The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Hello and
welcome to the very first episode

of the AAA storage podcast.

I have an esteemed guest here with Paul
Bennett, and I am so excited to get

his expertise and his insight to talk
to us about self storage investing.

So Paul, tell us a little
bit about yourself.

Paul Bennett: Hey, thanks Brandon.

Great to be here.

Um, I am the president of, uh,
AAA storage and also the managing

director of our current offering,
which is growth fund one.

And from a background standpoint,
Brandon, I've been in, uh, involved

in real estate syndication since
1981, been involved in virtually every

property type across the spectrum.

Um, and so this is essentially what
I've done for my entire career.

Brandon Giella: So you've, you've
been around the block a couple of

times, up, up markets, down markets,
you've, you've been through it

Paul Bennett: A few times..

See, I've seen a lot of different cycles
in the real estate market since 1981.

So,

Brandon Giella: Love that.

Love that.

Okay.

Okay.

Well, what I would love, uh, for
our listeners to understand, uh,

on this podcast is with the very
first episode is why self storage?

This is, this is a very simple
question, very basic question.

It's a softball for you, but
why self storage investing?

What's the, what's, why is it different
to, for different asset classes?

What are the returns like?

What is the big deal with self storage
and why should investors think about

it as part of their overall portfolio?

Paul Bennett: Yeah, that's
a great question, Brad.

And, and, and the, the, maybe the
larger question about why real estate in

general is a subject for another podcast.

Uh, because I think there's a lot in that,
but I personally believe Without any doubt

that any accredited investor should have
an allocation to real estate within their

portfolio directly into real estate not
You know owning real estate related stocks

or that type of thing, but self storage in
particular has been a tremendously popular

asset class over the last 10 years and
predominantly because it's extraordinarily

resilient If you look at all the data,
self storage has outperformed every

other type of real estate from office
to, um, multi family to retail, uh,

in more difficult economic periods.

It's, it's simply a product that,
uh, is a consumer based product.

It's not an extraordinarily expensive
proposition for people to store, uh,

their things and, and their, the demand
for storage holds consistent throughout

more difficult economic environment.

So I would say that's probably the first
and biggest reason, uh, to consider self

storage as a part of your portfolio.

Secondly, it's an asset class
that generates above average cash

flows and cash on cash returns.

Um, and is a very simple business.

Um, the expense structure in
most self storage, well run self

storage facilities is roughly 30
to 34 percent of gross revenue.

Um, and so it has an
extraordinarily simple model.

The two biggest expenses are real
estate, property taxes, and insurance.

Um, and beyond that, there's
not a lot of moving parts on the

operating side in self storage.

Uh, facility.

So it's a very efficient, um,
economic model that produces very

good cash flows and is counter
cyclical in terms of its performance

in more difficult economic times.

Brandon Giella: Hmm.

So one thing that you've talked about
is there's there's different mechanics

or metrics that you think about when
you're investing in real estate.

There's like cap rates.

And like you said, like operating costs.

And there's a couple of other metrics.

Can you talk about a couple
of those key metrics?

Part of the fundamentals of this
investment and why it's maybe either

superior to other real estate investments
or maybe just regular like equity

investments or things like that?

Yeah.

Paul Bennett: Yeah, um, you know,
cap rates are the metric that

everybody's most familiar with
and probably talks about the most.

In, in the self storage industry, cap
rates tend to track multifamily cap

rates plus about 50 to 75 basis points
or half or three quarters of a percent.

So, Um, uh, of a percentage point, um,
and part of the reason that they've

been valued that way, particularly
in the last two years, 10 years,

is the popularity of this asset
class with institutional investors.

Uh, there are five publicly traded REITs.

Uh, that have an insatiable appetite
for, for, for property and that's

driven some of that, that lower cap
rate environment for self storage.

There's also a tremendous amount
of private equity outside the, the

publicly traded REITs, um, that
has been attracted to self storage

because of the overall returns.

And so that demand on the property
product side has, has made, um,

the, the, the, the, valuation of
self storage properties not look

tremendously different than multifamily.

However, the difference is a good
multifamily project either cost or

cost to construct somewhere in the 200
to 250 a square foot range where self

storage can be built for around 100 to
110 a foot and can often be acquired

For, for something less than, you
know, well under 200 a square foot.

