The Broker's P&L Said 5.7%. The Real One Said 3.4%.

WELCOME TO THE PATRIOT DEAL ROOM, Issue No. 02

WHAT I LIKED

The basis math looked like a margin of safety. At the seller's real number, you are near $66 per square foot for drive-up storage on almost two infill acres inside Dallas. You cannot build this product, on this dirt, for that money. Buying below replacement cost is usually the start of a good conversation.

The remote-management conversion was plug-and-play. Automatic gate, cameras, keypad entry, management software, all installed and running. The OM also lists a checklist of recent capex: roofs, security, office, plumbing, lighting. On paper, the heavy check-writing looked done.

For once, the Texas tax trap wasn't going to spring. Current property taxes imply an assessed value around $3.1M. Buy in the high $2Ms and reassessment to your purchase price holds taxes roughly flat, maybe trims them. Regular readers know Texas reassessment is usually the line item that kills the deal. Here it was neutral.

That's the paper case. Then my COO went and looked. - Jeremiah Boucher

WHAT I DIDN'T LIKE

You can't see it, and it's rough. The facility is tucked inside an industrial park with essentially zero retail visibility. No drive-by traffic means you are buying every customer with marketing dollars, forever. And despite the OM's capex checklist, the field read is an aesthetically rough early-1970s asset with plenty of deferred repairs and maintenance still coming. The capex list tells you what they fixed. The property tells you what they didn't.

They can barely give units away. This facility spends about $36K a year on marketing, enormous for 280 units, and still sits at 66%. Then the web check: 10x10s advertised online around $32 against a $65 street rate. That is roughly 65 cents on the dollar of their own standard rates just to get bodies in units. The OM's “achieved rate” of about $100 on a 10x10 is a photograph of tenants signed in a better market. The rates walking in the door today are less than half that.

The oversupply is structural, and the competition is sophisticated. Nearly 15 SF of storage per capita in the 3-mile ring, against negative population growth and roughly a dozen housing starts. A wall of REIT and institutional operators sits within a mile or two. We know two of the nearest competing stores firsthand: very hard stores to drive rate or hold occupancy at. This is not a management problem an operator fixes. It is a market problem nobody fixes.

SELLER MOTIVATION CHECK

Watch the tape, not the listing. The ask dropped once publicly. Then the broker floated a number well below that privately. Then came the phrase every buyer should underline: “willing to get creative with the right group.”

Translation: the carry hurts. A passive owner paying a full third-party management stack, management fee, payroll, and $36K of marketing, on a building that is one-third empty is watching about $118K of real cash flow get eaten alive. And a seller cutting price into a market where his own manager is discounting 35% just to fill units knows exactly what he owns.

Two price cuts plus an invitation to structure is not a seller testing the market. It is a seller who has already decided to leave.

READ THE P&L LIKE AN OPERATOR

The offering memo shows three columns: actual trailing-12, broker adjusted, and pro forma. The marketed cap rate comes from the middle column. The middle column is where the fiction lives.

Quick refresher on the math, because it is the whole game: a cap rate is just NOI divided by price, and price moves inversely to the cap rate. At these cap rates, every dollar of NOI a broker adds with a pencil justifies roughly $15 to $18 of price. Add $76K of paper NOI, which is exactly what happened here, and you have conjured over a million dollars of paper value.

The games that built the middle column: repairs marked down to about 18 cents a foot on early-1970s metal roofs and asphalt drives, and marketing cut by two-thirds while the pro forma simultaneously leases the building to 92% and pushes rates 20% above what the market is paying. Pick one. You cannot have all three. Payroll was zeroed out and replaced with thin contract labor and a call-center line.

Even our own generous rebuild, remote-managed with realistic repairs and marketing and taxes reset to a high-$2Ms basis, only gets in-place NOI to roughly $173K, a low-5s cap rate at the ask. And that rebuild assumes in-place rents hold. The $32 web rates say they might not. The honest in-place number is the actual one: about $118K, a 3.4% cap rate at the current price. Here is what that means at every price the seller has floated:

THE VERDICT

‍

THE LESSON

Subscribe to the weekly newsletter

The Patriot Deal Room breaks down real deals we underwrite at Patriot Holdings, the ones we buy and the ones we don't. New issues publish every Wednesday. Follow along or reach out if you want to see what we are buying right now.

Start The Conversation

‍

DISCLOSURE

This content is for educational and informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, nor investment, legal, or tax advice. The deal described has been anonymized and is not owned by Patriot Holdings or its affiliates. Figures are drawn from a third-party offering memorandum and our own underwriting, are estimates, are not audited, and are presented to illustrate analytical process rather than any actual or projected result. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Any private investment offering is available only to verified accredited investors pursuant to the applicable offering documents, which govern in all respects.