10 Federal operated unmanned facilities before it was cool.
Now the Raleigh-based firm is on the move with its fourth investment fund that aims to buy 20 to 25 facilities and convert them into remotely-managed stores.
The fund, 10 Federal Self Storage Acquisition Company 4 LLC, opened December 15 and has raised more than $22 million in equity to date with a total target of $100 million.
So far the fund has purchased three facilities in Texas and one in North Carolina. The company is also set to close this week on the ASAP Storage portfolio of three properties in Temple and Villa Rica, GA. The portfolio offers 664 storage units totaling 96,000 rentable square feet, which 10 Federal is purchasing for approximately $78 per square foot. The portfolio is only 58% occupied due to the owner’s focus on other businesses.
“This portfolio presents an ideal acquisition opportunity since these properties are located in the high-growth corridor of the Atlanta, Georgia MSA. Similar to the Texas properties, each of these assets also offers interesting possibilities for expansion given they occupy nearly 15 acres collectively,” said Cliff Minsley, cofounder and partner.
Inside the fund
The fund is pursuing what Minsley describe as a late-cycle strategy that focuses on buying deals in cash or assuming favorable debt terms.
“We are waiting to see when the Fed pauses the interest rate hikes and will see how the markets responds. At that point, we’ll make the decision about how we will utilize debt for the current offering,” Minsley said. “In a bad scenario crash landing, we’d lever up 25 to 40 percent against the portfolio and use dry powder for distressed asset purchases.”
“In a softer scenario, we would expect interest rates to retreat during the life cycle of this offering. If and when that happens we may use debt to further lever our returns,” he said.
Pioneering the unmanned model
Minsley and his brother Brad founded the company in 2010, after working several years in multifamily real estate—including during the 2008 recession.
“At first we started out in the multifamily space going with what we knew. We became attracted to storage because it was a like-kind business and wanted to diversify into another real estate asset class,” Minsley said.
Upon buying their first facility, the brothers immediately noticed certain inefficiencies inherent in the business—in particular having an onsite manager that was idle most of the time.
“It got our wheels turning, how could we utilize technology to automate the onsite management duties?”
Building a better storage facility
Prior to the COVID-19 pandemic, 10 Federal was one of a handful of companies in the country offering storage units that could be leased online and move into automatically without any human interaction along the way.
Today many vendors cater to automation technology that make running an unmanned storage facility possible, but in the early days of 10 Federal the Minsley brothers had to assemble their own tech setup from scratch.
“We developed our own technology initially out of necessity, it wasn’t available off the shelf. As the industry has adopted this methodology, some of the technology we now employ are available off the shelf. That is a positive for us as it has allowed us to more narrowly focus on our core competencies,” Minsley said.
A self-confessed tinkerer, Minsley said the company is still pushing the boundaries of what technology can do.
“We are experimenting with AI cameras and autonomous drones. We’re actively working on a bridge to link those two technologies to automate surveillance using logic triggers,” Minsley said.
Unlocking tertiary markets
When 10 Federal first started, Minsley said that they simply expected to remove the manager’s salary from the bottomline and create a pop on value.
“What we found is that it was a tremendous revenue play. The efficiency of automation also acted like a Rosetta stone to unlocking tertiary and secondary markets,” Minsley said.
In such markets, Minsley said that operators can either afford a full-time manager but may suffer financially, or they lack staff but suffer from poor customer service. With the right technology in place, 10 Federal found that through automation they could reduce labor costs while enhancing the customer experience.
“Using our methodology, you can run a profitable store and offer an elevated customer experience,” said Minsley.
The successful operational model helped ensure the sale of the company’s first two investment funds. The first was purchased by the OB Companies & Nuveen Real Estate, and the second fund was purchased by Brookfield Asset Management. 10 Federal continues to manage both.
“We want to sell and be successful for ourselves and investors. If the buyer wishes us to manage it we will, if not that is fine with us,” Minsley said.
The company’s third fund, which raised a total of $45 million, owns 15 properties with one more to be purchased.
Given the uncertainty of the current economic environment, Minsley said it is a little more difficult raising money than in the past.
“Folks are pulling in their horns a bit. In general I’m pleased at the rate at which we are raising capital,” Minsley said.
Minsley says he doesn’t see larger investment groups that have recently made meaningful investments in the sector stopping, and more and more retail investors are aware that storage is one of the best performing asset classes in real estate.
“I think a lot of people want to have some exposure to self-storage in their portfolio, whereas that might not have been the case 10 years ago or more.”