Business Innovators Radio - Interview with Fernando Angelucci, CEO of Self Storage Syndicated Equities

Episode Date: June 14, 2023

By the age of 30, Fernando Angelucci has built a portfolio of over $200,000,000 in self-storage assets across the country within the last 4 years. Fernando diversified his investments between purchasing existing cash-flowing assets, building ground-up, class A, REIT-grade facilities, and utilizing adaptive reuse conversions of big box retail stores into premium self-storage. In addition to his own acquisitions, Fernando provides other self-storage investors access to off-market facilities at drastic discounts, capital for strategic partnerships, and opportunities for passive investors to participate in self-storage syndications.Learn more: https://ssse.com/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-fernando-angelucci-ceo-of-self-storage-syndicated-equities

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have with us Fernando Angelucci, who's the CEO of Self-Storage Syndicated Equities. Fernando, welcome to the program. Thanks for having me, Mike. Hey, so first of all, I want to find out what you do, how you do it, but give us a little bit of your story and what's your background.

How did you get into this industry? And, you know, boy, self-stores syndicated equities. That's a tongue twister right there. So that's interesting. I know obviously that you're focused on self-storage. So we want to learn what got you into that specific niche of real estate. Yeah. So when I was 16 years old, I read Rich Dad, Poor Dad, kind of changed the trajectory of my life.

life first started off investing in single family homes and multi-family homes. And then around 2016, I started to get fed up with the way some of these tenants were treating my properties. And then not only that, but when I took them the court to do these evictions, it could take as long as eight months to get them out legally. And I just thought that that wasn't right, that, you know, someone can live in my asset, not pay any rent for it for eight months. And then when they leave, they cause, you know, $20, $30,000 or the damage. So I started looking at it said, this doesn't seem like a real good investment, you know, from the get-go. And that's when I decided to wind down my habitation-based real estate portfolio and go into self-storage. And I

did that for a few reasons. First, it's guided by lien law as opposed to tenant landlord law. So when somebody puts their possessions in my self-storage facility, de facto, I get a lien on those possessions. If they don't pay within the, you know, five-day grace period, we overlock their unit. And if they still don't pay within the next 30 to 45 days, then we auction off their possessions, we recoup all of our lost rent. And then we get a new tenant in there. So a lot more rights as an owner, as opposed to being a landlord. A tenant, yeah, or a tenant. It's tenants, you know, have the power over you in the old scenario. In this scenario, it's cut and dry. It's like after this many days lock, this many days sell and move on. And there you have it.

Exactly. And then, you know, I'm an engineer by training. So looking at, you know, data is one of the things that I really like to do. So I looked at a few studies specifically, ones done by the National Association of Real Estate Investment Trusts. And they had this study period that was roughly 30 years long, 1994 to 2017. And during that time, you know, the S&P 500 returned about 7.5%. Single family and multifamily did a little bit better at about 30. 13%, but self-storage had an average annual return of 17.5%. So, you know, that four, four and a half percent extra return may not seem like a lot, but you get to realize that's compounding year over year. So in the beginning of that study period, if you had, let's say, $100,000 to invest, by the end of the period, if you put in the S&P 500, you'd have about half a million bucks. If you put it into apartment buildings or single family homes, you'd have about $1.7 million. If you put it into self-storage, you have about $4.1 million. million dollars. So, you know, over twice the return from those types of real estate assets. But then

everybody immediately when I bring up the stat, they say, well, you know, if the return is high, that must mean the risk is high. And so when you look at the actual studies that are done, the opposite is true. Self-storage offers an asymmetric risk return profile. So here's some good examples from recent recessions that we've gone through. If you look at the 07-09 financial crisis, the S&P 500 dropped 22% during that time. At the same time, if you were a multifamily or residential investor, you were losing your portfolio, there was foreclosures, there were bankruptcies. But during that time, self-storage only lost about three and a half percent of its value.

Again, this is another study by the National Association of Real Estate Investment Trusts. Now let's fast forward to the pandemic, which is a little bit of, bit more fresh in all of our minds. According to TREP, which is a commercial mortgage-backed security research firm, of the 1700 CNBS loans that were made to self-storage investors in the first three quarters after the economy shut down, only three of those were more than 30 days delinquent on those loans. That's a 0.17% delinquency rate. At that same time, multifamily was defaulting at a rate of 1,800% higher 18 times the default rate of self-storage. So you see that there's these high return potential.

