The Storage Investor Show
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The Storage Investor Show
Maximizing Profits in Self-Storage: Insights from Kenny Pratt
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DESCRIPTION
In this episode of the Storage Investor Show, Kris Bennett welcomes Kenny Pratt, CEO of Crescendo Storage Management and Crescendo Properties.
Kenny shares his extensive experience in the self-storage industry, starting from the early 2000s.
He discusses the evolution of his business from syndicating deals to focusing solely on self-storage, the strategic acquisition and later sale of a portfolio under the brand Life Storage in 2017, and the subsequent shift towards boutique syndication.
The conversation covers strategies for maximizing storage profits, including effective rate management, tenant protection plans, and ancillary income.
Kenny emphasizes the importance of market demographics and cash flow in making acquisition decisions.
He also touches on financing strategies, segmenting customer bases, and the benefits of having trustworthy partners.
The episode provides a deep dive into the operational and financial aspects of managing and growing a successful self-storage portfolio.
ABOUT THE GUEST
Kenny Pratt has been in self-storage since 2003, previously serving as Director of Operations at Life Storage. In 2017, he co-founded Crescendo Properties and Management, now owning 23 locations and operating 43 with 3M NRSF.
https://propertymanagement.storage/
https://www.linkedin.com/in/kennypratt/
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NEWSLETTER
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Welcome to the Storage Investor Show brought to you by our sponsors. Check them out in the description below. My guest today is Kenny Pratt. He is the CEO of Crescendo Self Storage Management and Crescendo Properties. Kenny, welcome to the show. Hey, thanks for having me, chris. All right, man, give us real quick. You know 60 seconds on your background and what you do.
Speaker 2:Yeah, so I've been doing storage since the early 2000s. Came 2000s, came out of business school working for some guys who were syndicating self-storage deals and mobile home parks, and then we basically converted to all self-storage deals Over time, became a partner with these guys, been working with them for a couple of decades now. It's awesome partnership I wish everybody had as partners as awesome as mine. And yeah, so we've been doing that. We rolled up a bunch of storages out of the brand name Life Storage and sold it all off in 2017. That was a huge transaction.
Speaker 2:Back then Started over again, syndicating again. We sometimes describe it as onto smaller, better things. So we're not really doing any institutional capital. So we're not really doing any institutional capital. We raised a bunch of private equity from TPG back in the day and a big line of credit from Citigroup. That's how we rolled everything up, sold it off to Sovereign Uncle Bob's, which is now Life Storage, and then we started syndicating again.
Speaker 2:So we own about 23 properties and we manage about 43 properties. Um, and we manage about 43 properties. So we're doing um, we own, we're, we're buying properties, but really doing maybe I don't know probably two or three deals a year. I mean, we're not huge, we're not, we're not, we don't have a fund. So we syndicate each deal, yeah. Then um, so we don't have any kind of like pressure to get a deal done, um, and then on the management side we're looking for stuff that fits right in with the stuff that we already own or manage. So it kind of is a win-win for the people that we manage for and for us, because it helps us build our economies of scale on markets and so forth.
Speaker 1:Yeah, you brought up a lot of interesting points there. So we are going to talk about maximizing your self-storage profits in 2025 on the management side. But your background there in acquiring a, building up a portfolio over time and then rolling that up into Uncle Bob's, which is now Life Storage, which was purchased by Exaspace which, about that I know, it's a different time. So, if you guys are listening out there, you know Kenny mentioned that this happened in the exit happened in 2017, but it's been a little while. The economy is a bit different now. But talk about what that was like. Um acquire like how big was the portfolio that you exited that you sold off to, uh, life store, uncle Bob's life?
Speaker 2:So, pre pre pre, we call it private life storage. You know to differentiate, maybe. So, um, before that we were syndicating as well. And, um, we had a portfolio of 16 locations. Um, we had a. We had a relationship with a guy who was kind of a wall street guy, um, his name was Bob, Wallace was his name, and uh, he was like hey, like hey, look, if you look at the metrics, the public companies for the same, basically, their implied cap rate is much lower than a private company. And so, if you can roll up and become a public company, then you're going to get a higher valuation for the same amount of noi. And that was the basic, that's the basic economic premise. And so, um, my partner, greg, found these guys in chicago who were branded like they had the portfolio, like storage. They started. It's not our idea. I mean, that was the great brand name we were operating at the time under storage kings just crappy brand name.
Speaker 1:I mean you got.
Speaker 2:That's a great brand name. Well, uh, I mean, at the time this is like. This is back when we started. It was like pre, you know, pre-internet. Really, I mean like we were like you know, yellow pages. I remember there's a time when we had all of the yellow page books that we were in. I got our rep to send me the tear pages, as they're called, and I had them plastered in a hallway for every book we were in. So this is, you know. So Storage King is not a great name, anyway.
Speaker 1:Well, you guys should have been. That's where all the quadruple A storage that you could be listed. That's where all that came from Triple A storage or whatever, yeah.
Speaker 2:So so, we, greg, found these guys in Chicago and convinced them to kind of join in with us and so, instead of selling their properties, they contributed them into the mothership basically, and they kept equity in the deal and we rode that thing forward. I was surprised. I thought a lot more people would kind of contribute rather than sell. We ended up doing the bulk of it was purchased rather than the bulk of it was purchased rather than than a kind of an asset contribution, and so we ended up rolling up to 84 locations and then sold it at that time. It wasn't because we thought 84 was the magic number, but it just was. Like you said, the times change over time, the market changes, and so we found that, as cap rates were compressing, it was harder and harder to find deals that were accretive. We didn't have an NOI per share, but we had like a metric that was similar to that, so we could kind of gauge whether or not the NOI that we were getting based on what we and it wasn't even the acquisition NOI, because everybody does their forecast hey, if I'm operating it, this is what it's going to look like, right, yeah, so we would look at that and say, well, is this accretive or not? Um, and if it's not accretive, and it became harder and harder to be accretive and so we said, hey, uh, maybe we should start looking at an opportunity to sell, maybe we'll get.
