Investing in Real Estate and in People
On January 1, 2021, Pearson Partners comprised of only one employee: yours truly. We started with zero storage customers and we’ve grown to over two thousand. On top of that, we’ve done things I did not think were possible only a short time ago:
· Started an in-house call center
· Started a self-storage property management company
· Created procedures for everything from cold calling to closing
Pearson Partners is now comprised of seven full-time employees and four part-time folks in two states. In addition, we improved the investor experience by creating a new website—complete with an investor portal which enables automatic monthly distributions and timely investor updates.
Many days, I’ve felt like I was flying a rocket ship to the moon…and other days I’ve felt like I was keeping it from crashing back to Earth. Often those days were back-to-back. It was stressful. I lost sleep and a little hair.
On top of that we’ve faced battles:
· The largest 7-day ice storm to hit Mississippi in the last 100 years
· The largest hurricane to make landfill in Louisiana since Katrina
· A new COVID variant
· Investment markets that could be called “frothy,” making new investments challenging
· After closing one of my first storage deals, the seller went under audit by the IRS and refused to turn over 50% of customer information, including many leases—this made the transition a little difficult.
But it has been a blast and I am proud of our results.
Burning the Ships and Getting Focused:
I know of the burning ships allegory, but since it's not explicitly explained here, I'd maybe delete this and just use the subheading Getting Focused so you don't confuse anybody wondering what this has to do with burning ships.
After dabbling in asset classes of medical office space and industrial, I decided to move all in on an asset type I have never owned or operated: self-storage. I built a custom database of all the self-storage owners in the Southeast so my team and I could build relationships and find more off-market deals. The strategy paid off. We closed nine deals in 2021 and all of them were off-market. This helps us to create more value by removing parties (fees) from the transaction.
Our business model is straightforward, but it all is founded upon buying prime opportunities or finding value. The flywheel, which was made popular by Jim Collins in Good to Great, helps companies understand what drives their business. If we can find prime opportunities (defined at below replacement cost, leased to customers below market rents, in little to no technology) then we can create a secure facility using great technology. If we can create a clean facility with great tech we can create happy customers, which will increase the operating income. If we can increase the operating income, we will deliver strong returns. If we deliver strong returns, we will attract more capital, which allows us to start all over again.
What I Am Most Proud of:
The team is starting to gel and our processes are starting to pay off. Putting the right people in the right seats is the hardest thing in business, after you find a profitable product or service to sell. There is a saying that a poor hire is 3x the person’s salary; that number is low when considering the cost of lost time and opportunity. I am spendingmore time trying to understand how to build a great team based on the job needed and the person’s innate personality. I am proud to report we have an excellent head of operations, an excellent office manager, and three great customer service reps. The only way we will be able to reach our vision of 10,000 satisfied customers by 2030 is through teamwork.
This past year proved a challenge for those looking to find value in real estate. If you had cash flow, you had buyers lined up due to record low interest rates pushing up prices and pushing down returns. This proved especially true in the self-storage world. But we have been able to build relationships directly with sellers which allowed us to find and create value. It is easy to buy $10M of real estate with $10M—just call your local broker. But the art of the game is buying $8M valued at $10M sixty days after purchase.
Real estate investment is a financially driven game. I proud to report our loan to value ratio (LTV) across the portfolio is 54%—for every $1 of value we only have $0.54 of debt. This provides a nice margin of safety when we encounter rough waters. In addition, our debt service coverage ratio (DSCR) is 1.88%. Most banks require a 1.30% DSCR. By being well above the required limits, we have excess cash flow to re-invest in the property or distribute back to our investors.
Why We Like Self-Storage:
· Over the last two recessions, rent dropped the least compared to all other asset classes.
· The demand drivers for self-storage are death, divorce, and dislocation (moving). These things happen in good times and bad, making the asset recession-resistant.
· We are on the Gulf Coast and natural disasters are a part of life. These properties are in higher demand during natural disasters and cost much less to repair than, say, a medical office building.
· Portfolio Aggregation—Buyers will pay a premium to buy a portfolio $10M or above.
How We Add Value:
· We target off-market self-storage facilities built from 1980-2010, with little to no technology, where the customers are paying below-market rent.
· Install brand-new gates, lighting, security cameras, and re-paint the entire facility. This will often take a Class C property to a Class B property in 90 days.
· Layer in the latest technology including a new website, payment processor, and the ability to sign leases on an iPhone.
· This all creates satisfied customers which allows us to increase markets.
· Higher returns allow us to attract more capital to repeat the process.
9 Lessons I’ve Learned:
1. Get laser-focused. Know what business you are in; and more importantly, what business you are NOT in.
2. Solving problems is hard and expensive. Best to KISS (keep it simple, stupid). After purchasingour8th storage facility this year, my team can complete the due diligence and on-board the new customers on to our platform with greater ease. That is the power of focus.
3. The days are long, but the years are short. It is hard to see—much less feel—the progress from a Monday to Tuesday, but when I look back over 12 months…boy,did we have some growth!
4. Focus on the process and not on the scoreboard.A year without goals out-produced anything I have done in the past. Focus on the process, solve the problem on your desk to the best of your ability, and the results will start to come.
5. Great people are invaluable. The only way to grow is to have simple, clear, and concise procedures executed by GREAT PEOPLE. Building the fastest racecar is fun, but you will not get very far without gas. People are the gas in your business.
6. Patience is important. It’s important when dealing with vendors, bankers, and partners. Every single small business owner that does roofing, painting, construction, and welding is backed up and understaffed. Find a good vender, build a relationship with them, and expect it to take longer than you would hope. DON’T take the lowest bid. It will cost more in the long run to do the work twice.
7. Understand your strengths and weaknesses. It is imperative that you understand where your strengths lie and build a team around all your weaknesses.If you get the right “whos” they will figure out the “how.”
8. I am not as smart as I thought. The more I come to know and understand many things in my life, the more I understand how far I have to go. In the beginning it looks easy, then very complicated, then hopefully, one can gain mastery.
9. Building things is hard.
Goals for 2022 :
1. Continue to build a world-class team—a company that lenders and investors want to help grow. Hirehigh-quality vendors and pay them on time. Maintain high standards and attract talented employees.
2. On-board the new office manager/bookkeeper into our system. This person will be on-boarded by February 2022.
3. Continue to build and scale trust with lenders, investors, and vendors though video and writing online.
4. Our 10-year goal (2030) is 10,000 satisfied customers. We need to continue to build the infrastructure and systems to reach this goal. That includes documenting all processes via video to smoothly on-board new employees and use the best technology to improve the call center experience and team communication.
5. Have some fun and work to build a culture people want to work for. Most of our employees are remote, which make this more challenging. How can we incorporate events that foster deeper relationship?
Moving forward, we are going to give it all we got!
