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.
Welcome back to the AAA Storage Podcast Today again, I have Paul Bennett. Thank you so much for joining me today we are gonna be talking about the Growth Fund two that you guys are launching and, and, uh, marketing Very soon. And I wanted to talk today about the Growth Fund two, because you have had a lot of success with Growth Fund one, and we've been talking for, uh, you know, several weeks now, several episodes.
This is episode 11 about some of the, the more broad strokes of investing in real estate, uh, particularly in the self storage industry, particularly in, in office flex and industrial properties. And so what I wanted to talk about today was to give listeners a view of. What it looks like that you're actually putting this fund together and what properties, you're looking at the details of how this fund is structured. We talk about ground up development, we talk about a growth oriented investment.
I wanna talk about some of those things. And so this gives a really realistic picture of what this looks like from a fund model, uh, for investors that might be listening. Now, of course, uh, this is, you must be an accredited investor and there's lots of disclaimers and so on at the end of the episode that do listen to.
Um, but to start, Paul, I wanted to hear, tell me a little bit about the story of you guys going to a fund model and you've had Growth Fund one, and now you're launching Growth Fund two. Just gimme kind of an overview of, of where you guys have landed and, and what you're launching with Growth Fund two now coming up.
super. Brandon, that's a great place to start and always fun to be here with you. So. Uh, I know, uh, I'm not sure. I love the way you say I'm here again, but, uh, but always fun to be here, man. For
Well, I have my expert here, Paul. Thanks.
No, I, I think the history's a good place to start. And, um, if you've looked at any of our information, you probably already know this, but we've been, um. We've been developing self storage in office Industrial Flex for more than 30 years, and we've had investors that invested alongside us in every deal we've done since 1993.
For most of those 30 years, we did single property syndications where we would find a property that we liked, prepare it for development, raise capital from a relatively small group of investors, usually eight to 10, maybe 20 investors. Alongside our own capital and then develop that project and either hold it or uh, or, or sell it. Uh, once we had it stabilized, we made the transition. Um, Brandon, we, we started talking about it internally in 22, 23 for a couple reasons.
We, we saw some shifts coming in the market that we thought. The timing would be great to take advantage of. Um, also from a pure business standpoint, raising, uh, capital for multiple properties at one time in a fun vehicle. It's just a more efficient way to do it. Um, and we made the decision after having sort of.
Treaded water in place for 30 years to really begin to scale and grow the business and reach out further in terms of the number of transactions that we did and also the number of investors that we, we dealt with, but the the underlying reason that anybody should care about why we transition to a fund model, why we're doing eight to 12 properties at a time. Versus one at a time is because of what we saw in the market.
Um, and, and it's, it's part of the whole thesis that was behind Fund one and once again will be behind fund two. And that is Covid caused a real distortion in the market. Occupancy rates were through the roof. As you remember. Interest rates were incredibly low. Uh, average occupancy across the United States was over 97. Percent. And what that spurred was a ton of new development.
And so the number of properties that were being developed in in markets across the country went up substantially and as it does in every real estate sector, resulted in some oversupply about the same time. Interest rates went back up 2223. Uh, which further, um, discouraged development. And what we're seeing today is what we predicted three years ago, which is a steep decline in the amount of new developments occurring in the self storage market particularly.
Uh, and what that creates is an opportunity because it takes anywhere from two to five years to start from ideation to actual. I've got units to rent on the ground because of all the land acquisition process, the zoning, the permitting, everything that has to occur. Um, we think there's going to be a time window in the market where. Demand has come back up and that's happening even as we speak.
We're seeing the markets solidify a little bit as that new supply that was built and and hit the market a couple years ago is being absorbed. And there'll be a lack of new facilities coming online. So we think that creates an environment that's a seller's market for good facilities. And we also know there's a ton of institutional capital on the sidelines that only in the last six to eight months have we seen start to come off the sideline looking for deals.
So we think there's a time window here. Maybe that's all too much information, but. Fund two is gonna look a lot like fund one did because it is being driven by the same thesis and the same strategy, which is we think in the late 2020s into the early 2030s there's a window of time where delivering new facilities, you'll see them lease up faster and you'll see the value of those facilities in the eyes of potential buyers be higher because of the lack of new supply.