Speaker 2:And so we looked. We had um, I mean the, the, the one of the genius things. I don't know if this was Bob's idea or or, or if it was our investment banker's idea or or whom whose idea it was. But uh, basically we went to market and said, instead of doing this as a typical real estate transaction, like buy whole, llc, the whole, everything you know Uh, and it wasn't really a broker transaction in the typical sense, it was more of a, um, investment bank type transaction. So we said, hey, these are the terms Um and so, and these are the terms that you're going to buy it on. And, uh, and so really, the price was really the main negotiating piece. It wasn't like offer a with 17 different terms and then offer B different price but 25 different terms. You know what I mean. So it was very. It'd be harder to compare, is there? All the terms were all the same, pretty much so okay, so wait.
Speaker 1:so to back up for a quick second, just for the listeners. So you rolled everything up. Was it because you mentioned 16 locations? When you rolled everything up? Did it? Was it 80,? You said 84?
Speaker 2:Well, 84 eventually, yeah, we just, I mean, it takes time to acquire right. So this was over the course of about four years, okay, and you know three and a half four years, um, and eventually sold it um to, uh, to sovereign uncle bob's yeah, okay, that makes sense.
Speaker 1:Um, and then how did you? You mentioned a couple things too that the it was becoming harder and harder to find deals that were accretive. That made sense. You know, on the acquisition side, are you guys? What was that like back then? What was driving that? Because we know today, inflation is a big driving factor behind that issue right now cap rates and all that but what was driving that back then?
Speaker 2:Well, I mean, I think so back then.
Speaker 2:I mean our strategy now is a little different when I say on the smaller and better things, we're not raising institutional capital, we're syndicating deal by deal so that we don't have time pressure, so we can find that kind of diamond in the rough and back in the day. Because our strategy at the beginning was very much we want to be class A, class B properties in top 50 MSAs because we want it to be acquirable. We wanted to be attractive to a publicly traded company or a private equity group or someone who would pay us that premium that we were hoping for by selling a portfolio right or to go public. So we had, from the very beginning, we audited all of our financial statements. We ran it as though we were a public company. We had, we had a board of directors. It was I won't name them but like people that in the financial community are well known, um, not necessarily storage, they're not storage people, but they're like well-known yeah, big names are well-known names yeah and um, and so we ran it as though we were.
Speaker 2:We were ready to be public, you know, um. And then when we came to sell the the kind of a pitch, I guess part of the accrete part of the way of getting a premium was to say, look, um, this is what we're going to do, and if you don't want, if you don't buy us, we're just going to, we'll just keep doing what we're doing and we'll just go public, um, and so we know we'll get a premium that way. So if you don't want to pay a premium, uh, for the acquisition, then we don't need you, we'll just keep doing what we're doing. When I say accretive, it's partly like you know, if you think about some of the, some of our best deals post sale have been in secondary markets, tertiary markets, um and that. But that didn't really fit the roll-up strategy to sell to a REIT or sell to a private equity company.
Speaker 2:So it was more like, as more and more capital was chasing deals, prices were going up in the markets that we were targeting and as prices went up for the same amount of NOI because cap rates were compressing it just became harder and harder to say, okay, well, how much lift can we get? And we didn't want to. We didn't want the lift to always just be the the magic of we're going to sell it someday and we'll get some. We'll get some, a lower cap rate on that sale. Um, we didn't want to assume that that that was going to happen. We wanted to make sure that when we bought stuff, we could actually, you know, increase the value of it and actually operate it.
Speaker 1:Yeah, you make it valuable, okay, and that that the lower cap rate and the potential sale later on was just kind of icing on the cake. Exactly, you got to be able to operate it. Okay, that's great. I want to bring it back to today here in a second. But you did say some of your better deals were the ones in the secondary or tertiary markets, but that didn't fit the buy box for the institutional buyers REITs or whatever. What about the secondary and tertiary markets is interesting and helps them. Uh, let's focus on the tertiary, for example. Um, like what do you, what do you guys define as or at least at that time, what was defined as a tertiary market and what made those deals work?
Speaker 2:well, I mean okay, so to differentiate with the institutional capital world, like in that time frame we had a very kind of defined markets and so forth, top 50 MSA. We had kind of a very strict buy criteria Post. Let's go back to kind of our small group syndicating deals again, like honestly, we don't have a written document that's like this is what a tertiary market is. I'm just using terms of art from things that people talk about in our industry.
Speaker 1:Absolutely yeah.
Speaker 2:So I don't have a.
Speaker 1:It's this amount of population or whatever, Population whatever, but I mean smaller markets.
Speaker 2:Like, for example, we own some stores in Sonora California, small markets. It's a small like kind of foothills market. I mean it's not a big market, but there's also we don't compete with any reach. I mean, I guess we had there's one NSA in our work, there's an NSA in our work, um, but there's just one, and so everybody else are kind of mom and pop operators. We have a couple in um, in grass Valley, california. I mean we're not only in California, but those are just a couple that are recent, more recent that that stand out to me. Um, yeah, okay, you know what I mean. These are smaller, these aren't, these are kind of like grass valley is like an hour outside of sacramento, yeah, you know. Yeah, but we also have a development deal. That's going crazy, that's gone gangbusters in sacramento proper. You know that we we took out of the ground, so we're mostly acquisition, we've done a little bit of development. That's a whole nother conversation.
Speaker 1:Yeah, um yeah, okay, so with the turk. Because I find it interesting. I, we look at deals. I've looked at deals in the past. We do look at, you know, population growth. Um, obviously you want to see new homes and you know all that kind of all the same metrics that everybody, all the larger players, want. And for that reason, because we want to sell later on to a larger group, which that's a great business plan, it makes sense.
