Unconventional Real Estate Investments: Masters in Business with Bob Moser

0:28This message is brought to you by AppleCard. Issued by Goldman Sachs Bank USA Salt Lake City Branch. Offer may not be available elsewhere. Terms and limitations apply. Bloomberg Audio Studios. Podcasts. Radio. News. This is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week on the podcast, what a fascinating conversation. Bob Moser is founder and CEO of Prime Group Holdings. They're the largest privately held self-storage owner, operator, investor in the country. Fascinating conversation. Started acquiring properties in college. Eventually started doing RVs and mobile homes.

1:21Just really fascinating methodology of identifying undervalued properties. I thought the conversation was fascinating and I think you will also. With no further ado, Bob Moser of Prime Group Holdings. Thanks for having me. So let's start out with your background. Bachelor's with honors in economics from Union College. Yes, sir. What was the original career plan? To tell you the truth, it was always real estate. So I've always had an affinity for real estate. Really? My mom tells the story that when I was like 14 or 15, she'd drop me off at the local real estate broker's office. and I would drive them nuts for a couple hours.

1:58And it was either that or just to get rid of me, out of her hair probably. But I always had it, got my real estate license before college. I got my brokerage license while at college and actually started the business basically my sophomore, junior year while at Union. Wow, that's amazing. So your college thesis focused on how to value income producing real estate investments by comparing demand and value. So you really knew exactly what you wanted to do by your senior year, what was the outcome of that college thesis? It's a good question. So it was on the valuation of income producing properties using hedonic and non-hedonic regression analysis.

2:36So when we say hedonic, you're adjusting for quality and - Correct. Location, attributes of the property, taking away basically the revenue stream, what else adds value to the asset. And I was really hyper-focused on fragmented real estate assets. So basically every real estate asset, when you look at it, goes through the same life cycle. when they're originally owned, developed, managed by local regional developers. Then over time, the larger groups come in and consolidate. So I was looking for that reflection point when that consolidation starts. And I was focused back then in college on the thesis for manufactured housing communities.

3:10And when you're a college student, people pick up the phone when you call because they're always trying to help somebody out. And I was very fortunate to speak to Sam Zell and some other, obviously, leaders in the real estate business. And they gave me some great insight. and one of the ones he said to me was that there's a lot of buyers, but there's not much product out there. You have to go out and find product for people. If you're going to be a good real estate investor, you have to have the ability to find the assets. So I decided to start a company in college to facilitate that transaction.

3:41Obviously, I didn't have any money. My dad was a retired New York City detective. My mom was a teacher's aide, so I didn't grow up on any wealth. But I figured out that if I could find good product, there was a numerous amount of buyers to buy it. And I did this by using the Freedom Information Act of New York and then various other states where I figured out that I could track all real estate asset classes using the same common denominator of water and sewer permitting. So I went down to Albany and I made my request and union was trimester. So I had these big gaps off around Thanksgiving to New Year's.

4:16And one day, UPS knocked at my door and I had converted my parents' upstairs bedroom to my corporate office like any kind of broke entrepreneur would do. And he's like – and handed me a box. I'm like, oh, there's my real estate information. And he's like, actually, that truck out there is. I had boxes and boxes of the old DOS printouts of every self-storage facility, every mobile home park, every RV park, marina, multifamily. Just so some of the younger listeners can appreciate this, forget AI. This is really before there was any sort of usable internet where you could say, hey, let me scan ny.gov and find all the real estate permitting.

4:59This is physical paper stored in physical office buildings and file cabinets. I had to pay per page on the printout. And what did that cost and how long ago was this? So this was back in 97. 96, 97. It probably cost me a couple hundred dollars, which I really didn't have as a college student. But I realized quickly that that information was the key to finding assets. And what I would do is I would systematically go through these lists, basically county by county, asset type by asset type, identifying the institutional quality assets that were still owned by mom and pops or non-institutional investors.

