DJE Texas (00:02.414)
Welcome to the DJ podcast where you will learn about real estate investing from real life examples. Here's your host, Devon Elder.

DJE Texas (00:16.206)
Hello and welcome to the show. My guest today is Mr. AJ Osborne. This is a self -storage discussion. AJ's built a series of companies over the last 20 years in the self -storage space and has gone on to build software companies, educational company, ground up development, management company, all around this self -storage space. So that's what we spend a lot of time talking about is how he runs that business, how he's built it. And really every facet from kind of the

how the hundred employees or so on the team are structured, what kind of deals are going out looking for today, how the self -storage industry has changed over the last 20 years, and kind of dive into all pockets of the business from how they're financing these things, finding them, putting the capital stack together, his role as CEO within these companies, and so on and so forth. AJ is a very accomplished investor, entrepreneur, business owner, and it was my pleasure to have him on the podcast. I think you're going to enjoy it.

This episode is brought to you by DJE Texas Management Group, a San Antonio, Texas based real estate investment firm with a track record of transacting on several hundred million dollars of multifamily land and industrial deals throughout Texas. E .J .E. has been in business for over a decade and is approaching 100 team members in San Antonio. To learn more about D .J .E. visit djetexas .com or the link in the show notes of this episode.

This episode is also brought to you by apartmenteducators .com, a complete ecosystem for professionals to learn how to find, finance, and operate large multifamily properties for profit. You can get started with a free mini course and learn more at apartmenteducators .com or visit the link in the notes.

AJ, welcome to the show. How are you, sir? Doing awesome. How you doing? Thanks for having me out, man. I appreciate it. Yeah, doing great. Excited to dive in and talk about the business for those folks that maybe are not in your orbit. And you've got a lot out there, right? You've got a book out there. You've been investing for many years, known in the space that you're in. But for folks that haven't been in your orbit, what's your back story? How did you get into this real estate game?

DJE Texas (02:32.814)
Yeah, so I followed in my father's footsteps in selling insurance. So my father actually grew up in extreme poverty. He had no running water. He poached for food and selling insurance that got him out of poverty. And when I was growing up, I wasn't dyslexic, ADD, so I wasn't good at school. So I thought the only thing I could do was sell insurance. So that's what I was going to do.

I was going to follow my dad's footsteps and sell insurance. And I was actually excited about that. I was like, this is great because I could control my own income, everything else. But I learned quickly that that was a treadmill just as if I had kind of a normal job. I thought I'm my own boss. I mean, control my own time and revenue. Right. But at the end of the day, it just meant I had lots of more bosses. Right. All my clients were my bosses and my revenue was not mine. I didn't own it. I'm an intermediary. Right. I get sales commissions.

And so as we were doing it, it was like, this is great, but I couldn't get what I viewed was so important. And that was like the compounding effect of capital and the disassociation of my time with money. And in order to get that, we were looking around and real estate was an obvious answer. Now, at the time, this is a long time ago. So at the time, I was kind of looking at multifamily.

Right. I was looking at single family homes because this was pre 2008. Right. So everybody was doing single family homes and it just didn't make sense. Things didn't add up and the numbers didn't. And we you could look at it and compare it to this other asset class that nobody liked or wanted. And it was this weird asset class that was self -storage and it was viewed more as a junkyard. Banks didn't like it. Investors didn't like it. It was viewed as risky. And I couldn't understand how they could perceive that when the numbers didn't make you

You had a 10 cap, you have huge cashflow, diversified risk amongst doors, and you have revenue potential. Yet everyone viewed the thing as it was either risky, especially when compared to single family homes. This was wildly confusing to me at the time. And one of the main reasons is I was based, I did a lot in cash -based businesses. So I didn't understand in this equity component, in the market driven equity component, it was this mystical, magical thing that didn't make sense to me.