Interesting. Okay. So overall summary is it's much more efficient to invest in this way from, from your perspective as a sponsor, but also it gives you, I guess, access to more properties, um, to maybe deliver more value to investors. Is that kind of the, the hope of, uh, what a growth fund could do as well?
I, I think the efficiency benefits both investors and. Um, sponsor. So it's, it's really not just a selfish issue. If we save money, our investors save money. And, and if, you know, if, if, if the point of the efficiency is to is to be more efficient in terms of cost, then everybody benefits from that. Um, and, and yeah, it, it's really about scale and volume, right? It's, um, it, it's ultimately that. Provides more opportunity.
The other thing from a fund standpoint is it provides diversification. Our, our legacy investors often would invest in multiple transactions over time, so they, they built diversity by, by investing in different projects one at a time. The fund investor gets to do that with one investment. One commitment of a couple hundred thousand dollars is then spread across in fund two, at least eight, and potentially as many as 12 different projects.
And so it gives you some diversification geographically and by product type. 'cause fund two, like Fund one will develop both self storage and office industrial flex properties. So, um, the diversification's the other sort of rationale for the fund from an investment standpoint that we think, you know, benefits investors significantly.
Yeah. Okay. That makes total sense. Okay, well let's, so let's jump into growth fund two. So tell me a little bit about how this fund is, is structured. I, I know there's, uh, you've got some slides that are coming out, uh, for different presentations, talking about the, the strategy, so things that we've talked about before. There's ground up development and it's also a growth oriented investment. And then, um, with that strategy paired to the different property types that you have.
Uh, it's a really good mix for a fund. So, so walk me through a little bit of the strategy and then I wanna talk about some of the, the properties as well.
Yeah. Uh, uh, real quickly, you mentioned the disclaimer. Obviously this is, we're gonna talk in concept about fund two. It will not be available to investors until the end of April. And nothing in this podcast is intended to be an offer to buy or sell securities. It's, it's simply an overview. You need to get the prospectus and get all of the information to ever make an investment decision.
So just to be clear and the disclaimer will appear at the end, I know, but just wanna make sure people are clear on that. Um. So our strategy is simply to be what we term a merchant developer, and that is to develop properties, stabilize them, and by stabilize, I mean get them leased up to somewhere around 80, 85% occupancy where they create positive cash flow above debt service and then sell them. And the reason we choose to take that approach, particularly in this market, is.
Our objective is to harvest the value that's created in the development process. Um, we've talked about yield on cost. We've talked about all of that in prior episodes. I'll probably touch on it in a minute, but there is a tremendous amount of value that is created. The difference between what it costs to build a project and what that project is worth in the marketplace based on the cash flow that it creates. Those are two completely different universes.
Um. And, and, and in the development of self storage, there is a wider than average gap between those two values. Um, so we are focused on, um, not buying properties with existing cash flow and distributing that cash flow to investors. We're focused on. Developing from a ground up standpoint, creating that value difference between what it costs to build it and what it's worth based on the cash flow stream it produces.
And then realizing that value for our investors we're time valued, return driven. I think I said this in an earlier in, in an earlier conversation. We, we've. We absolutely rivet on internal rates of return for our investors. And that is driven by yield on cost at the development level, which is related to development spread. Um, yield on cost and development spread are what indicate and drive that value creation and development process.
And, um, our track record, and I don't wanna do a commercial here, but our track record. Over 30 years and 90 full cycle deals as we've averaged just a hair under a 20% internal rate of return for our investors. And, and, and look, investing in cash flowing, self-storage assets or any type of commercial real estate that's cash flowing.
I, I, I, I'm a firm believer in and do personally, uh, is just a different investment and it does not generally offer the same types of overall returns because to grow the value of an existing facility, you have two. Levers. You can pull one, you can pull one, you can't. One is growing net operating income and the other is cap rate compression. It's the only way the value of an existing property moves, so there's no leap in value that occurs when you buy cash flowing assets.
So, uh, our fund two will be appropriate for investors whose investment objectives are the growth of their equity capital. If they're looking for. Current income. If they're looking at a quarterly check in the mailbox, we're not the right opportunity for you. We talked about that I think on an earlier episode as well,
Yeah. Okay. Fascinating. Okay, so with that in mind, all of the. Strategy, the story behind, uh, switching to a fund model and now launching this second fund. Tell me what comprises this fund? So you've got a mix of properties. They're, they're all over what I understand the southeast, uh, the United States mostly.
