel it was like over COVID or just before COVID all of a sudden, like freaking a third of the invest, Rezzy investors in Baltimore all started doing self -storage deals. And there was a couple of educators that were like just having, just doing, you know, week long seminars or three day things and you'd fly out to somewhere and then come back and then be like, start sending direct mail to. little old lady operators who had, you know, their a hundred units self storage thing and that, and those guys just like, Like so many of them did really sound, at least to me, it sounded like they were doing really well with that. Like has the industry, has there been a maturation of the industry where like it took some, like a lot of the, you know, some of the inefficiency has gotten squeezed out of the self storage space or was that, or were those smoke and mirror seminars and that was all bullshit. And there's some like fatal flaw that no one's talking about, right? Like, how should I be thinking about the guys who got out of Rezzy five years ago and started doing self storage? Craig Fuhr (40:06) Yeah. Jack BeVier (40:31) And I have they haven't come back, right? And they haven't come back. So like, did they blow up or are they doing very well quietly? And and I missed it, you know. Jacob Vanderslice (40:42) Yeah. I'll specifically answer that question in a moment here, but I do want to touch on one thing. everyone is always asking about track record, right? Track record, whether it's an institutional investor or a hundred thousand dollar retail investor, talking about your track record. And I think track record means less today than it ever has before. If you bought deal, pretty much any deal, whatever five years ago, and you monetized it before early to mid or even late 2022, you probably hit a home run. And you might be a terrible operator. You might've been delayed on your construction project. You might've delivered it over budget, but you were saved by rising rents and compressing cap rates. So when, when, when people are putting out their pitch decks. Yeah, absolutely. Absolutely. And when people are putting out their pitch decks and, we look at our IRR track record and our multiple track record. Jack BeVier (41:25) The longer you go, the worse an operator you were, the better you did. Jacob Vanderslice (41:36) The question I always ask is when did you do that? Over what time horizon? When did you get in? When did you get out? It's like people saying, I got a buddy who's done really well in the stock market. Well, when? When did he buy in? When did he sell? And that track record component, it matters in that you've operated through cycles. You know what you're doing, you understand your asset class. But when a sponsor puts up a giant IRR a couple of years ago, today, just to a degree, it doesn't matter. To go back to actually answering your question, what's happening in the storage space as it relates to consumer demand? So we've seen, if you look at the articles out there and the data, you've seen a material year over year decline in street rates. And street rates purely mean what is the rent that the operator is asking for on their website? So on the website, a 10 by 10 is going for 100 bucks a month. So those street rates have declined materially year over year. Now, if you kind of pull back the curtain, first of all, you might infer, rents are way down. That's not good. The asset class is in trouble. But if you look a little more carefully what's happening, especially with the REITs, and we're doing this now more, we're kind of following what they do. Not in all ways, but they know what they're doing, but don't get me started there. But last year, the REITs started doing historically, substantive move -in concessions, more than they've really ever done before. So getting customers to move in at a really cheap rate. And before they started doing this, the typical, so one of the little acronyms in storage is an ECRI, and that stands for existing customer rent increase. And they're all month to month leases, so these ECRIs are how all of us create a lot of value or try to in our portfolio. So before all this, the REITs would do... ECRIs within like 9 to 12 months. So if the customer is still there in 9 months, they're going to see whatever percentage increase on their base rent. So what happened last year in conjunction with these more substantial move -in concessions is the REITs were getting someone in at a really cheap rate, but then they were more rapidly moving them up to market rates. So again, if you're looking at street rates, you see a year over year decline. But if you're looking at achieve rates, In many sub markets, you might see a year over year increase. But achieve rates are not as easy to get to as achieve rates, obviously, because it's not really public data. So you've got 23 for consumer demand and storage was fairly rough. And when I say it was rough, you're coming off of a historic peak in consumer demand. I mean, the NOI growth that we saw, Jack BeVier (44:05) Yeah, you can scrape the Ascii for yourself through the internet. Jacob Vanderslice (44:22) in the years following COVID, us and other operators was extraordinary. It was almost like the cap rate