There's a lot of protection from the law that's codified in for being an owner of self-storage assets. And when you look at the downside risk mitigation, you see that this is an asset class that is recession, resilient, and far superior to other real estate assets. You know, all that is a lot to unpack. So I'm excited to unpack it because here's a couple, things that pop into my mind, risk. You know, it's, it's that assumed thing like the seesaw. Well, if risk is high, then the return is, you know, it should be also high. Well, that's what

you just said is that report says, nope. And, and that's, that's awesome to, and I've heard over the decades, you know, I've always heard, oh, yeah, but then I think people's next thought goes to, yeah, but that means I got to go buy peace only and to develop and build it, then hope people come. So I think that you've got a solution for that. We'll talk about. But one thing that comes to my mind is in the example of the tenant that you were talking about, trying to get them out and evicting, that's one aspect to consider. But what about once you do get them out or if they do leave on normal circumstances and they damage the unit, you know, then you're having to fix it and hold security deposit and all that.

What about damage as it relates to self-storage units? Is that a factor or a big factor at all? Yeah, it's barely ever a factor. You've got to realize these facilities. It's like metal wall. steel and concrete, right? Yeah. So for somebody to do damage, they basically have to run a car into one of the units, you know, or a truck.

Yeah. It's very rare to happen. And especially the way that we built them, we put these concrete ballards. They're like these safety poles made out of about six inches of concrete, six inch to eight inches of concrete. It makes it almost impossible for cars to hit our facilities. I love it. And that makes, that makes logical sense because I know that I've been to a lot of storage units before. and it's these rows and rows of, you know, here's this door to slide it up.

And it's like, yeah, how can you damage it? Even if it's not, you know, the best steel, it's still metal, steel, whatever the door is, concrete. So, you know, that makes a lot of sense in that way. And I love on your website, you've got a statement that says tax-advantaged self-storage self-storage investments with an emphasis on downside mitigation and social stewardship. Well, we've talked about downside mitigation. Talk a little bit about how these investments are. tax advantaged and then also the social stewardship aspect because both of those phrases jump out

as very positive. I'd like to learn more. Yeah, sure, Mike. So on the tax advantage piece, a majority, almost 70% of our investors are people that, yes, they're looking for a good return, but the real focus is they want to lower their taxable income. So one of the things we're able to do with our self-storage facilities is when you build these facilities or when you buy them, you're able to to depreciate this asset, right? This is typical of any type of real estate. But one of the things you can do as well is you can accelerate that depreciation using something called a cost segregation study. And that allows you to get bonus depreciation all in year one. So here's a perfect example. I have a self-storage facility and one of my cost segregation engineers walks to the

place and does his assessment. He says, well, okay, commercial assets are supposed to be depreciated it over 39 years. So you get to remove 1.39th of the value per year on your tax returns. However, when they're walking to say, hey, this door is not going to last 39 years. This carp is not going to last 39 years. These chairs and these lights are not going to last 39 years. So what they actually do is they convert that real property into personal property on a 5, 7, and 15-year depreciation schedule. And because of the 2017 tax and jobs act, we're able to take all of the depreciation that's

available to us on less than a 20-year schedule in year one. Last year was 100 percent. This year we can take 80 percent of that and it's stairs steps down each year. So I have some investments where every dollar an investor puts into our facility. They'll get one to $2 back year one in passive losses that they can use to write off against their other income. Nice. That's huge. And let's now shift into the concept that I had hinted at before, which is, okay, I've read rich dad, poor dad. I know that real estate is a wonderful investment, but I personally don't want to go through the things that you mentioned about tenants and damage and leasing and, well, I got someone out of the unit. Now I've got to find someone in this sitting unoccupied. So all of those negatives are now overrun and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and, and. solved with self-storage units. Well, does that mean that you're going to teach me how to go out and find a whole facility to buy or to buy a piece of lien and build it? Or do you have another

type of an opportunity that allows people to participate in this realm? Yeah, we actually have kind of four to five different verticals when it comes to the self-storage space. So, you know, what we started off with is buying existing mom and pop facilities. These are those typical self-storage facilities that you think of when you think of self-storage, it's rows of buildings with doors that you can drive up to, right? There's roughly 70,000 self-storage facilities in the United States, and 70% of those are owned by these mom-and-pop operators that have two or fewer facilities are typically these, what I call Class C or first-generation self-storage facilities.

So one of our moves is to buy these mom-and-pop operations, increase the revenue, drop the expenses and then put them into larger portfolios of 10 to 20 properties and sell them off to larger publicly traded self-storage companies like public storage, U-Haul, life storage, those types of guys. And in that scenario, are you going in and going, oh, wow, we could do, you know, I don't know, 50 grand, 100 grand worth of improvements on this whole facility so that we can raise the rent. and then now there's an immediate cash flow increase.