So, um, it's, it, those dynamics kind of
create a very interesting environment.

Um, as, as you know, others listening
to this podcast may not know, we

are a developer of self storage.

We tend to focus on the development,
the ground up development of new

projects, and then the management and
stabilization of those projects over time.

One of the fundamental differences in self
storage versus any other, segment in the

real estate industry is the yield on cost.

that the product provides.

And, um, again, that's a subject maybe
for a whole different conversation,

but very quickly yield on cost
is the cash on cash return that's

proforma when a property stabilized
versus its actual cost to construct.

Um, in the self storage world, we
see a yield on cost in the nine and

a half percent range is typically
what we look for on a project.

And if you look at every other
segment in the real estate industry,

A developer of multifamily retail
office is really pleased if they can

get a yield on cost in the seven and
a quarter to seven and a half range.

That's a pretty big difference in terms
of the yield that a project costs or

produces based on its cost to construct.

And when you combine that with development
spread, which is the difference between

cap rates in the market, and the yield
on cost that a project can generate.

What you see is there's about a three
point spread between today's cap rates

and yield on cost in our projects.

And that 3 spread is what creates
the immediate value that's realized

when you develop a project from the
ground up and get it stabilized.

So that is another sort of
economic efficiency dynamic.

Um, and some metrics that we look at very
carefully as we're looking at projects

and, and we think are a great reason
to not only invest in self storage, but

invest, invest in the development of self
storage properties from the ground up.

Brandon Giella: Okay, I feel like
there's like a hundred episodes that

just came out of what you just said.

But, um, but I want to focus on,

Paul Bennett: I shouldn't have gone
there because it's, I mean, I can

give you some examples of both.

I can take that a little bit further.

Um, but you're right.

That's a whole, that's a series
of conversations probably.

Brandon Giella: Yeah, yeah, no, I love it.

I love it.

That's that's what's so cool about
what you guys are offering and the

way that you think about self storage.

And I don't want to, you know, super
hard pitch for for exactly, you

know, this fund and what you guys
are doing, but it is really unique.

And so I think a little bit
of detail would be helpful.

So one of the things I
was going to mention was.

Something that makes you guys
distinctive is that kind of vertically

integrated model that you have part
of what you just described that

you develop the properties as well.

But another one in this fund in
particular is that that cash.

when a lot of people think about self
storage investing, they think about

kind of a cashflow type business where
they're receiving, you know, cash

based on rents and things like that.

But you guys actually lock up that
cash for a period of time and then

distribute that the, the proceeds at the
end, uh, which is a little bit unique.

Can you talk a little bit why you
do that as, as part of a model?

Is it, is it helpful to get, um,
you know, more value than more of

a cashflow model or, or how do you,
how do you guys think about that

when you're structuring the fund?

Paul Bennett: Yeah, um, gosh,
several places to go there, Brandon.

Um, first of all, in self storage, there
are the same opportunities to invest.

That there are in any
other type of real estate.

You've got core and core plus, which
are class B, class A properties

that are stabilized, cash flowing,
don't need any capital expenditures.

They're just sort of really nice assets.

And then you've got value
add, where you buy a property

that, uh, is underperforming.

Maybe it needs some capex, maybe it
has the opportunity for expansion.

Um, And then the third or fourth
class would be ground up development,

which is really what we're focused on.

Um, as a ground up developer.

The investors that, that invest with
us are looking not for necessarily

cash flow on a quarterly basis.

We don't send out dividend
checks, uh, from the fund, uh,

although I can unpack that.

We certainly, there are
circumstances where we may, but

that's generally not our plan.

What we're about is providing
investors with the opportunity

to, um, get significant growth
in their equity capital.

Our track record over
30 years and 90 days.

Full cycle deals is we've returned on
average across those 90 deals a little

bit more than 3 times the equity that
the investors gave us to start with.

Um, and we've done that over an
average three and a half to four

year period, which equates to an
internal rate of return of about 19%

on average across the 90 projects.

So we are fo the metrics we're
focused on, start with yield, on cost

that we talked about a minute ago.

'cause that drives the value
creation and development process.

process and time valued rates of return.