DJE Texas (04:57.454)
So I went after a cash -based business that I could improve. And it was as a way to try to stabilize my income, create actual wealth and disassociate the income with my time. And that's how we got started. We were really small, small facilities and small markets. And we built from there. So we started buying them up.

It was me and two partners and we ended up selling all of those small ones off. And then we moved up after 2008. We got bigger ones and bigger deals and we kept growing, but we've been in cell storage for 20 years now. So it's been a long time and we're very big in the industry itself. Meaning we own lots of different companies within the industry. I own over.

seven companies which I own, operate, manage within the industry. And that's a wide array of everything from tech, SaaS based businesses, startups, to architecture development, obviously property management and the more private equity side of the real estate syndications. We do it all. We do feasibility studies. We kind of do the whole gamut. And that was an interesting journey going into.

an asset class that as one person put it, they're like, I don't understand this. You're like this white colored professional and you're becoming a slumlord. And that's how they kind of viewed it. Right. It was this weird thing. And so, but yeah, that's, that's how it started. That's why we even got into it. Interesting. So what has happened in the eyes of the lenders and the banks with cap rates over the

dismissed asset class. My perception is that's not the case today. What happened there and what you know, did that happen slowly and then suddenly was this a gradual change and what was driving that? Do you think the numbers have always kind of been there? Right. Yeah. The interesting thing about this asset class as opposed to other asset class, you really got to kind of understand the history and the comparison to other asset classes. So it's

DJE Texas (07:19.405)
So this asset class is the newest commercial real estate asset class on the block, right? It was 2008. It was relatively new in the early 2000s. You're talking about something that really came about in the 80s, kind of started to grow in the 90s, and then had never been tested through any kind of market cycles, like a debt crisis or anything else, while all the other staples were retail or whatever those asset classes were, were large, long, established, had infrastructure to...

deploy capital to analyze risk and to operate those assets. Storage didn't have those things. So the institutional capital, they couldn't model out and so they couldn't predict. So the risk, they didn't really understand maybe, but that was one part of it. So institutional banks, right, didn't want to invest in it. Institutional investors had really big struggles understanding what that looked like. And there was no third party management.

Definitely not of institutional quality at the time. So even if you could, if you bought it, what do you do with it? Right? Like it's, okay, now that we got it and we own this thing, what do we do with it? And that prevented institutionals from really coming in. So institutional capital was concentrated around 9 % of the market. You're talking like 9 % of the entire market was rates back then. And the rest was fragmented mom and pops.

And a large majority of them, it was predicated on land holds. So we're buying it, we're building it. And when a better usage of this space comes, we'll tear it down and build it up. Well, that kind of consolidated into a few things. Fragmented, mom and pops, poor operations, right? Because it wasn't really thought as the end all be all. And banking didn't want to lend. So you had very, very low debt loads. You had low debt loads, high margins.

And you had a fragmented industry. And that's actually what I loved about it because I thought this industry will consolidate and it will come. So I wanted to roll, do a roll up model in storage. That was my whole plan. I was like, we can go do a roll up model and we can approach it differently. I, my first book that began bestseller was predicated on line. I said, is self storage isn't a real estate asset. It's a business.

DJE Texas (09:37.901)
And that's how I believed it. And that's how I view it is this is an operating business, right? I'm not a real estate investor. I am a self storage business. That's what I do. So when we look at it after 2008, what happened was the financial crisis came and basically eliminated and just wiped out all these assets. Self storage was not eradicated like all the other ones were. So self storage was the best performing. It was the lowest default.

and has been for like 26 years or something now, the highest performing lowest defaulting asset consistently over that period of time. And that shifted massively the way that lenders and institutions viewed it. But also right before that, you had a company called Extra Space. And Extra Space brought in institutional grade third party management. These things coincided right after 2008.