5:37And then I would do a deep dive on those assets. I would call and get the rent. I would call the tax assessor to get the real estate taxes. My goal was to know more about the real estate than the owner did by the time I called them on the phone to see if they'd be interested in selling. And then I would continually call them every 30 to 45 days after that until they became a seller. That's unbelievable. So that's what led you to unconventional and overlooked segments. You mentioned marinas and RV parks and other things like that, manufactured homes. How long did it take you before you managed to acquire your first property?

6:14So there was a – I acquired my first property shortly after college. And what happened was there was a mobile home park in Streetsboro, Ohio. It was actually called Camelot Village. A guy named Mike Duffy owned it. And I used to call Mr. Duffy probably every 30 days to see if he would sell his asset. And one day I finally got him to sell and I made a nice fee on the transaction. but I still needed a little bit more. And the year I graduated, my mom took a home equity loan against the family house. Is that how you financed this acquisition? That's how I financed my first acquisition. So before that, I was facilitating transactions, making fees almost like a broker, but not a listing broker.

6:53And then the first asset I bought was when my parents took a home equity loan. So if in, you mentioned you got your real estate license in college, how are you finding buyers for these sort of unconventional properties? Are you going to the big institutions and saying, hey, I have a property that fits into your portfolio? No, what I actually did was I had these lists, obviously, that I got from the FOIL request, and I kept on seeing the same name show up. As buyers or sellers? That were owners. Okay. So if I knew they owned five assets in that particular region, I thought, hey, if I develop one or I get a relationship with a seller that would sell, I would bring it to that You knew where to bring it.

7:31100%. Huh. Really, really quite fascinating. And so when did you found your own real estate brokerage firm? So that was basically in college. That was in college. That was in college. I became a real estate broker. Before college, I was a licensed salesperson. And then you have to have X amount of hours under your belt before you become a brokerage. And I got my brokerage license in 97. So how long did you do that as a broker rather than an investor? or they kind of ran parallel paths? No. So I was basically working exclusively for generating fees from like 97 to 2000-ish, 2001. I started buying my first asset around 99 going into 2000.

8:12Obviously, the first one I bought, it took me a while, obviously, to give up the transactional side until I could support myself on owning assets. So you ramp up various assets until 2013 when you start Prime Group. Was that the path? So what I did was, so my mom took the home equity loan my parents did against their home. The first asset I bought, actually, I had sold to that gentleman 10 months prior. And I called him up and I said, hey, Wayne, I sold you this property. It was on Cape Cod. Would you be interested in selling it? And I sold it to him for$3 million. He ended up selling it to me for$5 million 10 months earlier.

8:48And then I moved up to Cape Cod and I actually ran the asset for the first two years to see how the business worked. because I didn't want to be that owner that would tell people what to do without actually being able to do it themselves. And then I bought my second property and then I bought my third. And then by 2005, August 12, 2005, I had a large liquidity event. I sold a group of assets to Sam Zell. That's when he converted MHC, which was manufactured housing communities, his REIT, to equity lifestyle communities. And he started to focus on RV parks. So on that date, I sold him roughly five assets back then, which provided a substantial amount of liquidity to myself.

9:27And I went out and did a bunch of, that's when I really started to build the portfolio. So I want to draw a line. So you're a college kid, randomly calling big real estate investors, including Sam Zell, who took your phone call. Took my phone call. And you had a long conversation with him? I did. I did. And so how many years later is it like, hey, Sam, it's me, Bob. Do you remember me? I have some assets for you. It was funny when you say that because when I was dealing with the CEO, the CEO of the time, I always wanted – because I never really spoke to him then after. So I wonder if he actually put two and two together.

10:02I'm sure he did. But it was a really interesting transaction. It was – the RV world was an interesting business, the RV parks. Basically, I was the first one to really use securitized financing in the RV park world. It hadn't been really done prior. So it was an interesting time. So now you have a liquidity event. You're tapping into Wall Street securitization or to fund this. At what point do you say, oh, there's a ready source of capital. I could just put a roll-up strategy together and run all these properties more efficiently than mom and pops can do. every one of these would have to have a separate accounting and a separate tax filing and all that stuff.