Yeah. Southwestern, Southwestern orientation a little bit. Yeah,
yeah. Okay. Okay. Yeah. Talk to me about that.
A, a couple of places in, in our conversations, we tried to give people a look behind the scenes. So I'll give you a quick look behind the scenes,
Yeah, please.
we're actively, um, drafting documents and working with our attorneys and doing all the things you have to do in the final stages to launch a fund. The work for Fund two actually started more than two years ago, um, because it starts with the acquisition of the land. If you. Remember we land, bank land there. There's a process land has to go through before you can turn the first shovel of dirt over, and that process can take anywhere from one to two years.
To get it zoned per, to get the project designed, to get all the permits that you need to deal with the Department of Transportation in whatever state that you're developing in, because you have to have driveway cuts and sometimes they require turn lanes and other improvements that you have to make as a developer because of the traffic impact of the project that you're building.
Um. We don't want our investors to take the raw land risk, the risk that you buy a piece of land and that ultimately can't get it entitled to develop. Um, and we also don't want our investors to be exposed to the additional time that it takes. Um, I. To get land, it would, it would, it would lower the time valued returns, right?
If you have to buy the land and sit on it for two years before you could even start development, um, it stretches out the time frame for the capital that comes into the deal and, and lowers overall return. So what we do is we land bank that land, and our development team has been working on the 12 projects that are going into fund two for more than two years. Um, they're all approaching final permits. Um, we have civil permits. Everywhere.
So we could start site work on all the sites tomorrow if we wanted to. Um. And, uh, and, and so that process has been ongoing. Um, today we're in the final stages in the last few weeks of drafting the, the private placement memorandum and putting together marketing material and, and all the things that, that go with actually launching a fund. But the work for Fund two has been going on for, for quite some time. Fund two will look very much like fund one.
Um. In the future, we will probably, based on market conditions and and investor appetite, we may take a different approach, a different strategy, but we think the strategy that we use in fund one is still very viable, like I've already said for fund two. Um, and so what we plan to do is raise $40 million. We will have the right to go up to $60 million in equity. Um, our projects are typically levered net, net net, somewhere in the 60 to 65% loan to cost basis.
Um, so if you do the math backwards, if we raise $40 million if's, probably about a hundred and. $10 million worth of real estate development, which will be around a million square feet of storage and office industrial flex. If, if the appetite is there and we go to $60 million in total funding, um, then that will be paired with another.
Um, I can't do the math in my head quick enough, but, um, you know, it, it, it'll, it'll take the total fund to probably 130, $140 million in total construction cost and probably 1,000,002, 1,000,003, uh, square feet total. Um, I. So, you know, we're setting out with the objective of raising $40 million. We have 12 identified properties that will be in the fund. They're spread between the Houston, San Antonio and Austin Metros and Texas areas where we have developed extensively for 30 years.
Um, and then the last area that will, that'll be in fund. Two, and it'll probably be the first property we develop in Fund two is in North Carolina. In the Charlotte Gastonia market. We have a fantastic project, 17 acres. It will be a combination of an office, industrial flex business park, and self storage. There'll be separated, but there'll be both products on that site.
A corridor where the market is evolving and directly across the street is a brand new development that's just getting ready to break ground that has 800 new homes and about a hundred thousand square feet of retail and commercial space.
Wow.
and it will not only will that project feed our project, but it will also be the trigger we believe that begins to transform that corridor. And I think you'll start to see it. It's been a fringe area with a little bit of a. Industrial almost feel to it. Um, I think this new sort of high-end homes are gonna be in the 350 to $650,000 range. Um, it's a good price point and I think that project will really flip this corridor and in the next five years you'll see it transform completely.
So maybe a little bit too much detail on that one project, but, um, total of 12 projects. Um. A little more weighted to self-storage, um, than fund one was. We try to strike a 60 40 allocation between self-storage and office industrial flex. This fund will be eight, um, self-storage projects and four office industrial flex projects. If we go beyond those 12 projects, we'll probably add a little bit more industrial flex to try to get closer to that 60 40 mix.
Um, but out of the gate, um, it'll, it'll probably be a little shy of that, probably a little bit more. 70 30, um, 70% storage and 30%. Office, industrial Flex. Um, and we're super excited. We've got a great site in the Houston area. We, we've got, um, Ray Ellison a, a site in the San Antonio market is probably one of the best self storage sites I've ever seen. I.