So after the great financial crisis, you had those two things that really coincided together. And that made for deploy of capital and management of those businesses by institutional grades. So now institutions could do it. That was the kickoff for the consolidation of our industry. And since then, now institutions, mom and pops are probably down to 50 % of the industry. So.

in a 10 year period of time, it went from 90 % to 50%. And that will continue to accelerate over time. One of the major reasons though it did was because you had firms like mine who said this is a business and we built a business in vertically integrated operations. We do things like dynamic pricing, revenue management, right? You're acquiring customers. So I view units as products and customers, or excuse me, tenants of customers.

and we build marketing strategies, we do all of these things to work on the business, the operational side of it. Well, that means that the larger we get, because we're a business, the more efficient we get. Our expenses get lower, our margins get higher, we get a competitive advantage. So anytime you have a model where the bigger the business gets, it gets better, or you get bigger margins and more competitive,

DJE Texas (12:01.037)
through business operations because they can be leveraged. This isn't just capital. This isn't just we get lower capital and things like that. No, we actually can execute and perform at a higher level and we can do it at a lower expense. That causes consolidation. So this is what we were trying to do and accomplish. And that is what brought the big change. But not only that, the customers changed. So Americans really started to understand better the asset and it became more of a staple.

Then it became more infrastructure. It left the industrial parks and came into the neighborhoods. And all of a sudden, storage wasn't viewed as this weird asset class. In fact, it was the opposite. It started to be viewed as a staple of real estate and also critical infrastructure. People need it. And the demand is driven from an economic and regulatory basis, not a consumer basis. So lots of times when we think of demand, we think of wants, needs, right?

Well, real estate has always been great about that because that's not what it is. You have to live somewhere. If you can't afford a home, you have to live in an apartment. Right. That's the beautiful thing about it. It is a right. Out of all the things that are going to go away, those are the bottom of the barrels. Housing, food, right. So that's why people like, like real estate so much. Well, storage was never viewed in that light. Right. At all. In fact, a lot of people thought it was a fad and over time.

that it shifted because the customers changed their viewpoint of it. The reason economically, housing cost, everything else went up so much and have gone up so much over the last past 30 years that the price per square foot to add on additional space has gone unattainable for a lot of people. But then also you have regulatory environments where 85 % of all neighborhoods that are being built have HOAs. And you have regulations that have doubled in just, you know.

matter of 10 years for landlords or not even just landlords, but homeowners. So, you know, when I was a kid, if we wanted, my dad wanted to work on an old car or something, he'd build a shop in the backyard. Well, you can't do that anymore. You can't put things in your driveway, on your street. You can't just go add another garage or shed, right? And lots of America, that's not even a possibility for people to do. So we changed the cost of real estate, but we

DJE Texas (14:24.717)
also change the utilization. Those two forces drive self -storage demand.

I love it. I hadn't thought about that. HOAs and...

DJE Texas (14:38.157)
and keep on cycling.

DJE Texas (14:44.269)
What does a project look like for you guys today? Are you building these things? Are you still rolling them up? Is it all of the above? What's kind of a, write down the fairway project for something that you guys would buy or build in 2024? Yeah, so 2024, we have a three -pronged approach, which is our roll -up model, our acquisitions. We buy underperforming facilities in growing second -tier markets. That's what we've always done.

And we rolled those up. Our other leg is development ground up. So we do ground up developments in areas where we cannot buy, but the market is amazing. Then the third leg is conversions. So we buy big box stores and I turn them into storage facilities. I'm doing an office building right now. So we'll actually buy buildings and we will change the utilization of them and convert them into storage. So those three legs, which we're doing all three right now, I've got.

85 ,000 square foot facility that we're purchasing turning around. It was a expansion that the guy had expanded and debt markets changed. He got in trouble so we can buy it up at a low cost basis. Under replacement costs turn around. The other one we have is a ground up in Phoenix where we can ride on a freeway exit. The market's incredible. Then we have another one that is the office building in a downtown area of Boise, Idaho.

where there's very, very tight constrained supply. They're all generally 80 to 200 ,000 square feet net rentable. So they're big, they're really big. We have another ground up development that we're rolling out in Idaho that's about 240 ,000 net rentable square feet. So they're big, big projects. They're climate controlled, they're drive up. We offer.

lots of services, all sorts of different products, and that depends on each of the market. But those are our three strategies that we're deploying in 2024. And our strategies change, excuse me, our strategies don't change. How we deploy them changes given the market. No matter what, we're a value add. I value add the market, I value add a different asset class, meaning I convert it and value add it. So I'm taking one revenue usage that is low, turning it into another revenue usage that high, or we buy it operationally and we turn it around for my mom.