Speaker 1:But when I was interviewing Bo Agnello from GoStoreIt, he said one of their best performing locations is in a tertiary market and I didn't get a chance to kind of dig into that more with him. But I find it interesting that you say you're not saying the exact same thing, but you're saying something similar that hey, some of the ones in the tertiary markets they do really well for us. How do you look at those? Because if I am tunnel vision looking at deals where there's 1% population growth and there's this economic whatever the heck the factors are, that makes me feel good about a location. But then I hop onto any of the data providers out there Radius Plus, trackiq, whatever and they show me oh, there's like three developments nearby and an expansion. We're about to go from 12 square feet per person up to 16 square feet per person within the next year. Yeah, the market's great and you got apartments and all that going up. But now I got to deal with this development that's coming in around our potential location. That's obviously not the same in the tertiary markets markets.
Speaker 1:But then how do you balance out the fact that, yes, there's maybe no REITs, but there's very little, or maybe slow population growth, or maybe it's a, you know, kind of a fixed I call it like a fixed population. People aren't moving out but not people moving in. Yeah, like is like. How do you guys uh, get comfortable with a market like that?
Speaker 2:I mean, I think for us, um, so we always, um, we're always buying with cash flow in mind. Currently, like our current, like our current investors that come into our syndications, um, they're, they like the cash flow, we like the cash. Like I don't, I don't, we don't have a, a strategy and like our the. The first, the last iteration was like build, sell. This iteration is more like build and ride, just ride the cashflow. Like, so, um, so I'm not so focused on who's my next buyer per se. I'm more focused on like, is this a good buy? Can I buy, buy this thing? And because I know how to operate a storage facility really well, I think I mean, I don't know pretty good, um, we're gonna, we're gonna take it from you know, we're going to take it in the, the, the, in a sense, the applied cap rate, if you were to you know, kind of the year one cap rate or whatever you want to call it. Right, yeah, I've done enough of this. Or, as a team, we've done enough of this that our projections are pretty good, like, I mean, when we say this is what's going to happen in a year, we're not very far off and so, so when we look at that and we go, okay, well, now we can get you know this is going to be a healthy cash flow. This is going to be a, you know, eight and a half percent cash on cash return, growing to 10 plus over the next few years.
Speaker 2:Like I feel, like I would be, I want to be, I want my money in that deal and I know my investors want their money in that deal deal. Um, and I don't really, and you know, and we'll put 10 year money on the. Typically we're putting 10 year money on our deals because we're not trying to like just flip it and sell it, you know. So if it's a, if we look at it and go, this is a good buy, um, there are competitors that we can, we can win, um, and yes, somebody might develop during that timeframe and yes, that will be, you know, in position temporarily on our returns or whatever. But because we're not sure we don't have a specific timeframe for selling, because we're not a fund, you know, whatever Then I mean we can write it out if we needed to.
Speaker 1:Yeah, okay, that's understandable. So when you guys are looking at a deal, it brings up the management side of the coin. So when you're looking at a deal, you're looking at a deal, you're looking at the financials. Maybe it's formerly mom and pop.
Speaker 2:when you're looking at tertiary markets, what size like? Is there a certain criteria for size? We don't like the small guys so much. I mean we have a couple um, we have a couple small ones, and it's only because they were like close to something we already own, like when I was listening to your um, your episode with the white label storage guys, yeah and um and like just putting together. And I went to a conference once with um, the uh go, let go local, the store store local guys.
Speaker 2:I live in corderlane and they host their thing in corderlane oh, yeah, yes, yeah, yeah, okay, so I live in corderlane, so I've been to their thing and they had the KO Storage guys on stage at one point.
Speaker 2:And it's just like to me, having like 100 locations but smaller seems like so much brain damage. Like I'd way rather have fewer locations but bigger, because it's just easier. It's just easier, yeah. And so if we're buying, we're typically 60 000 net rentable or bigger um. I mean, there are some exceptions to that, like if we can tuck it, tuck it in with something that we already have and if we run something unmanned which we have, a few um, it's always because it's closer to something that we have. That's man. So it's not a problem getting someone to the location to go put eyes on it, to go fix the thing, to go help the customer, to whatever. So we can reduce the staff costs by not having someone there all the time. But I don't have to worry about is it like how long? It doesn't have to go very many days without someone looking at the property to make sure it's not junk in the aisles or whatever you know what I mean?
Speaker 2:yeah, yeah, so, yeah so because we're not focused on kind of like the white label guys, like we just need to get a bunch of you know, or the copper storage guys. We're like we need a bunch of unmanned. That's our niche, like I feel like we could do it, like it's not. It's not that much different than running a regular one. You, you just have to understand, just have to have the technology part figured out, and once you do, then it's actually, I think, in my opinion, better to have it close by to something that has staff, because it's easier to service the issues that come up. You know it is.
Speaker 1:Yeah, it is. It a hundred percent is. I mean, if you buy a small deal that's unmanned out, wherever it might be it might be in Charlotte, you know, whatever a decent sized city but you don't have anything nearby. You're now relying on you know, like you probably heard in the podcast before. You're relying on a 1099 person to go by because you're not paying them W-2, full time income, right, and so they may incentivized to optimize the operations of your facility. They're incentivized to maximize their income per hour. So they're going to go there quickly, look around, do what you got to do as quickly as possible, take the photos and then leave. And that's really about it. And if an emergency comes up God forbid, because they're working another job, we got to come over to your place you maybe have to pay a little extra bonus or something like that to get over there and take care of stuff for you all of a sudden. So it really depends on your agreement with that person. But yeah, we've had problems in the past where people this happens everywhere but people were living in units. We didn't know about it, you know, until a bit later. Maybe a camera was disabled or whatever.