Um, as everybody knows, a dollar you
get today is more valuable than you

get a dollar you get 10 years from now.

And so we're focused on essentially being
a merchant developer where we're going to

go in, we're going to develop a property,
we're going to get it stabilized, um,

and when it's stabilized, we can get full
value for it in the marketplace and we're

going to sell the property and distribute
those proceeds back to our investors.

Um, you talked about vertical integration.

It's a critical.

component of what we do, um, but I'll
go all the way back to the beginning.

If you're familiar with self
storage, um, today there are

really two types of self storage.

There's the, um, drive up self storage
that have been around forever, and

then there's what we call the big box,
multi story, usually brick buildings

that are all climate controlled.

We have remained focused
on drive up self storage.

And we stay focused on that because we
can build it because of our vertical

integration for about 105 a square foot.

Um, the big boxes that you see, some
of the big brand names doing and even

regional players that are multiple
stories, all climate control, um, 180 to

200 210 a square foot to build because
they include elevators and sprinklers and

brick exteriors and and that costs money.

Um, but the interesting thing is if you
look at those big boxes, they may get a

small rent premium over our facilities.

We offer both climate control and non
climate control, but because it's a

little fancier building, they may get
a small rent premium over our facility.

Let's say the neighborhood
of 20 to 25 percent.

But their costs are 2x our cost and so
their yield on cost and therefore the

value creation that that they have the
ability to create for their investors

is significantly less than what we
can create for our investors and Part

of that is the product that we stay
focused on and the strategy that we

have and part of it is the fact that
We're totally vertically integrated

particularly in the state of Texas Um, we
control all the resources, um, from the

acquisition of a property to the final
construction and CO, um, both the vertical

and horizontal construction process.

Outside the state of Texas, we do use,
uh, third party contractors, but it

doesn't affect our costs tremendously.

It's a little bit more expensive
to build outside Texas.

We also have our own vertically
integrated property management team.

Uh, we manage all of our properties.

Today, we have a portfolio of about
25 existing facilities that we manage.

Um, and all the new product that we
develop that comes online, um, is taken

over by the property management team.

David Lutz, our VP of property
management, has 20, almost 25 years

in the industry with AAA Storage.

He's probably one of the best lease
up, uh, property strategy guys in the

country, um, which is an important part
of the process once you get it built.

Um, so we feel really confident that with
our vertical integration, the product

that we focus on and our focus on yield
on cost, we can drive above average

time value returns for our investors.

That's a lot.

Sorry.

I just kind of dumped the
whole dump truck on you there,

Brandon Giella: No, no, no, no.

I'm glad you did because I think it's
you guys are doing something so unique

and have such a cool approach to the
way that you think about self storage.

And that's what I was hoping we would get
out of this conversation because there's

self storage, but then there's, you know,
the triple a way to do self storage.

And I wanted to highlight a
little bit of that because it is

there's so much to think about.

And you guys being so You know, experts
and having so many decades doing this

that you've got a great way to do it.

So, yeah, so I'm glad
you went into the detail.

Um, but I

Paul Bennett: me give you a quick,
let me give you a quick example.

The vast majority of offerings
that are out there today.

are acquiring existing
self storage properties.

Um, some of them may have a little more
of a value add component where they're,

they're buying mom and pop facilities
that haven't been well managed or

maybe have a little room for expansion.

Um, but they're distributing income to
their investors, which is a great thing.

And it's exactly what some
investors are looking for.

Our whole strategy, and I said a minute
ago, I could give you an example.

I'm going to give you
a very quick example.

Of the, um, value creation in
development of self-storage which is

what we're very specifically focused on.

Um, if you have a property that costs
10 million to build, and has a $950,000

pro forma NOI, Um, that is a 9.5

yield on cost.

If you do that math, which is about
where our portfolio sits on average.

Some a tick higher, some a
tick lower, but on average,

that's the target we shoot for.

Once that property is stabilized and it
cost us 10 million to build it all in.

When you put a 6 cap rate.

On that $950,000 NOI, the
value of that property is $16.5

million dollars.

So if we've leveraged that 70/30
which is our, I mean, our typical

leverage is 70% loan to cost.

That means our investors had $3
million of equity in that project

that we built for, for $10 million.