10:47You centralize that and suddenly it's productive and efficient. 100%. So basically from let's say 2000 through 2005, 2006, I was acquiring a lot of mobile home RV parks. I also owned shopping centers, a little bit of everything. It was a pretty diversified portfolio. and what really transitioned to me to become an asset specialist, which we are now, was how well self-storage was doing during the first financial crisis. I was doing a year-end portfolio review in around 2007, 2008, and the self-storage assets were a smaller part of my portfolio back then, but they were outperforming everything else at that time.

11:24It wasn't like they were going straight up, but they were so defensive and they were doing so well when all these other assets were getting beat up. and I decided at that point to become an asset specialist, singularly focus on self-storage. So I sold off over the next few years, I sold off the rest of the mobile home and RV parks. I had multifamily that went to third-party management and from that time forward, I continued just to consolidate self-storage. This was on my own balance sheet at this time and then I started the commingled fund business around 2014. So from basically 2007, 2008 through 2014, I was using my own capital or in-house capital to acquire these assets.

12:04So I'm curious, why would self-storage do well during the financial crisis? Was it literally people losing their homes? They had to figure out where all their stuff had to go? Or what was happening in that period that made that such a standout performer? I would say it was more the defensive nature of it. These other assets were decreasing dramatically. Storage was holding its own. And it's need-based real estate. I do not buy aspirational real estate. I think that's where a lot of people get in trouble. I buy real estate that people need for all different economic cycles. And that's what self-storage is.

12:39It's upgrades, downgrades, death, divorce, all of those types of life cycles or something that happens in life creates a need for storage. It seems like you are in a variety of different regions, everywhere from Saratoga to Springs to Chelsea here in New York City. How do your underwriting assumptions differ relative to, is this urban? Is this suburban? Is it ex-urban? Is it out in the sticks? How do you look at these different spaces? Obviously, valuations differ and rents differ. What's the thought process? So we truly, obviously, real estate, and that's not cliche, but it's location, location, location.

13:20So if you look at our portfolio, it basically – you take the United States and it looks like a U. So we're up and down the coasts. Right now, we don't have exposure in Texas. And the reason why is that there's a lot of open zoning in Texas and one of our major requirements is barriers to entry. And the reason why we're along coastlines and then we're picking up in the mountain cities out in like Utah and Colorado is that there's a barrier that's – natural barrier keeping the population tight to a nucleus. So we want to be in predictable downtown retail corridors when we're choosing the asset. So that's the first glance over deciding where we're going to buy.

13:57Then it goes down to what is the supply? What's going to constrain the supply in that particular market? Because like any other type of real estate, there's always areas that are oversupplied. And the key is finding these areas that are undersupplied. When I was first doing this with paper, it was a lot of obviously calling on the phone, calling the assessor, feeling the market out, visiting. Now we have built very sophisticated software that helps us pre-identify these areas that we should be buying, not even the area, the exact asset we should be buying, even though it's not for sale. So we built out this program where basically I can put in our buy box and it populates out of the 60 ,000 self-storage facilities in the country, the ones we should go after, even though they're not for sale.

14:38And then what we have is our deal teams, which are a group of roughly three dozen people internally that we allocate the deals that fit our criteria to. And then they continue to call and visit those owners until we convert them to sellers. So we truly buy everything off market and it's 100 % organically originated. Really, really fascinating. Coming up, we continue our conversation with Bob Moser, CEO of Prime Group Holdings, discussing the prime storage business. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

15:37When you get a new Apple Card, you can earn bonus daily cash. To qualify, apply at apple.co slash getdailycash. Apple Card, issued by Goldman Sachs Bank USA, Salt Lake City branch. Offer may not be available elsewhere. Terms and limitations apply. As markets move and headlines break, what matters most is context. A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Bob Moser.