Speaker 1:But when you have a third party management company handling some of those things. You as the owner don't know sometimes what's going on at the property, whereas other people might. So you're right, I think your strategy makes a lot of sense. So you're targeting larger locations. Typically, the majority of the time, you can have a decently salaried or hourly person there handling whatever may be coming up. Can you give the folks a little bit of some, some tips, some advice on? You guys know how to operate. So when you look at you know a t12 or an operating statement or whatever. What are some of the things that you're immediately looking at, saying okay, where can we improve revenue wise or expense wise? What kind of jumps out at you initially?
Speaker 2:yeah, all right. So let me just plug real quick. Um, I mean, one of our core values is is um, is to be very, uh, what do we call it? Um the word that's escaping me process or amazing. All right, very process oriented. So we have. We have like kind of very checklist process oriented. So we have a thing called the magic revenue finder, um and so, and if you want, I can, I can send you a card. You you know, if you want, I'll send you one if you want, but that's awesome. Yeah, uh, basically it is.
Speaker 2:It's like um, it just kind of walks you through 11 different areas where you can be like okay, just on the revenue side, like, for example, we're gonna look at um and none of this is like rocket science, but it does help to look at it piece by piece rather than like, rather, look at a P&L and go, what can I do with the revenue? Kind of writ large, dialing into very specific little pieces and being okay. So, for example, what's the unrentable unit situation? Look like at this property, like, have they not been paying attention? Do they have 47 unrentable units, whatever? You know? Um, or what is the? What is the um? 47 unrentable units, whatever, or what does the delinquency look like in the sense that they have occupancy but it's effectively not revenue generating? We will look at rent per foot and all the market comparisons and all that to see from a revenue management's perspective. What do we think the opportunity is there. We'll benchmark all the late fees and lien fees to REITs and say, okay, well, if they're charging less than what a REIT is charging, then we should benchmark our late lien fees and our admin fees to kind of what the REITs would charge if they were in the mark. We look at here, I'll pull it up here, let me just I'll go through it real quick. We look at here, I'll pull it up here, let me just I'll go through it real quick. Um, we look at yeah, that'd be great.
Speaker 2:Uh, tenant, tenant protection is huge. Um, I mean, it's surprising how many people don't have still don't have that kind of thing in place. But it's not just having it, it's also what's your, what's your um attachment rate? Like, what percentage of your customers have it? It's also your average selling price, like. We've done a lot of work to figure out how to increase the average selling price of our tenant protection plan. So it's not just about selling. Like one thing that's I see sometimes is a guy who's like, well, yeah, I've got a tenant insurance or tenant protection plan kind of thing in place, but his average selling price is, like you know less. It's like 10 bucks ish, you know, and I'm like that could be. That could be like 17, 18, 19 bucks. You know, it depends on the market, but it could be much higher.
Speaker 2:I find that most people object, most people object to the idea of having the tenant protect. You know, being forced, if you will. I mean, we don't force anyone, but you know that's sometimes the feeling. You're asking me to buy something that I don't want. And it's not so much a question of whether it's ten dollars, twelve dollars or thirteen dollars or fifteen dollars, it's just it's the, it's the. It's almost like the principle of the matter. Like I have this, like I, I don't want to have this thing because I'm like I don't value my stuff enough or I don't, whatever, right, but yeah, we can overcome the hump of that. That kind of sentiment, then whether it's 10 or 13 dollars matters less. So I think there's obviously there's oftentimes opportunity to increase the average selling price of a tenant protection plan.
Speaker 2:Um, and also the kind of the way you sell it makes a difference, and that's that's a whole other thing.
Speaker 1:Um, that's good actually that's really good. People don't really think about that, because if you have a 50 50 thing, that's good. Actually that's really good. People don't really think about that because if you have a $50 unit, let's say, and you can get an extra $5 on the tenant protection, that's actually a good percentage-wise based upon your actual income. You think about it. It's like, well, it's a latte, but yeah, but it shows up in your P&L, it shows up in your income statement there, your operating statement. It can be very meaningful, especially if the current owner isn't doing it or isn't optimizing it. So we shouldn't sleep on that. So it's a good point.
Speaker 2:Yeah, and that's why I'm saying, like you want to look at it kind of piece by piece rather than just, well, you know, it's this many square feet we can typically get this per foot like, so, therefore, that the revenue number is gonna be x.
Speaker 2:Well, let's know, let's dial in like each little piece and see what that would look like, right, yeah, um, I mean ancillary income. Uh, we don't focus a ton on merchandise sales or or or truck rentals, although we do, obviously, offer both at at some locations I have truck rentals, uh, if it makes sense. Um, but you definitely want to look at it and be like hey, where can I, you know, where can I pull this lever? Is there a lever to pull here? I mean, we're actually considering. This is just kind of a one of the one of the. We have kind of a thought experiment that we run from time to time. It's just to be like how can we add $100, of revenue? And we don't, you know, like it doesn't have to be a hundred thousand, but it's just like let's think bigger than like 25 bucks.
Speaker 2:Yeah, it's a, it's a big, it's a number and it's something to aim for, and and so, just as just recently we were talking through like well, what about like Turo, like Anyway, we're always looking at. I mean, ancillary revenue is revenue.
Speaker 1:That's a great idea. Have you guys ever done like Amazon lockers? I don't know if that actually works that much.
Speaker 2:We've never done that. No, okay, but I don't know anything about it. I don't know if it's a good idea or not. I don't have an opinion, yeah.
Speaker 1:Yeah, go ahead.