Oh wow. Okay. Tell me about
it's surrounded by apartments, um, in a, in a, in a vibrant and, uh, good, not, I wouldn't say affluent, but strong, middle to upper class area of San Antonio. Um, so we're super excited about the portfolio. In fact, we, our, our market analyst just finished as we approach a fund. Then it'll still be.
Six months before we start construction on the first project and fund fund two, because we have to launch the fund and then there's a minimum amount we have to have committed before we can break escrow and actually start to make investments. So we're still six months away from any actual activity where the fund's gonna actually acquire the land itself and we'll start to development process. Um, but at this stage, one of the things that I just finished, um, yesterday.
Uh, going over with our market analytic team, um, is we've gone back and looked at each one of these properties and done very deep dives on everything from the demographics to the storage demand in that market to the supply. Um, that's, that's coming online. We do things like that. Data's out there. I can tell you by looking at Radius data, how many proposed new facilities there are within a certain distance of our site.
But. One of things that some people don't do, but we do, is we then call the local planning commission and confirm that those sites are actually permitted or in permitting. And what you're seeing a lot of today is where the radius data may tell you there are six new sites within five miles of you, and the supplies gonna go through the roof when you do the check. Four of those six have been canceled and two of 'em are really early stage and may never make it to development.
So you, you have to peel the onion back a little bit today because of sort of where the market is. But we've just completed the final review and started drafting internal feasibility studies on each of the 12 properties. Um, and that's documentation that ultimately will be in our secure data room and available to investors to look at as they consider an investment in fund two. So.
Man, that's amazing. There's so much due diligence that goes into this, but it hearkens back to the last episode where we talked about a hyper-local markets of supply and demand. And so that kind of due diligence on the actual, you know, five mile radius getting to, I think you said, what was it, 10 uh, square feet per capita or something like that of, of a storage space. I mean, that kind of threshold, the detail of that is so cool.
So knowing that you've done that for these properties is, is really great.
Yeah. Well, Brandon and I, I've said this before, again, sort of miniature commercial. Um, we do that first because it's the right thing to do.
Yeah, of course.
and secondly, because our investors expect it. But thirdly, in Fund one, we were the largest single investor in the fund, and that's likely to be the case. Uh. I hope we won't be, because I hope somebody writes a really huge check because they love what we're doing, but, but reality is we'll probably be the largest investor in the fund with somewhere around four or $5 million of our own capital committed as a limited partner alongside our investors. And so the last reason we do it is because we.
It's, our money's gonna be at risk right along beside our investors. And we are the guarantors on all the construction debt. So we have more financial risk than any of our investors will have at any moment in time. And so it's not only prudent for our investors, but prudent for us. So, and I don't mean that to sound like we would only do it 'cause it's our money, and if it wasn't, if our money wasn't in it, we wouldn't do it. No, it's the right thing to do. But, um, obviously we're.
A little more motivated because we have such a significant commitment. I, our history, if you look back at every deal self that we've done for 30 years, I would dare say there is not one where we have not been the largest investor in that deal. And it's because the, the foundation of this business was John Muic, who was an IBM engineer designing. Computer chips and was doing real estate on the side.
Decided to leave the technology industry and, and really focus on self storage development, and it was initially his own investment. Activity, he just brought in investors to expand what he could do a little bit. And the reality is we kind of still think about it that way. Um, we, we don't consider ourselves a sponsor. We're investors and we could just do more investments if we have people that wanna partner with us. And that's sort of how we
right. What I love about that is it, it is, it creates, uh, aligned incentives that if you do well, the investors do well and vice. Versa. And, and that's I think is a really beautiful thing and, and definitely more needed in any kind of investment vehicle. Like this is great.
can assure you. That the fees that we earn, which really only cover actual real cost, um, but there is no monetary benefit that we get from the fund that would offset or overshadow. The financial risk that we take as an investor, if the fund doesn't go well, it is not a win-lose situation where the investors didn't do so good, but AAA storage came out okay. Um, it doesn't, that's not the case.
Um, we are absolutely aligned with our investors and have the same objectives, and doesn't mean we can't make a mistake or a project doesn't go, you know, the way we thought it would, that. Can happen to anybody, but, um, certainly it's not because of a lack of aligned objectives with our investors.