And then the whole package looks really good to one of these huge investors. And now in essence, you're either selling it off or you're creating even more cash flow. So I guess a twofold question, are you putting money into rehab that facility so that you can increase rents? And then what does it look like when you take the next step? Are you totally selling it to then get a return for your investors? or are you then, you know, doing a whole, you know, sale or leaseback so that there's increased cash flow? Right, exactly.

And so sometimes you don't even need to do any type of construction. So because a lot of these mom and pop operators, they are not running the business, like a professional business. Sometimes they're 50, 60 percent below market on rent. So day one, I can come in without even putting a dollar into the facility. I can raise the rents by 50 or 60 percent and that increases the revenue, which increases the NOI, the net. That's not gouging people.

You're probably assessing, here's what market rent would be for this. You're well below. So I'm going to increase it, which is still at or below market rent. So you're being ethical. It's just that the mom and pop was just like way below market rent. Right, exactly. Most of the time when we do these drastic rent increases, we're still the lowest price operator within our trade area. So even if the tenant wanted to go or the customer wanted to go to another facility,

they'd still be paying more if they left our facility. So that's one of the opportunities that we find is just no market research done by the previous seller. And that's an opportunity for us. Another piece is by dropping the expenses. You know, there's a lot of facilities where the owners are charging a lot of things to the business. They have full cable packages, cell phone plants for their employees, things like that. That is not standard in the market. So we come in and we get rid of those expenses again, increasing NOI, which then multiplied by your cap rate will give you a higher valuation.

So that's one way to increase the valuation is just by increasing the N-O-I. But there's a second piece, which is bringing this package to a higher caliber of buyer. These facilities on their own, these mom and pop facilities that are typically 10 to 30,000 net rentable square feet, these are too small on their own for a larger institutional player to spend the time in the manpower, labor hours underwriting and buying. But if you're able to combine 20 of them together, And now you have some type of purchase price in the $30, $40, $50 million range. Now you're getting interest from these larger buyers who have much lower cost of capital than we do,

which allows them to buy at lower cap rates and therefore higher valuation. So alone, let's say we don't do any value added on any of these facilities, but all we do is we package them just by packaging them together and bringing them to a better capitalized buyer, you are able to get an additional 100 to 200 basis points in valuation. on that cap rate just because you were able to put them together into one transaction for a larger buyer. And isn't that larger buyer, and I have no clue on the answer to this, but I'm assuming that that larger buyer would have never dreamed of glancing at your one solo deal because it's

so below their threshold. But now they only look at deals that are whatever mega, mega millions, yours happens to be in it because you created this bundle. And now they're like, okay, let me assess it. We now have done our due diligence. We love it. We're going to buy it for X. And your deal is in that, but they never would have looked at your deal because you're too small.

Right. Exactly. So that's one piece. You can call us an aggregator. So we aggregate facilities into larger portfolios. On the other hand, we also build Class A fourth generation self-storage facilities. So these are the types of facilities. When you're driving past them, they're three, four stories tall, state-of-the-art technology, climate control, state-of-the-art security.

They're all gated. everyone has a keypad entry and exit. You can open your units with your phone. They're no touch facilities, right? So these are the new generation facility. These are usually much larger. Instead of being 20,000 net rentable square feet, they're 90 to 100,000 net rentable.

And just one of these facilities alone, I could usually sell for anywhere between $18 to $26 million. So that's the other side of it. And what would that have taken to build in that scenario? Yeah, so we're typically able to build these facilities for about at $125 a foot all in. So I can usually build them for around $10 to $12 million a piece. So several million dollars of profit when you've done all the numbers and, you know,

just like a spec, just like a spec piece of real estate. Correct. Yeah. We buy the land. We get it zoned correctly in an area that has high demand, high population growth. Like Central Florida, for example, we're doing a large portfolio down there right now. of developments. And these are the areas that, again, you've got to kind of think of this business as a feeding chain because of the fragmented opportunity in the market. So of those 70,000

facilities in the United States, I was telling you about, only 18% of those are owned by the six largest publicly traded self-storage companies. Then the next 100 largest operators combined to own another 9 to 10%, which means that 70 plus percent of this industry is ripe for aggregation and consolidation. So those larger operators are looking for people like us to feed them up properties because they don't want to do the work of building these things

or buying and aggregating these larger portfolios. They'd rather someone else do it, and then they just come in with the very low cost of capital. In some cases, you know, their combined cost of capital on both their equity and debt is in the twos or three percent. So if they buy something at a five cap or a six percent cap rate, they're doubling their money where I would never buy a facility that low of a cap rate. And they just want to cherry pick and be handed primo deals that you're putting together.