Speaker 2:Oh, anyway, I was going to say so. We look at other things that are kind of like anti-revenue, like late fee waivers, right. So back in the day we used to allow our store managers to have some discretion over late fees. We now we do allow, we have, we have like a role in our company. We have a district manager, which is typical, store manager, which is typical. We also have an area manager, which is like a store their store manager, which is a little bit more responsible, and so the area managers can authorize a waiver of elixir as an example.
Speaker 2:The key there is not that the area manager is so much smarter than the store manager, but what it does is it alleviates the store manager from having the responsibility of having the angry or requesting or crying or whatever person in front of them and takes away the idea. I'm like I gotta either be the good guy or the bad guy, and I hate being the bad guy. Yeah, right, yeah, if they can say um, you know, I'd love to help you with that, let me see what I can do, but you know what I I'm not. I don't have the capability inside of our management software to waive your late fee. I'll'll have to make that request. Then they can make the request and if it makes sense, it makes sense, if it doesn't, it's easier to say no, yeah absolutely.
Speaker 1:Then that frontline person is like you said, they're not the one taking the heat and then it probably helps a little bit. On the reviews is going to be my guess, because right there, if the area manager can't, I'm sorry. If the store manager can't do something about it right now, you can get to the area manager and find out a bit later on, whereas if you told them, no, we can't do that right now, they would get really upset, like if I had the authorization.
Speaker 2:I just said no. Now it becomes a personal thing between the two of us.
Speaker 1:Exactly and I equate that with the store. Then I get mad and go online and write a review about that. So, yeah, absolutely, that's a good, that's a really good practice there.
Speaker 2:So you know, we look at move-in promotions. I mean I think it was Bo actually was talking about the six months half off kind of thing. Like I mean, I think sometimes people you know you're acquiring a property like they may have some really weird move-in promotions. Like I mean they probably I mean, if it's a mom and pop kind of situation they may have some very stagnant rates. Like you know, if you look at what's the rate change history here, it may be very like old, old school, like I change rates once a year or you know, I do rent increases once a year or I haven't done a rent increase in forever. You know, like so these are the kinds of things we're looking at on each acquisition and or or when we're bringing on a management client.
Speaker 2:I mean a management client is going to run through the same thing. We're going to look at it like how can we? Just Our tagline is rocket your cash flow with zero hassle. That's what we're going for. We want to rocket your cash flow. We want you, as the owner, to have a zero hassle, don't worry, it's handled. And so that's where we're going. We're going to go with the same checklist with them with their property, to try to just juice as much of it as we can.
Speaker 1:Okay, that's a good point. You mentioned the revenue there. I was going to ask you about ECRIs and what you think of that current practice within the REIT space and then others doing it as well. If you guys employ that, I assume you do. But how do you look at ECRIs when you're looking at a facility and of course you don't have to say every single thing you do but just in general how you look at that as far as being able to push revenue. And then what do you think about when you're trying to look for a new location and underwrite it with ECRIs? Whether they're doing ECRIs, it's kind of hard to come to a true value, I guess, or a true revenue number how do you guys look at that? So I guess? Or true revenue number how do you guys look at that? So I guess the first question is what do you do going in? What's the general ECRI best practice that you guys?
Speaker 2:employ. Yeah, so, okay. So we do do ECRIs. I would say. One thing that just recently came up was we had a manager quit and emailed her reasons, which is not often, you know, that doesn't always happen.
Speaker 2:Sometimes she was walking in. This person gave us an interesting glimpse into her mindset and reasoning. A lot of it came to some things. She criticized some industry practices like selling people's units, raising rates, things like that, it units um, raising rates, things like that. And so it was interesting because I was like, oh, this is, if she has this concern, I bet a lot of our staff, you know, um, especially at the entry level, are maybe have some of the similar concerns because they don't understand. I don't say they don't understand, but like, maybe they don't understand the nuance of um, why, why, things are down the way they're down. So, yeah, so we just spent a little bit of time actually just doing some Loom videos for our team to explain.
Speaker 2:So one of our Loom videos hang on, I'm going to pull that real quick is titled. One of our videos is titled Rent increases can upset people and here's why we do them, you know. And the other one's titled understanding our auction process. Do we kick people when they're down for a profit, you know? Like, oh, there you go, that's good, you know, trying to help our storage staff engage and understand some of the complexities, like with ecris, for example. Um, I mean there's lots there what the reits are doing.
Speaker 2:It's not how I would prefer to do it, because I do feel like it puts our store managers in a position to be the bad guys. Yeah, because I mean I wouldn't I'm not going to say the word like it's jarring for a customer to get a large rent increase right, yeah, and depending on and it's I think it's difficult to as you scale, as you get bigger, if you have one location, it's maybe easier to help your store staff be very on script, on message, all the time, because you only have one person with whom to train and give feedback and so forth. But to help everybody be on message or to explain, well, setting expectations with the customer or whatever, or maybe dealing with the fallout after the rent increase happens, that becomes much more difficult. So I wouldn't prefer to do it the way the REITs are doing it, because I think it's problematic. I think it's problematic but in some cases, like when I was explaining to our staff, like here's why we do rent increases, here's why it's because, realistically, you have I mean, unless you're in the, unless you don't compete with any REITs you have, even if you don't, I mean it doesn't matter, just having the nature of our business is six, five, six, 7% of our customers turn over every month, right, so you have to replace customers.
Speaker 2:If you have to replace customers, you have to go to market with a price and a promotion that is similar or competitive with your competitors. And unless you're and because it's very difficult even if you have a very nice facility, the best pictures on the internet, it's hard to convey a huge amount of differentiation between Store A and Store B. But even if you have video, but then you got to assume is the customer even going to watch the video and or read the copy on your website or whatever, right? And so because it's hard to communicate effectively the differentiation between store a and store b, other than the location of it, that's obvious to the customer. Like is this close to me or is it far away? Yeah, yeah, it's close. And there's two or three that are close. Um, I mean, yes, I guess if the one's really run down and one's new and modern, then yeah, it looks obvious. But if they're both kind of like class b facilities whatever, like you don't know that the one has weeds growing up in the back or not? Like you know what I mean. Like, yeah, subtle things like the gutters or not on the roof. So that are you going to get dripped on and rained on every time you walk in your unit and the books are or not? Right, like these are subtle things that you're not going to communicate well through your website.
