James Sprow | Blue Vault |
On Tuesday during Alts Week 2022 a panel presentation was hosted by Trey Killingsworth of Orchard Securities and included Brandon Hunt of Strategic Capital Fund Management, Bill Leitner of Leitbox Storage Partners, Stephen Morehart of Sealy & Company, and Todd Williams of Hamilton Point Investments.
Todd Williams shared that Hamilton Point did quite well during the Pandemic, despite their concerns that tenants might not be able to pay their rent. Prior to the lockdowns they were collecting 99% of their rents. They were quite pleased that they actually had about 97% rent collections and increased occupancies by 1%. The Federal and State support helped, and their price points at about $950 per month helped. In 2021 and early 2022 they saw significant rent growth in the 20% range, and pricing jumped in the multifamily sector, with some of their property sales up 70% over their purchase prices.
Bill Leitner reported that one in every 11 people take part in self storage and this year that may drop to one in nine. Downsizing and urbanization have had a very positive impact on the self storage sector. America is on the move. As a developer rather than a portfolio manager, Leitbox has been able to stay ahead of inflation as the price of materials has not exceeded the rate of rent growth. They can stay ahead of inflation with a market-to-market ability with 30-day leases.
Brandon Hunt said data centers and broadband assets have been highly Pandemic-resistant. They saw record growth using metrics such as megawatts. 2020 saw a massive jump and last year they saw up to a one gigawatt increase in their capacity. Demand is outpacing supply. And, there has been a large influx of capital flowing into the sector from institutional investors. They are anticipating a higher cost of debt, higher construction costs and higher cap rates. There is a flight to safety and quality, keeping cap rates compressed. Because their sector is a critical asset they have very low tenant default, and they have the ability to lease up assets at new market rates, which can offset the cost increases on the operating side.
Stephen Morehart said during the Pandemic there was a flight to the warehousing and industrial space that Sealy was well-positioned to supply. There has been a move from Just-In-Time to Just-In-Case strategies. There was a move to the e-commerce life-style. As Amazon expands, they tend to be the driver in the industrial space, building for themselves and staying in the buildings for an extended length of time. Construction costs being as high as they are, we’re seeing delivery times extending out further and further. Rent growth is incredible, in some markets 15-20%, not uncommon in some markets at 40-60%.
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Brandon Hunt sees mobile technology doubling capacity every few years, with new uses requiring more capacity and bandwidth. He sees opportunities in older data centers where they can buy older assets below replacement costs, particularly in the secondary and tertiary markets, and upgrade the properties. They do seek to hedge their risks on financing interest rates.
Stephen Morehart said that Sealy took a significant portion of their variable rate debt and made it fixed rate. They were able to re-leverage and that made their largest fund and take advantage of the growth and the value of the assets and were able to make a large number of purchases in the fund. They are seeing potential in the secondary and tertiary markets as there has been bloating of pricing in the primary markets. They want to have a good balance in their funds with regard to secondary and tertiary markets.
Bill Leitner stated that Leitbox is a niche, sharpshooter developer of product in self storage. From the earnings calls of the five big public self storage companies the industry has been exceptionally successful across the board in 2021. If you look at the 4th quarter 2021, their NOI growth was 20-28% on a same-store basis. This is unheard-of growth. They are seeing more of the same in 2022, with January and February already in the books. Leitbox has seen their exit cap rate drop from 5 ½ to 3 percent overnight. Last year they didn’t have an exit cap rate above four. There’s nothing on the horizon right now that would be a speed bump. They are going to continue to assume an exit cap rate of five, even though the market is three. Driving that is the capital inflow from Wall Street that is seeing self storage as an attractive asset class.
Todd Williams at Hamilton Point says one of the reasons they like multifamily is that the asset class weathered the 2009 recession well. They are not underwriting based on the current high rent growth. They will continue to keep their focus on secondary and tertiary markets where they can buy below replacement cost. They are selling at $150K per door where new construction costs are $200K per door. To date they’ve sold almost 60 properties. 2021 was a great year and fundamentals are expected to continue to improve in 2022. Demand is outstripping supply. Material shortages and delays have kept supply lagging behind demand. They are starting to see some attractive student housing as distressed assets. They have bought five or six student housing properties at about half of construction costs.
What is the one thing that keeps you up at night?
Stephen Morehart: The pricing pressure that is driving up the primary market pricing in industrial assets.
Todd Williams: One thing that keeps him up at night is his kids! The war in Ukraine and the possibility of a sustained recession.
Brandon Hunt: One thing is the large amount of capital coming into the sector and pricing, and tenant quality.
Bill Leitner: From a macro, capital market standpoint, the flow of additional capital coming in, when your cost of debt starts to equal your cap rate, that starts to concern me a little bit. It’s coming so hard and so fast, it’s a little hard to sustain. Also, the permitting process is running 20 to 30% slower. There aren’t enough resources at the city level to handle the volume.
There are still many sessions to come in Alts Week 2022. Register here now!
