Self Storage University Podcast: Episode 57

Going Where The Water’s Deep Without Drowning

Conrad Hilton’s mother once told him “if you want to launch big ships you have to go where the water’s deep”. But that sentiment almost cost him his career when 1929 hit. In this Self-Storage University podcast we’re going to review the dangers of going “big” and how to mitigate those risks.

Episode 57: Going Where The Water’s Deep Without Drowning Transcript

Conrad Hilton grew up in a motel called the Mobley, it's in west Texas, very, very small town, he knew one day he would take over that hotel, so as a young man, he was already working the desk, learning how to run it, but he was very unhappy, he didn't like having just this small hotel in West Texas, he dreamed of having a big, fancy hotel in a big city, so his mother asked him, "Conrad, what's wrong with you? You act depressed. You've always been a really, really happy person, and suddenly you're sour. You're not happy anymore." And Hilton said, "I don't wanna do this little, two-story hotel thing in small-town Texas, I want to do bigger things," to which his mother said, "Well, Conrad, here's the deal. If you wanna build big ships, you have to go where the water's deep."

This is Frank Rolfe, the Self Storage University Podcast. We're gonna talk all about going where the water's deep, what it means and how to try and do that without drowning. Now, in Hilton's case, those words almost killed him because he took his mother's idea that you have to go where the water's deep and he decided he would no longer be a hotel keeper in small-town Texas, that he would instead go to the big cities, so the first place he went is he went to Dallas and he built Dallas's first fancy high-rise hotel, and he got that all done right in about 1928, 1929, then, off that hotel, which seemed to go over so well, it was the roaring '20s, he went on and built another and another and another and another, borrowing money on everyone thinking he was making millions, happy as could be, and then came the Great Depression, and suddenly he lost every single hotel he built. His life was absolutely ruined, because that's the problem, when you go, the water is deep... Because you can't stand up in it.

When you're in shallow water, well, what's your worst-case scenario? You can swim around. You can put your head under the water, but you can stand up. You can't really drown. You can't breathe, you just stand right up and you're safe and you're fine, and that's how it was back at his little hotel called the Mobley, down there in West Texas, not a care in the world, no debt on it, it was all fine, he could have stayed there, he could have built wings on that hotel, he could have built other little, one-story, two-story motel shack-like things in West Texas and never suffered all the degradation and danger he did by going to the big city, trying to build big stuff.

However, there's two morals in that as far as the self storage facility industry is concerned. The first one is the markets that you hit. Now, again, if he'd stayed in a smaller market, he would've been fine, but he couldn't have built those big hotels, but the market would've been much more stable. In fact, Mobley today is actually still around, it's the tourism department for that town out in West Texas. So that one still survives, whereas most of his other hotels are long gone. So there's just more of an element of danger when you're in the big city than when you're out, not in the big city.

And I see that true in self storage all the time. You look at all of those facilities that are 100% sold out, everything's stable, running perfectly, everyone getting paid. Where do you find those mostly today? Well, you find 'em in suburbs and exurbs, outlying areas outside of all the risk of the big city. You look at those urban facilities, a lot scarier. Talking to another storage owner recently, he told me that he had lost 90 units in a single month. Can you imagine that? Can you imagine losing 90 customers, having 90 times about $150 was his rent missing in a single month? How absolutely terrifying that would be? But how is that possible? Well, when you have a self storage facility in a big city with all of the tumult that's come on in America today in urban markets, it's not uncommon, people packing up, leaving, don't wanna be there anymore, worried about crime, worried about everything. That's a very humiliating experience and very dangerous and risky.

However, when you're in those smaller markets, when you're in the outlying areas like suburbs and exurbs, that's where everyone's moving. Every single person that leaves outta the big city, where do they go? They go to that suburb or exurb. Recently, Best Places brought out its list of the best places to live. What did you notice from that article, what they all were? None of them were cities. They were all suburbs and exurbs, every single one of 'em, no one wants to live in the city anymore. So the first issue about big water is maybe the big city isn't where you wanna be, maybe it's better off being safer and more profitable in those outlying areas in the suburbs and the exurbs.

The other item we're gonna talk about water-deep is just the size you grow yourself into. Now, one of Hilton's problems probably was, not only did he have just that one fancy tower, he had many. If he had just the one, maybe he could have saved it. Maybe he could have borrowed from friends and family. Maybe he could have mortgaged that little hotel at Mobley, but when you get giant, it creates risk, it creates danger 'cause you have lots and lots of debt. Remember that most self storage facilities are built upon the premise of leverage, and just as leverage can make you money, it can also hurt you. It's like a knife, it can cut either direction, so when you're thinking of, how big should I grow? Well, you gotta think about how much risk do you wanna take? 'Cause once again, size creates risk. The bigger you are, the more debt you're probably going to have, the more reliance you're gonna have on other people like managers and different markets.

So then how do we mitigate that? If we say that size creates risk, and risk obviously creates danger, then how do we go where the water's deep without getting in a risky, dangerous spot? Well, I'd say it's very clear locationally, you want to try and go with markets that are growing, and that's gonna take you outta the big city, I don't know any big city location that I myself would find alluring at this moment in American history, so you can mitigate a lot of the size or a lot of the risk from size by not going into those big urban markets, hanging on the outside, stay on the perimeter, stay in the suburban, exurban markets that seem to work so well. On the growth side, as far as growing, number one, use lower loan-to-value ratios on your debt. That's what public storage has always done, it's always tried to do its debt at a very, very low level. In fact, most of your reads, real estate investment trust, the darlings of Wall Street sometimes, they typically only have loan-to-values of 50%. They've learned that over time, that's the safe spot to be. They don't lever up. They don't try and have the debt as absolutely as high as they humanly can.

Number two, try and make sure your debt is nonrecourse if possible. Nonrecourse debt means if there's a problem, you walk clean off the loan. Now, that isn't gonna help you in the event of a trouble because you'd lose the property, but it gives you a much better renegotiation position, so if you're nonrecourse, the bank will work with you 'cause they have nothing to gain from not working with you, so they're more likely to say, "Okay, keep doing your magic, you run that property, and hopefully it'll all work out in the end, but we don't want it back," just another good way to mitigate your banking risk.

The third way is just to make sure you've got plenty of liquidity. When you're buying a self storage facility, have some money for a rainy day, have perhaps just at least one month of revenue in the bank so if all your customers should miss their payment for one month, you'd have a little money left around. There's no problem, there's no shame, there's no danger in having a financial partner. If you need more capital to feel good and safe with what you're doing or to buy that property, then go get a partner. Assuming that you had a partner who took 50% of the equity, if you bought two properties, it's the same as owning one by yourself, but it might be a whole lot easier and a lot easier to sleep at night.

The bottom line to it is, think at all times about the danger of going where the water's deep. Don't just blindly follow Hilton's example thinking, "Well, I wanna be big, I wanna be huge, I wanna be in the big cities." That's not always the right decision, and believe me, if Hilton was here to tell you about it, he would agree. This is Frank Rolfe, the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.