Speaker 2:So therefore, your price and promotion has to be reasonably in line with your market.
Speaker 2:In order to attract the customers, you need to replenish the turnover, let alone grow your occupancy, if that's what you're trying to do.
Speaker 2:So if you have to have competitive price and promotion, then you have to also have ECRIs. Have competitive price and promotion, then you have to also have ECRIs If you're going to not just watch the value of your rent roll erode over time, at least in this market, right Post COVID, right now Maybe this hasn't always been the case, but at least post COVID we saw a huge increase run up in the value of each rent roll, because anybody that was paying attention was increasing rates significantly. And then and now we're not increasing rates, we're having downward price pressure, and so you have to create some ECRs and I mean, in some cases, you just have to make. You maybe have to accept, perhaps in the market, depending on the market you're in, that you're the value of rent rule is going to diminish a little bit over time, for the next little while perhaps, but you're trying to mitigate that as best you can, putting in some you know ECRIs, ECRIs.
Speaker 1:That's an interesting point. I never thought about it that way. I learned something. Every single time I have an interview that you do you got to backfill, move out. Even when you close on a facility, you can be the nicest, hey guys, we love you. Won't you stay, Don't leave, it doesn't matter. Somebody's in 20%, whatever the number is 10% of your rent roll is going to leave just because there's a new owner. I don't know why that happens, but whatever the number is, there's a percentage that just leaves and they won't come back, at least anytime soon. But you have to backfill and if you've got to get them in, you got to run a promotion to get them in, sometimes most of the time, and then you got to raise rents on the people who are there in order to make up for that shortfall. Otherwise, your whole pro forma and your whole business plan is now upside down if you don't do that in some way, shape or form. And then that affects the manager at the store level, like you just said. So that's a really good breakdown. I mean I appreciate that. I'm curious.
Speaker 1:On the acquisition side of the house you mentioned, rates are going down. I think Yardi Matrix just came out with their recent report, like quarter report or cyber report, whatever it was. They just came out with a report and showed most MSAs, most major MSAs, that they track rates are going in with downward pressure. They're going down. How do you guys look at deals? You're not under pressure to do any deals and every market is different. Of course Every location granted is different. Pressure to do any deals and every market is different. Of course every location granted is different. Um, but how are you guys looking at acquisitions, at least at this point in the cycle?
Speaker 2:yeah, so I mean I guess I'm not really a lot differently, um, it's just maybe fewer deals perhaps get done, um, but the, like I said, we're cash flow buyers and so we're just really looking at. I think the trick is or one of the tricks anyway, um is to you can't just look at what their current street rates are, um, or their asking rates, um, and you can't also go off the broker package that says you know, this is much, this is how much you know, kind of the P and L revenue and whatever. Because you got to look at the, you got to break down the rent roll a little more carefully and see like, how, who are the people on your rent roll, how long they've been there, um, and because if they, if they've been there since 2020 and ran up through COVID, um, and now they're paying much more than you're asking rates, I mean you can increase their rents. I mean people do pay. I mean it is possible, I mean we do it. You're asking them to pay more and they're already paying more than what your advertising rate is.
Speaker 2:But you have to be careful in what you assume you can do, because, uh, because you can't just assume like maybe in the old days, you could assume, like I'm just going to get a 2% or 3% annual growth on my, my top lane revenue, rental revenue, um, just because we're going to kind of see a little bit of church, you know, a little bit of inflation, kind of like prices will go up over time, kind of thing, like that's where we're at right now. So you just got to be more careful on the buy side as to not um, you know, you got to look at all these other revenue levers and say, is there enough juice in these other areas that I'm, I have a margin of safety, even if my rents don't increase significantly or stay flat or even decrease a little bit over the next 12, 24, 36 months. And also kind of depends on your um, I think, a little bit your your time window, like your your investment window right, like is it a good? Like a guy that has a 10-year investment horizon sees it differently than a guy that has a two-year investment horizon, you know, or a fix and flip kind of investment horizon, I mean you know what I mean. So if you're kind of like, hey, this is like, so we're in contract on a deal right now, it's not very juicy, the buyer in this case is one of our investors, has other assets and has coming out of a 1031 and wants to put some money into a deal in storage, and we helped him find a deal.
Speaker 2:Um, that that I mean, were it not for the 1031, might probably wouldn't do, because it's not that it's maybe not quite enough meat on the bone, but from a 1031 perspective and a preservation of cashflow and not having to pay, uncle Sam, I mean it's a good deal. Yeah, you know, yeah, so yeah, anyway, got it. I don't know if that helps.
Speaker 1:Yeah, no, there's different ways to skin the cat and there's different reasons and motivations to do a deal and at this point in the cycle it's probably fewer deals and being a bit more circumspect, a little bit more specific about what you're looking for on the revenue side, versus, like you said, just putting the pro forma. Hey, our revenue goes up 3% per year and our expenses increase 2% per year. Even though that looks conservative, it doesn't really pan out in the environment.
Speaker 2:Yeah, exactly, and I think one thing that I think is we're pushing on probably the you know extra spaces in the world probably do this already, maybe awesome, I don't. I don't really know. I don't have an insight into their in their inner workings, but I mean, I think a lot of the thinking around ECRIs historically has been around how much and how often, and it's almost like a trigger of like when my customer who moved in gets to a certain number of months post move in, then they get then that you know then like they get a rent increase. And then the secondary question was and how much? How much of that rent increase? And I think those are both relevant questions.