compression rising rent story. I mean, there was so much demand, people clearing out their third bedrooms, they're moving to a more rural location because they're working remote now. There was a big demographic shift that drove up storage demand and that couldn't last forever. So, 23 was kind of the year of moderation, but we're seeing consumer demand kind of come back. We've seen, for March and April, those two months and the time in the leasing season yet, those were the highest occupancy growth months in our portfolio that we've ever seen before. And it's a different portfolio makeup. We bought some new deals, we've sold some others. But the high level story is street rates are down, achieve rates depending on your operational prowess are probably the same as they were, maybe a little bit higher. But all these single family operators that might have gone into the storage space, their success or failure is probably driven by what was their debt going in? Did they go in with a floater or a fixed rate loan? What was the deal type? Were they building a new project and a bunch of new inventory came online and they got crushed? And what markets were they in? Just like every real estate investment, self -storage is so sub -market specific. Like right now, Phoenix is blowing up with new supply. It's probably a scary place to invest. Rents are going down, but there are pockets of Phoenix that still make sense. So it kind of depends on what they did and where they went. But just like anything, it's got a lot of risks to it. And one... Jack BeVier (46:03) So, so, so what, explain to me why a REIT would pay a five cap. Like what's, what are they, what's the story that they're telling themselves in a, in a 5 % treasury environment? Why would you pay a five cap for self storage? Which is, I would think like from a, you know, from a, from a supply of inventory point of view, there were probably very few markets that are, you know, geographically supply constrained. like, so, Why do they think that there's upside in rents that would justify paying a five cap? What's the story they're telling themselves? Jacob Vanderslice (46:40) Well, it's not just a cap rate exercise. It's also an exercise on replacement costs. Are we buying this deal for materially cheaper than it would cost us to build a new one? What's that look like? So that's a data point we look at too. I mean, the yield on cost, the cap rate matters, but what's your price per pound, right? If you're buying something that's pretty nice in a decent location, that's fairly new construction, and you're buying it for 25 % less than it would cost you to build it, maybe that makes sense. But I think there are... Jack BeVier (46:51) So. Okay. Jacob Vanderslice (47:09) Just like any, whenever you sell a deal, especially a deal that trades on a cap rate basis or a multiple of the NOI the deal produces, you're selling a dream, right? It's a, you've created, you've executed on your value creation and you've left some meat on the bone and you're selling this new dream to a new operator and they might be paying a five cap, but in their model, which their models are probably as wrong as ours are, all models are wrong. But in their model, they're probably seeing a story to get it to 6 .5 % by year three. But when you do the math, obviously, and you're thinking, all right, how can you finance it a seven and buy it a five? Obviously, it doesn't work, right? Unless you're really low leverage, you're probably losing money. The reason that's happening is that belief in that NOI growth upside. So that's... Craig Fuhr (48:02) Yep. Yep. Jacob Vanderslice (48:05) probably their logic in paying a five cap. Craig Fuhr (48:08) So, fascinating conversation, looking forward to episode two, why don't we end this one here? And I'd love to jump in and talk a little bit more about that dream that frankly, I had, I don't know if I ever even mentioned this to you, Jack, but I had a chance to sit in on several of those seminars with a very well known guru in the space. And I love this report, what I saw amongst those sitting in the room, sort of the dream that you just mentioned, Jake, and that whole business model of I'm going to buy it at this cap rate, we're going to add a little value, we're going to sell it at a better cap rate and make our money. I didn't see anyone in the room that was like, serious operator, you know, we're going to hold this thing forever. It was all the dream of like, you know, that back end five year performer that like never ever works out the way you said. the way you just said, right? So we'll end this one here. Check out Jack. Jacob Vanderslice (49:05) Never, never ever. Jack BeVier (49:09) Hey, we have one more Tuesday. And I really want to dig in Jake on the fundraising aspect, right? Cause you've fully made this transition to commercial real estate, which necessarily requires that you raise a lot of money. And I want to talk about that experience and how you guys have gotten good at that. So yeah, looking forward to the next one. Craig Fuhr (49:15) Yeah. I will tune in for the next episode with Jake van der slice from Van West partners. This is real estate radio. We'll see you on the next one. Jacob Vanderslice (49:36) Thanks guys.