16:24He is the CEO of Prime Group Holdings, specializing in privately held self-storage commercial real estate. The firm has acquired over$10 billion in real estate assets across 350 locations, 28 states, Canada and the Virgin Islands. So let's talk a little bit about the business model of self-storage. I see these areas popping up everywhere. I see these self-storage facilities popping up everywhere. How widely used are they? How profitable are they versus traditional commercial real estate? What is the appeal that just over the past 10, 20 years, this space has exploded? It's a great question. So self-storage has the lowest breakeven occupancy of any institutional real estate asset class I can think of.

17:18So at 40 % occupied, you're breaking even on expenses. So, it's very risk adverse. It's a very risk adverse asset from top to bottom. When you're looking at what the tenant signs to become a tenant, these are month-to-month leases so we can adjust to what's happening in the macro environment at any given time. There's no lease risk whatsoever in the asset class. So, no lobby, no doorman, no showers, none of the things that multifamily makes so expensive. Well, you think about a multifamily, if you're going to turn a unit, it's going to cost you anywhere from, let's say,$1 ,500 to$5 ,000, depending on what you're doing.

17:53Self-storage is$5. We're sweeping it and replacing a light bulb if there is one. So, and tenant improvement is what really hurts, especially office, but a lot of real estate assets. You're constantly chasing that capital improvement. Really, really quite interesting. What about ancillary revenue streams? We've all seen those silly reality shows where they find these, you know, someone abandons a unit and they find some million dollar painting in there. How much nonsense? Yeah, I haven't had that look. But it's funny that you bring that up. So prior to those TV shows, we would have the auctions on site, kind of like you see in those TV shows.

18:32What happened though, everybody all of a sudden started showing up to these, had a personality. They thought they were on TV. The traffic became overwhelming on the assets. So everything now is virtual. So when we have an auction, it's all done online. And it's not a revenue source for the business. So we put our properties through a five-step value creation process. And one of those steps is diversifying the revenue stream. And it's a great question because there's a substantial amount of value picked up in self-storage through these ancillary revenue streams. One of them is a tenant protection program where the tenants are able to push the liability of a storm or something happening to their goods onto the landlord for paying a certain price.

19:10There's obviously – there's prime access. If you need access past the operating hours. So let's say you need access 24 hours a day, you're a small business. You can pay for that. So these items obviously add up when you have 200 ,000 to 300 ,000 units like we currently operate. I hadn't even thought about the idea of a storm. So you live near a coast. There's a big hurricane coming. Hey, I have a bunch of furniture and I want to get soaked if we're swamped. Let's move it inland to a storage area. And God forbid something happens to their home. You know, obviously, a lot of stuff gets moved into the storage facility.

19:46So, you guys are the largest privately held self-storage set of ownership. What's the competition like? I know Blackstone is in here. We see cubes everywhere. We see public storage. Who are your big competitors and is there an eventual play where someone takes you out? Correct. So, there's the group of public companies that you were just mentioning. You have extra space. You have public storage. You have CubeSmart, U-Haul. U-Haul. I didn't even think of U-Haul. That's right. Most people think of them just as the moving business, but obviously they own a substantial amount of self-storage, substantial amount.

20:21What we do differently is we operate differently. We have a different, I would say, rationale when it comes to operating compared to the REITs, where the REITs are highly focused on occupancy. They want to keep their occupancy above 90%, 92%, where I'll trade occupancy for top line revenue. So what we'll do is in the off season when it's slower, we'll hold our rent, create some occupancy, and then come spring when the season's busier, we have room to put the higher payers in. Where the REITs are more focused on keeping that occupancy steady at 92, then come spring, they have no room to put those people in.

20:55So we really focus on driving the value. We've looked at what works over the last 20 years, and now we've just implemented it on scale across the portfolio. And then the related issue I see are the mobile pods people sometimes use. It seems sort of adjacent to the space. What are your thoughts on that? So we're not in that business. It's a lot more labor intensive. You got to physically drop the pod off and come collect it later. Correct. So in storage, one of the main benefits is we take no abalement risk. So we're never taking possession of the person's goods. Where the pod, you start to cross that line a bit.

