High Interest Rates. Inflation. Recession. No Problem.
The Ideal Investment for the Next 10 years is Essentia Self Storage Offering IV
Essentia’s self storage offering is an “all weather” investment ideally suited for the new economic environment.
The last 15 years were not normal. Many investors under the age of 40 can’t fully comprehend this. It’s not their fault. We all have the tendency to engage in recency bias. After a decade and a half with interest rates near zero, older investors will have trouble too — reminding themselves that in the 50 years preceding 2009, the average federal fund rate was 5.9%. Lower than where we are today. With rates at zero (aka free money), the Fed’s quantitative easing stance and government stimulus (aka more free money), asset prices had nowhere to go but up. Whether you were investing in stocks, start-ups, real estate or even NFTs — many investors realized gains due to the excess of money in the system. As the saying goes, “A rising tide lifts all boats.” But the tide has shifted abruptly. And as Warren Buffet famously put it, “Only when the tide goes out do you learn who has been swimming naked.”
Investors Face Three Big Challenges
In the next decade ahead, no longer will just “being in the water” be enough for investors to see returns. Many investments will struggle to even preserve investor’s capital. In today’s economic environment generating returns will require investments that can not just survive but thrive in the face of high interest rates, persistent inflation, and even a recession. Our advisory firm, Essentia Capital Partners, has reviewed countless investment offerings over the last 10+ years — and shared many of these with our network of 500 individuals and families. We believe self storage in general offers strong opportunities for the decade ahead and that our operator/partner in particular is built to deliver market-beating returns with well mitigated downside. Our corresponding Essentia Self Storage Offering IV is our strongest conviction offering in the last 10 years. Why? Let’s quickly look at the challenges investors are facing and how our self storage offering is able to respond to these.
High interest rates are a significant weight on most asset values. Take stocks. The value of any company’s equity is directly tied to investors’ expectation for the firm’s future earnings. To arrive at a current stock price, those future earnings need to be discounted into today’s dollar — that means factoring in the prevailing interest rates. Higher rates crush the value of those future earnings — and hit today’s stock price hard. All indications are that we are now in a “higher for longer” regime, which means by many measures stocks are overvalued today — and at the very least the equity markets will face pressure for longer. This same issue applies to assets of all kinds.
Further, high interest rates means that many capital intensive investments like infrastructure, new manufacturing and real estate — that rely on leverage (aka debt) to finance them are significantly less attractive — or in many cases no longer viable at higher interest rates. See multifamily real estate as a prime example.
Our operator/partner is unique among self storage operators. They are not swimming naked. Quite the contrary. Our operator’s business proven model is built on their proprietary data science platform that enables them to identify mismanaged properties in growing supply-constrained markets. These properties are frequently charging rents that are half what they should be. We are acquiring these properties in all cash transactions — using no debt. Post-acquisition, our operator employs consumer friendly tech and automation to improve the user experience while at the same time reducing operating expenses. Then over the next several years the property management team progressively nudges rents from the bottom of the market — to the top. This essentially doubles the net operating income and corresponding value of the property. Because the business plan can be executed using zero debt we completely mitigate any risk or issues associated with higher interest rates. And if rates moderate at some point, we can add a conservative level of leverage (debt) and distribute the proceeds to investors, which would significantly increase investors’ returns.
Inflation is the silent killer of value. Whatever nominal rate of return investors may see from stocks, bonds or other investments — high inflation erodes the actual returns. Many investors cheer the prospect of earning 5% on bonds. The problem is that if inflation is 3%, then the real return is only 2% — and after factoring in taxes, the gain is more like zero. In an inflationary environment investors are challenged to find assets that can offer real returns.
Real estate has long been recognized as an effective hedge against inflation. Because rental properties like apartments can adjust rents yearly, these can be reset to account for inflation. Higher wages and prices translate to higher rents. Self storage is an even better hedge — as rents can be adjusted monthly, although in practice they’re usually increased just once a year, This means storage can more effectively respond to quickly rising market prices. If inflation jumps, then corresponding rises in storage rents will protect investors’ returns.
What’s more, the offerings conservative projections provide investors with tax-advantaged average annual distributions of 7% over the course of a five year hold and an annualized total net return of 15%. This is well ahead of current inflation figures. And, as previously noted, this asset class inherently benefits from its ability to keep pace with any future increases.
Recession. What if the economy enters into a recession — the “hard landing” that many experts have predicted? Storage is not hinged to the economy. In good times people buy more stuff and store it and in a bad economy they downsize and store things. Thus, self storage has historically proven resilient in the face of economic headwinds. That’s what the industry saw in the Great Financial Crisis of 2008–09 and again more recently during Covid. Further, our operator’s unique ability to acquire mismanaged properties and unlock intrinsic value provides a level of cushion for the business. In fact, because the rents at the properties we are acquiring are significantly under market rate, the prices in any given market could drop 10–20% and yet rents at our properties could be up by 10–20% — and still be the best value in town. (i.e. if a market’s rent drops 10% from an average rate of $100/mo to $90, our property could increase their rent 20% from $50/month to $60 and still be the best deal for consumers).
In short, Essentia Self Storage Offering IV is an “all-weather” solution, uniquely positioned to thrive in the new normal environment of sustained higher interest rates and higher inflation. The fund’s construction is even suited to perform even in a recession. By acquiring mismanaged properties in growing, supply constrained markets that are cash flow positive from day 1 and using no debt, we can follow a clear path to market-beating returns with a well mitigated downside. Can your investment do that?
By,
David Scacco
This is not intended as a solicitation for funds or an investment offering. This is for information purposes only.