Yeah, I love, I love the structure and the stories that you guys have around that kind of thing because you guys have an amazing team, been doing this for decades, but it, it speaks really to the integrity and the character of what you have as a team. That you are aligned with your investors as much as possible because if you, they win, you win. Uh, yeah, it's, it's really powerful.
I, I, I would say the biggest reason we were successful in fund one and had people that chose to partner with us, some of whom had known us for years, and some of whom had known us for a week when they made the decision to invest, um, is our track record and the alignment that we have because of the way we approach it, that we're taking risks right alongside our investors. Um, and, uh. I think that makes for a good partnership and I,
Yeah.
you know, I think, I think it's the right way to do it.
I love that. I love that. So Paul, I know you're gonna have, uh, some information about the fund coming out on your website, aaa storage investments.com, but how else, uh, should somebody reach out to you or reach out to the team to find out more if, uh, if they're interested in, in kind of exploring the, the fund?
Yeah, the, the new website with all the fund two information should be up really, really shortly. And there is a contact link in there, so you can shoot us an email that'll go directly to Andrew Frowine our Director of Investor Relations, and we'll get back to you immediately. Um, we are partnering with PassivePockets um, which is a platform an online. Platform and community that is all about educating people who want to make passive investments and maybe haven't done that in the past.
Um, and, uh, and also about making opportunities available to invest on that platform. In fact, we'll be participating, we'll be a speaker at an investor conference in Columbus. Ohio the weekend of May 1st, that's sponsored by PassivePockets and that will actually be where fund two launches. Um, the documents will be ready by the end of April and they may be up on the website or may be available to somebody, but the official launch.
Of, of fund two will occur at the PassivePockets Investor conference. There'll be 150, uh, active limited partner investors there, uh, who are coming to learn and get some information about new opportunities. I think there's still some tickets available. So, um, if you're listening to this and you're interested, um, I would suggest go to passive pockets.com and take a look at the information. And it's a great platform.
Uh, but also the, the conference is a great opportunity, but that'll be where we launch fun too.
Perfect. Okay. So fun. Uh, after party, uh, uh, of course everybody's gotta go. No, I'm just kidding. Uh, no, this is
we're hosting a dinner. One of, part of
Oh, okay. Okay. I was just joking. Okay.
yeah, no, part of the, part of the conference is the 150 investors each get to choose a sponsor that they want to have dinner with. So on Friday night of the conference, we actually have a reservation at probably the nicest steakhouse in Columbus in a private room, and we'll have 15 or 18 of the investors that'll join us for dinner. And we, no presentation, no selling. It'll just be a time to get to know each other and hang out a little bit. So,
Cool. I love that. That community element. That's cool. Well, Paul, thank you so much for this time. I'm so excited for, uh, growth Fund two to launch in a couple of weeks, and, uh, yeah, I'm excited to see you next time on the show and we'll talk some more.
super. Brandon, it's always good to talk with you.
All right, man, we'll see you soon.
Take care.
This update for Triple A Storage Growth Fund 2 (the "Fund") contains "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes," "will" and words and terms of similar substance typically indicate forward-looking statements.
All forward-looking statements are the Fund Manager's present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. You are cautioned not to rely on such forward-looking statements, which speak only as of the date they were made.
The Fund manager, Triple A Storage and its affiliates are not under any obligation, and expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to Triple A Storage, its affiliates or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements referred to in this section.
The Fund invests in the development of self-storage and office/industrial flex properties in competitive markets and is dependent upon local and state regulations and economic, and social conditions in the US markets in which it operates.
Changes in local zoning and permitting regulations and requirements, the cost of construction and other materials, the availability of qualified contractors and sub-contractors, new facilities constructed by competitors, tenant demand for its self-storage and office/Industrial Flex properties, and other factors within or beyond Triple A's control can adversely affect the Fund's results.
Triple A Storage Growth Fund 2's actual results could differ materially from management's expectations because of changes in such factors.
Some of the other factors that also could cause actual results to differ from those described in, or otherwise projected or implied by, the forward-looking statements include, but are limited to, the risks related to interest rates and the availability of financing for the Fund's development projects, as well as the risks described in the Fund's Private Placement Memorandum that was provided to each investor in the Fund and which will be made available upon request.