21:31So on the storage, it's 100 % the consumers or the client's possessions. We have no contact with it. They put their lock on it. They're the only one that has access to it. We're 100 % hands off. So this really went from kind of a niche to a mainstream investment class over the past couple of years. You were really early in this space. What did you see that are those myths? And what do you think a lot of commercial real estate investors don't quite understand about this space? It was the fragmentation. Again, the first fragment assets I was focused on were the mobile home parks and RV parks, which I saw starting to consolidate.

22:10And then obviously how well storage did during those tougher times, which really led me to the storage being highly fragmented. When I first entered the asset class, even back in around 2015, 2014, it was roughly 80 % still owned by mom and pops. So just the REITs and the institutionals only own 20 % of the outstanding supply. It's probably closer to 70, 75%. So there's been a lot of consolidation. But what's interesting about storage is that the new supply coming online is being brought online by what we call merchant builders. So they're regional developers who have an extra piece of land. They're shopping center developers who put a storage up on that corner lot or that key lot they might have.

22:51It's not the large institutions building the supply. So it keeps it pretty fragmented. So they're the ones adding the new supply to the market. That's really kind of interesting. So a couple of years ago, you did a raise, a couple of billion dollars from outside investors. Seems like that's a good chunk of money to go out and start either buying or building. How do you look at the two options? So we don't like taking construction risks. So I like that we buy cash flow. So day one for an asset to make it through our IC committee, we have a very high threshold. And that part of that threshold is cash flow.

23:29We pride ourselves on being able to distribute free cash flow to our investors pretty early in the fund's life, even during the investment period, which is pretty rare. But the fund business started in actually 2015 as a smaller fund. Up until that point, I had only purchased on my own capital. And we did a test fund that did very well. It was a smaller fund. It was only$154 million. And then the second fund, we grew it to$725 million. And then the third fund is the one you're referring to is roughly$2.5 billion fund. So why go to outside investors rather than go the securitized route? Is it that much less expensive to do?

24:07It was basically – it's scale play. So I knew the asset class was going to consolidate quickly once the other – the large institutions understood it better or when the large investors did. And I wanted to have that foothold in the market. And the best way to do it was through the commingled fund way. And also by doing that, I think we were able to disrupt things a bit because we pride ourselves on delivering what we call entrepreneurial type returns. We are operators. We are in the field on a daily basis. We're in the office grinding this out. So we try to deliver direct property level returns to our investors.

24:42So not hands-off REIT-like numbers. So let's – you mentioned your investment committee. Walk us through the typical acquisition. How do you source these things? Is it still just calling people up and saying, hey, let us know when you want to sell and following up? And then what's the process like through the investment committee? So this is where it takes the correct personality to be this part of the team. And these are what we call our deal team members. So what we use is our proprietary software we have developed in-house that we load our entire buy box into this software. And it projects – it's an AI system – every self-storage that fits that criteria in the country.

25:23And it has every data point about that asset, the owner, how big it is, the taxes, the rate, everything you could imagine. Then we allocate that deal to the deal team member that covers that area. Then he or she continues to call that owner every 30 to 45 days until we convert them to a seller. So some of these deals that we're buying today, we've been working on for a decade. And we finally got the seller to the point to sell. So it's a very thick-skinned, long relationship, but it's a numbers game. So if we have 36 people with good information calling these owners, and the reason why we do so much upfront information is we want to know more about the asset than the seller does in a way because we want to separate ourselves from anybody else calling them.

26:05We want to show that we're sincerely interested in buying their asset when we're able to tell them or even educate them about their own asset at times. So I get calls and emails from private equity guys, hey, do you guys want to sell, blah, blah, blah. It gets annoying at a point. What's the conversation like with the seller? Hey, spoke to you back in October, just checking in, seeing if anything changes. How receptive are people to this? So it's more than – and I get those same emails and it drives me nuts. Or the phone call, will you sell your property? I'm like, which property? What area? So when we call, we're referring to an exact asset.