And they've got access to all this cheap money, which you don't or the normal person doesn't. So that's a really neat strategy there that you're describing is not just looking at one facility, one project, but bundling a whole bunch together to get the attention of these big guys. Exactly. So that's our second vertical. Our third vertical came about because of the pandemic. So basically we started seeing all these supply chain shortages. And even if you could get the materials you wanted, you'd be paying something like 500% increase in price.

That's what happened to us with steel pricing. So what we started doing is looking for another avenue that allows to accomplish the same thing with lower cost and lower time. to deliver the product. And that, what we did is ended up buying a lot of big box retail stores that went dormant like Kmart's and circuit cities and Sears buildings and turning them into self-storage facilities. So those three avenues, investors can participate alongside us. But if you're someone that wants to maybe take the bull by the horns and do it on yourself,

then we have avenues four and five. And that's what you can do is one of the things that we do as a self-storish. company very well is we have a very large pipeline of deals that come into our funnel. And the reason for that is because we treat our company like a marketing company, which then allows us to see all the deals in the market and cherry pick the best ones that work for our buy box criteria. The unfortunate part is we, the amount of deals that are coming in, we can't close on everyone that we like.

So what we'll do is some of them will put them under contract and we'll assign that contract to another investor so that they can close on it. and do the operations themselves. So that's if you want to do it all on your own. And then, of course, about 30% of the deals that we do, we do as joint ventures with someone. Typically, they're already a business owner in their own right or a real estate investor in their own right,

just not in self-storage. And they find us a really good piece of property. Right. They find a good piece of property or an existing self-storage facility. They say, hey, I got this deal. Fernando, can you take a look at it and see if this is worth my time? And I say, hey, this is great, great opportunity. If you need help, let us know and say, yeah, I don't know how to operate a storage facility

or I don't know how to raise the capital on the debt or the equity side to get this done. Would you be willing to partner with me? And we say, of course. So those are kind of the five ways that we make money as a business and how we operate with other investors. And then through all of those five ways, if anyone is listening going, I love the concept. I love the vertical and the niche and that real estate and the self-stores. storage. I don't want to be the one to go and do this piece and that piece and that piece. You've got an opportunity to invest and your dollars goes into those projects you guys have

going and then there's a rate of return there because you in essence are creating some type of a reet where money comes in. You're investing in these projects and then a path like a passive investor would be able to go good. I know my money's going to those projects, lower risk than most and a good rate of return. So how does that set up work? Yeah, so typically we only take accredited investors, but there are one-off cases where we do bring non-accredit investors if we already have a previous, substantial relationship with those people. So the two SEC guiding laws on this piece are your Regulation D, Rule 506B, and 506C. So that allows us to register with the SEC, bring investor capital in the silent partner position, if you will, as limited. partners. So you make an investment and then you just start getting mailbox money each quarter as

opposed to having to show up to the weekly meetings and walk the facilities and deal with the contractors and the property management companies and all that. Awesome. Well, I think that's for the, I guess some people would call it, well, that's the lazy way to do it. Or some people could look at it and say that's the more efficient way to do it because, yeah, you might be able to make a few extra basis points more in return if you did it all yourself. But what is that? that costing time, energy, expertise, risk of doing it wrong. So why not let you do it, all invest in that and take a little bit less of a return than if you did it on your own, but at least you've got your money in the right market.

That's right. I love it. I think it's really spectacular what you're doing. If someone is interested in learning more and reaching out and connecting with you, what's the best way that they can do that? Yeah, so there's a few ways. You can go to our website, which is s-s-s-s-e.com, so triple-sse.com. We have a bunch of information there. If you want to be investor, you want to buy self-storage facilities, if you want to learn about the industry. Our social media, you can either follow us at Triple SCE or Self-Storage Syndicate Equities. You can follow me at the Storage Stud.

We put out a bunch of free education on our social media. There's never any sales pitch whatsoever, usually three to five times a day on how to get into the industry, what are good deals, what are not good deals, how do you underwrite, how do you evaluate these properties? And then for those that are a little bit more brave, if you want to reach out directly, I'll give you my personal cell phone number. It's area code 630408-8090. Excellent. Well, Fernando, thank you so much for coming on. It's been a real pleasure talking with you today. Yeah, thanks for having me, Mike. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past

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