Q&A with Lloyd Hussey of William Warren Group

Self storage has both compelling qualitative attributes relative to other property sectors as well as strong historical empirical data supporting the thesis.

On the qualitative side, the storage sector is a relatively higher margin business due to the simple, cheaper to operate physical plant. Unlike multi-family for example, there is little to no plumbing in many of the structures. Storage landlords also do not have to manage any sort of judicial process to evict non-performing tenants and enjoy strong lien rights which allows a quick resolution of aged delinquencies. Lastly, the self storage lease structure is typically 30 days which allows operators to quickly raise rents post acquisition to create value and generally allows the sector to track well with inflation. Lastly, self storage is well suited to ""contactless"" operations and given the importance of the sector in small business logistics it was officially designated an ""essential business"" during the pandemic.

The empirical data shows that the sector has long outperformed both other property sectors as well as broad indices of equities and bonds. Using various sector REITs as a proxy for other real property sub-types, we can see that self storage had higher returns and lower risk (volatility) in most periods going back 20 years. Similarly, looking at a scatterplot of 20 year annual returns and standard deviation for big stock and bond indices, the self storage dot plot indicates higher return per unit of risk than most alternatives. We've also looked at how storage performed during the GFC and it declined less than the Morgan Stanley REIT index and the SP500 and recovered much faster as into the recovery.

Our Fund is an open-end, ""evergreen"" fund that is currently seeded with 10 assets across four states (CA, WA, AZ, FL). As an open end fund without an arbitrary sunset date, we're taking a long term view towards building a generational wealth creation portfolio of self storage assets that will deliver inflation hedged income and long term capital appreciation. The fund's unique structure will allow us to continue to diversify into high growth/high barrier markets and to do so across market cycle vintages, smoothing the effect of any deep troughs.

Our target acquisition profile is typically coming from the vast universe of undermanaged ""mom and pop"" owner operated stores. Approximately 70% of the 50,000 self storage assets in the US are non-institutionally owned and we will carefully underwrite operational upside scenarios that can be executed on our national operating infrastructure. Identifying multiple levers of value creation can include rapid revenue growth from our algorithmic daily pricing models to quickly adjust in place contract and asking rents to market, expense management from leasing automation/kiosks, utility savings from solar etc. We may also identify under used or underbuilt areas for additional rentable square footage.

The over-arching goal is to create a durable passive income stream with tax efficiency and future capital appreciation potential.

Storage is generally a low volatility, recession resilient asset class but there are some threats to mitigate with careful, seasoned sponsorship.

Over-supply can dramatically impact rents and occupancy in a store specific trade area given the commodity like nature of the product. Our 30 person real estate team does extensive research to identify markets with defensible barriers and strong demand drivers. We carefully analyze all existing assets, as well as planned, permitted or under construction assets before making an acquisition.

Interest rate risk is affecting our ability to finance assets at accretive leverage returns, which has led us to look at deals that work on an unlevered basis or those that have assumable below market loans in place. The increment is interest rates also increases cap rates and can have a mark to market impact on the NAV/share price.

Recession/inflation fears can cause some softness in certain markets as consumers feel pressure to cut costs which can lead to modest declines in occupancy and rates. This impact is generally muted in the self storage sector given the relatively small percent of household budget a unit represents. Our revenue management team adjusts prices and move-in specials daily to optimize revenue.