Speaker 2:Um, but I think that there can be some additional sophistication around building profiles for your customers and so that not all customers are treated the same, in the sense that the ability to pay, the willingness to pay, is not equal among all of your customers. And so can you do some things to put your customers to segment your customer base, not necessarily your incoming customers, but your existing customer base? Can you segment them into different buckets, if you will, and then treat them differently because of the maybe assumptions and or your kind of theories around their willingness and ability to pay does that make sense?
Speaker 1:absolutely, yeah, go ahead. So a very simple.
Speaker 2:A very simple example would be I look at my rent rule and I analyze it based on address, and I see that there are some people who live 30 miles away, some people live 100 miles away, some people live hundreds of miles away. Okay, if you're living that far away, what's the chance is you're going to come move your crap out of my storage facility if I give you a 20 rent increase. Wow, I'm gonna. I'm gonna make a. I have a theory like it's not gonna be true all the time, it's not gonna be 100 all the time, true, but that you're less likely to come move your stuff out, you know?
Speaker 1:Um, so anyway, um no, that's a good point. I was. I was going to say, uh, I think Bo might've hit on this, I can't recall. But also unit size, oh for sure.
Speaker 1:Yeah, so if you have someone renting a small unit, that's easier to. That's just logically easier to move out of a small unit than it is a larger unit. So if you have a double whammy there where you live 60 miles away and you're renting a 10 by 20, you're probably not going to come move all that stuff out if I hit you with a $20 rate increase, whereas if you were down the street and you're renting a five by five and I hit you with a whatever equivalent a rate increase, you might actually come and move that stuff out because you don't feel like paying for it anymore. Um, that's, that was my thinking yeah, a hundred percent.
Speaker 2:I mean there's, there's, a there's and there are many, many more. I mean we, these are like I, I don't, I hesitate to share because I don't know, like we haven't tested all this, like I don't know that these are all good ideas, right, like you know what I mean. Like, but but like I mean just like there's so many ways you could segment your customer base to try to put them into, to make educated guesses, I guess, around Absolutely, yeah.
Speaker 1:Yeah, you make an educated guess and it's from probability, of you know low, high and whatever retention and then see which one is most likely and then try to execute and hopefully hit that most likely scenario.
Speaker 2:Yeah, and then you do kind of like extra space. You just test it. You're like, okay, well, this is my theory. I'm going to go try it out. I mean thankfully unfortunately we don't have the scale of extra space to try it on as many customers at a time, whatever. But so it goes. You know you do your best, yeah, 100.
Speaker 1:Last question here before we get to the final four and kind of wrap everything up. I'm curious on the financing side of the house how are you guys financing deals? I know you said you put 10 year money on it, long-term debt. Is that, generally speaking, how everything is done? Are you guys ever pay cash, all cash?
Speaker 2:yeah, I know yeah, I mean it's not. I guess when I said 10 year money it was maybe it's more illustrate that we tend to hold longer than I mean we're not. We're not kind of fix and flip mentality, but but it's, there's no hard like the most recent deal we did. We did all cash because our assumption was interest rates are going to come down. Maybe not, I don't know, and maybe not significantly, but we could get an acceptable cash flow at an all cash deal.
Speaker 2:And if we can um increase, if we can pull all the levers on our magic revenue finder, cut expenses, do whatever we can to optimize noi, then when the time comes to put debt on it, um our what, we're trying to get it as as perfect as we can so that because the lower your leverage, the better your terms, absolutely less hair on the deal, your better your terms. And so if we can, um, if we assume that rates are coming down over time at least that's we, we think that will be the future trend um, then, and we can finance it after we've done some optimization, then we can kind of increase as best as I can our chances of getting good financing that's accretive, basically a positive leverage rather than negative leverage um if interest rates are really high right, so that's that's a great strategy.
Speaker 2:Yeah, I mean, there's other things like I mean other things we've done in different times, like one. One thing that's worked out really well for us on from a financing perspective is we've had, we've done some um. Your listeners, some of your listeners will be familiar with CMBS debt, um, you know CMBS debt is great, um, but you can't really make many modifications to the, to the property, and you're also not going to refinance at any time soon because it's so onerous the refinance, the kind of prepayment penalties to it. And so sometimes we're like, hey, because we're looking for value-add deals. Typically we are saying, well, we're not quite ready for this permanent debt because we don't want to be stuck with it for the next 10, 7, 10 years, whatever.
Speaker 2:So we've had relationships with local banks to bring in and, uh, bring in some debt and we'll have them underwrite, uh, to our pro forma, basically, and then they will give us an initial loan amount based on our existing noi what they can actually underwrite currently, yep, and then with an earn out provision. So if we can hit certain metrics, then we can get additional loan proceeds without having to refinance the deal or without having to go back to the loan committee. It's already underwritten, it's already. It's just a matter of hitting certain debt service coverage targets Coverage ratio yeah, exactly, targets, or. And then, once we can hit the targets, then usually it's like a two or three month look back so we kind of say, okay, and then we can get some additional loan proceeds more easily that way. So that doesn't. That might not be the strategy right now, but that could be something of the future could be something of the future.
Speaker 1:No, that gives you options, right. So that makes sense. If you don't have an over-leveled property to get the deal done, then it makes sense to do that and pull up proceeds down the road and make it a lot easier to replace that capital and go do something else with it. So I think that's great. That's a great summary of everything. I actually wish we talked more. I want to keep going. I'm curious about a number of other things, but we are time's a little bit short here, so let's wrap everything up here with the final four questions brought to you by a sponsor. Check them out in the description below. Usually there's some more sort of discount for you guys. Try to bring you guys the things I like and use and trust. So check those out in the description. It helps keep the show going. Can you talk to us real quick about a low point? Let's do a high point first. Let's talk about a high point in your career and what you learned through that experience.
