How does SSSE underwrite properties?
Self Storage Syndicated Equities is committed to downside mitigation. Our underwriting process is our first step in minimizing risk. From the very first phone call or email we receive with an opportunity, there are at least 3 levels of underwriting that a deal must make it through prior to any consideration of investment.
The first is our “back of the napkin” underwriting. Our acquisition team is fielding constant responses to our marketing efforts day in, day out. In order to be efficient and effective, they must collect a minimum threshold of information from a lead in order for it to be even considered an opportunity and continue to move through our process. That minimum information includes the contact information of the seller, broker, or wholesaler; the name and address of the property; size and/or acreage of the facility; current occupancy or zoning of the property; and current annual gross operating income.
With this information, we are able to identify an as-is financial valuation and replacement cost valuation for existing facilities. For development opportunities, we have standard build types that are possible based on the size of the lot and from that a range of value we can assign to the land with comparison to market value of similar listed and sold land. The purpose of the “back of the napkin” underwriting is to be able to provide an offer range as quickly as possible to the seller, broker, or wholesaler that will be fine tuned in later levels of underwriting.
If the lead passes our “back of the napkin” underwriting and becomes a potential opportunity, we perform our “underwriting lite”. This involves collecting readily available due diligence items and remaining information. Unit mix, pricing, expenses, recent capital improvements, needed capital improvements, management structure, build types, security components, insurance information, and more.
In our “underwriting lite”, we perform the “chicken pox test” on Google Maps, searching for storage in the nearby area to see how many red dots show in order to get a general sense of supply. We virtually drive the market using Google Street View to compare the subject facility to competitor facilities. We pull up census data to get a general understanding of population, trends, and demographics. We compare the subject facility’s unit prices to the 3 nearest competitor’s prices to see what sort of soft value add is available. We call the city building and zoning department to see if there are any active or applied permits for self storage development. Once we have completed underwriting lite, we should be able to solidify value and viability for the subject property. Beyond that, we have our full underwriting and analysis.
Self Storage Syndicated Equities’ full underwriting and analysis takes all of the previous steps of our initial acquisition activities, formalizes them, and expands upon them. We have a full due diligence document checklist that the seller is required to submit prior to the due diligence period starting. We take all of the due diligence documents and audit them by recreating them within our standardized underwriting and analysis template. By auditing and recreating their rent roll, we are then able to create an accurate unit mix with each unit size’s range of rates accounted for.
In our full underwrite and analysis, we conduct an extensive competition study where we compare the supply index number, the competitors’ historic and current occupancy, and the subject facility’s historic and current occupancy in order to get an accurate assessment of the market’s supply and demand. The supply index number is determined by using satellite imagery and secret shopping to measure the size of each of the competitors and the type of storage the competitors provide. Using ArcGIS Esri Business Analyst we are able to map 1, 3 and 5 mile radii in addition to 5 minute, 10 minute, and 15 minute drive times, to establish our potential market and customer base. We analyze our potential market to determine population, income, housing and other metrics within the various radii. Dividing the population by the storage supply within our market radii provides us our supply index numbers which we compare against the state statistics provided by the latest Self Storage Almanac. Our competitor’s historic and current occupancy along with their unit rates is established through secret shopping. This underwriting triumvirate of supply index, subject facility occupancy, and competitor facility occupancy gives us as accurate of a market supply and demand study as possible. We are able to use the market supply and demand results along with the competitor unit rates matrix to determine what the market rates are and update the unit mix with the potential rental rates for each unit size.
By updating the seller’s unit mix with market rental rates gleaned from our competition study, we achieve a projection of gross potential income that can inform development and expansion plans. It allows us to project future years profit and loss in comparison to current income and expenses with downside mitigation factored in through stress tests, applying a range of decreases to income and an increases to expenses. We explore the various debt and equity structures available and the effects on cash after debt service and internal rate of return. Beyond the quantitative analysis, we collect qualitative information: physical appearances, amenities, opportunity zone qualifications, property insurance qualifications, FEMA flood map reference, police reports, and more. We order a Phase I Environmental Site Assessment, a Property Condition Assessment, drone photography, and a site walkthrough. In the scenario of an expansion, adaptive re-use, or ground up development, we order a third party feasibility study to verify our work and further mitigate downside risk for us and our investors.
When everything is said and done, we can identify if there are any changes needed to the purchase price, projections, or structure of each deal.