We sell it for 16, pay off the
$7 million of debt and send

our investors back $9 million.

That's the power of development.

The development opportunity in
self storage is the ability not

to just distribute income, but
to create true growth in equity.

Um, and, and give our investors
an opportunity, um, to get, you

know, in that two and a half to
three and a half times, uh, their

equity investment back as a return.

Brandon Giella: Do you take
American Express or can I just get

Paul Bennett: Well, obviously I'm
enthusiastic about what we do.

In, in what we do.

It's not for everybody.

Um, you know, some investors, you
know, their objective is income

on a, on a steady basis, and
there's nothing wrong with that.

But for investors that are looking
to grow their capital base, um, I

can't think of a better opportunity
to consider as a part of a portfolio

than the development of self storage.

And P.

S.,

there's a little bit of risk in
the land, the raw land piece.

Of, of any development activity,
buying land, getting it

permitted, getting it ready for
construction has some risk in it.

In order to strip that risk out of
what we offer investors, we land bank

land and take it through a process
to get it fully permitted and ready

for construction before it goes
into one of our investment vehicles.

So our investors aren't
taking that raw land risk.

There's still a tick more risk in
development, uh, in theory than there is

in buying an existing stream of cashflow.

Um, but again, if you, you, the, the
risk in self storage is generally less

from a lease up standpoint than it is in
the other aspects or the other segments

in the real estate industry because
it's a consumer based product with very

broad demand, um, and, uh, and, and it
historically has performed very well, so.

Brandon Giella: So I'm hearing
less risk, greater returns.

This is, this is perfect.

This sounds,

Paul Bennett: It, it, I would say there's
more, there, there, I mean, I wouldn't,

I wouldn't be truthful if I didn't
say there's more risk in developing

anything than there is in buying a
stabilized, you know, real estate asset.

However, I think if you look at
it from a risk adjusted return

standpoint, where you compare the
degree of risk to the incremental

return, self storage comes out on top.

Brandon Giella: I love that.

I love that.

Okay, well, what I want to do with
the rest of these, we got many more

episodes coming and you highlighted a
lot of different, uh, I guess segments

of the business and the way that
you guys think about self storage.

But, you know, in the future, future
episodes, I want to talk more about,

like, how do I get started in this?

How did you guys get started?

You know, how to how to as an investor,
You know, maybe I want to start up my own,

you know, kind of development practice.

How do I do that?

You know, just kind of walk me through
the mechanics of what it looks like

to get involved in this world that
you're, you're painting this picture.

But also, you know, what are some case
studies of investors you've, you've

seen in the past, how people gotten
involved and what does that look

like from an investor point of view?

And then I also want to talk a lot about
what are future trends that you're seeing

in the self storage space and the real
estate market and in general, because You

know, obviously we're having inflation.

There's, there's bond yields,
uh, are elevated right now.

You know, there's a new
administration coming.

There's just a lot of different
things that may be happening.

And I think it would be helpful for
investors to understand your point of view

on the world because you, you are such
an expert and you have such a great team.

So in future episodes, I hope listeners
will stay tuned and, and, um, be

focused on those kinds of things.

And if you have questions,
Please send them to the team.

Like what, what are things that are on
your mind when you're thinking about real

estate investing, self storage, investing,
what can the team address for you?

Check us out on social, check out our
website, get in touch with the team.

Like, let's have this conversation because
I think you've got some real experts here.

that can provide so
much great information.

And I, and I want this podcast to be
a place for that build this kind of

community where we can all help each
other succeed, grow portfolios, improve

land values, improve asset values,
and, uh, and really make a difference.

So Paul, I'm so grateful for you
and your expertise, uh, as well

as the rest of the team, Andrew,
Mike, John, some of the others.

Um, I know you guys are doing really
amazing things and I'm, I'm really

grateful for your time and I'm
very excited about this podcast.

to be a lot of fun.

Paul Bennett: All right, Brandon.

It's been a blast and I look
forward to doing some more.

As you know, I'm that
short on opinion, so.

Brandon Giella: I love it.

More opinions are the better.

I love it.

This is great.

All right, man.

we will see you next time
on episode number two.

See you next time.

Paul Bennett: Great, brilliant.

Thanks.