Speaker 2:So I'd say, well, I'll talk about two. One is a personal kind of hooking up with the partners that I have a guy named Tim, a guy named Greg, a guy named Andy and man having partners that you love, trust, whatever. I mean, we're not related, we're not family, but man, what a huge blessing that is, you know, to have guys who are not selfish and just want you know they're looking for the greater good, they're looking for the long term. It's such a blessing. So shout out to my partners, they're so good. And then also, obviously, the life storage transaction was a huge win. That kind of put me, uh, from a standpoint of, uh, I guess not wanting like you, not, yeah, I have needing the job, basically to not need the job.
Speaker 1:So yeah, um, yeah, that was that was huge. Uh, that was a huge, huge win absolutely, ma' man, talk just real quick about a low point in your career and what you learned through that process I mean relevant to our, our audience here.
Speaker 2:Um, like one thing, there's been a few learnings that were painful. Uh, one learning was man, how important, um the the demographics of your facility might be. Uh, we did a deal in Kansas city, missouri. Uh, that was an opportunity zone. It had very low rent per foot, or rent per capita, rather very low rent. Uh, uh, square foot per capita. Gosh, get the words out right you know what I mean.
Speaker 1:Supply, yeah, we'll both supply.
Speaker 2:Very low supply per capita, but also very low income, demographic and man, it was a struggle for us to achieve the rates that we hoped for and we moved people in and achieved the rates we hope for because, man, if people don't have money to spend, they don't have money to spend, and so that was a, that's, that's it. That was a huge learning. Like that, if I don't know what the, I'm not sure what the we don't do enough development for me to have enough, um, hard-won experience to say and here's the number that you should avoid, you know which, it becomes too low, um, but that was. But we, whatever the number is, we were below it, you know at least.
Speaker 1:That's the. That's funny now, but it's not funny. I get what you're saying. Uh, you look at the deal and you're like, oh man, you look at the deal and you're like, oh man, this could be a killer deal. Opportunity zone, tax benefits, et cetera. We just push rents to this because people can usually pay and afford storage. But then you realize, phew, this plan is not working out the way we expected. So yeah, I do the down point.
Speaker 2:Last or second, because often we learn more through those experiences than we do. The oh, 100%, oh yeah, I mean, I could tell you a few more, but I don't even know.
Speaker 1:for the sake of time, sometimes I should just do an episode of just all low points in all of our lives, all the payments suffering.
Speaker 2:Yeah, yeah, we can cry together.
Speaker 1:Uh-huh, all right, give us a uh good business resource, something to be storage investing, but just you know, book, podcast, whatever, whatever that you recommend for the listeners.
Speaker 2:Yeah, you know I really have been enjoying Dan. He's got a book out. What's the name of it? It is called. It's called Reset and it is. It is fantastic and it gives you lots of. I'm big on kind of like with the Magic Revenue Fighter, for example, breaking it down to try to like look at each individual part, and Reset gives you lots of ideas about how to look at your kind of the operations of your business and break it down and make things better. So that's huge, especially for folks with kind of an operations side mentality.
Speaker 1:It so that's huge especially for folks with kind of an operations side mentality, it's not really a finance-oriented book, but if you're an operations person, that's a great one.
Speaker 2:Who is the author of that one? Again, dan Heath is his name. He wrote some books with his brother, chip, and so another one that's recommended by the same kind of guy is Power of Moments. That's maybe one your listeners may have heard of, but both fantastic books if you're kind of into operation stuff absolutely I think that's great.
Speaker 1:Yeah, we're gonna recommend another one of that. That was it. Those two, I don't know.
Speaker 2:I mean that's those two. Um, I mean stuff on a personal side, that's more like there's one. There's a book called die with zero. Um, that was, I think, is interesting, uh would help. It definitely changed my thinking about how uh, kind of like how I live my life.
Speaker 1:So yeah, yeah that's excellent man. Sometimes we got to think about the end. Uh, keep the end in mind, um because we could do all this more.
Speaker 2:If it sounds but it's, it is yeah, it's a.
Speaker 1:It's sobering, you know, um, because you just never know, but it's a good thing to do. It's a good thing to keep in mind, because life throws you some curve balls, man. So, kenny, we talked about a ton of information. I hope that it was beneficial for the listeners and viewers. How can folks get in touch with you if they want some third-party management service for their facility, or maybe just to reach out and connect?
Speaker 2:Yeah, I'd give them like two ways. You can find us online at propertymanagementstorage. So storage is a top level domain now. So you can go to propertymanagementstorage. You can read about us, whatever. If you want to email me or my team, info at pmstorage, make it easier so you don't have to type in the whole long URL. So info at pmstorage works. If you want to find me on LinkedIn, it's just LinkedIn, forward slash, you know the in, and then forward slash Kenny Pratt and that's me, and they can find me there.
Speaker 2:Connect with me there. I'm not super active, like I'm not posting all the time or anything like that, but if you hit me up with a message, I'll probably read it and respond. If you aren't trying.
Speaker 1:Kenny, I know you got the 10X course coming with Grant Cardone and all that stuff. Man, I know you're posting all the time. You're about to host another self-storage, a different self-storage. Meet up there in Coeur d'Alene. I know you got to come and manage in the works. I'm just kidding Guys. I'll have the links to all that in the description below for the episode. Kenny, I really appreciate you being on the episode and sharing your knowledge with the audience.
Speaker 2:Yeah, thanks, hey, and if you or your listeners are out in Coeur d'Alene, hit me up. Let's get out on the lake, do some wakeboarding, wake surfing that kind of thing.
Speaker 1:It'd be fun. Let's do it, man. Appreciate it, kenny. Thank you so much. Thanks, see ya.