DJE Texas (17:02.669)
pop, but it's the same, but how we deploy it is different given different market cycles. Today, ground up development in most of the United States does not make sense in storage. You need to obtain a certain amount of revenue because the soft cost and the hard costs are so high, but in lots of areas in the United States, occupancies are lower and revenues down or excuse me, rents are down, but we did not see a decrease in the overall.

cost to build. So we have a cost to build that is three times higher than it was four years ago, yet in lots of areas in America, you don't have three times the rent. So our window, an area of deploying capital for ground up has shrunken massively over the last two years. So we're very, very picky about that. Conversions, as you might know, they're difficult to do. And it's not difficult in Madison.

work goes, the work and figuring out this stuff doesn't bother me, but the actual infrastructure. So a lot of people just say like, Oh, you have a mall. Why don't you just make that into an apartment building? And you're like, because it wasn't built to be an apartment building. It doesn't even have the sewer usage. It doesn't have it like you. So lots of times these conversions that people think, Oh, that's just easy. It's actually would cost you more to convert a building than it would if you just had ground up to do it a lot more. In fact, so conversions we love.

but they're very difficult to do and execute because of that, but also the usage that is obtained. And our mom and pop rollout models, this is really good in today's market. There's just not a lot. So the spread to buy ask is like 30 % that we're seeing out there. So we have a 30 % buy ask spread, but because of the market conditions are there, where there are so many buyers are gone, we're finding some of the best deals that we've seen in years, which not tons of them, but the ones that we're doing, they're...

I mean, they're amazing deals. We're getting them at cap rates that we had not seen. We've seen about the first tier markets, nice facilities, class A's. You really probably haven't had much of a basis change cap rate, honestly. Now, if you move to second tier markets, you probably have a hundred basis point spread. But if you go into third tier rural markets, you're going to get a lot more. You're at 300 basis point spread, right? On cap rates. But...

DJE Texas (19:24.781)
A lot of people aren't seeing that because whatever's being listed, first of all, last year, I think 60 % of all properties that were listed didn't transact. Out of the ones that did, the 40 % that did, I never saw one that transacted at the listing price. So people are putting things out at four caps, but nothing's transacting. But that's very discouraging to a lot of people because they're like, oh, I can't buy that, it's four cap. And I'm like, well, that's what it went to the market with, but that's not what it's transact.

Yeah, that's right. It's what a wild year last year. What does the capital stack look like for you guys on these projects? Are you approaching it in a bunch of different with cash, with investors, without investors? If you're bringing in investors, is it different tiers of shares? How are you structuring the financing on all these things? Yeah, so our capital stack is interesting. First of all, the first 15 years, I never took an investor ever. So we built...

$150 million portfolio on our own. We went out to investors after we'd already had our businesses and our assets, which is very unique. Most people, it's the opposite way. But we built our companies and then we went out. Now, we were doing work as a roll -up model and we needed to consolidate more so we need more capital. Generally speaking, we're going out to accredited investors and maybe small family offices. I don't generally go to institutional, so that creates...

a capital stack that is more standardized, but equity is us, along with our investors. Generally speaking, we're putting 40 % down on properties, and then we have debt on the other part. Our shares go mainly focused on how much is being brought to the table. So.

If we have a large investor, they'll get better preferred returns things. But generally speaking, we're shooting for a 2X return and we want to get at least 120 % return in the first four years. And so we get that through a refinance. Generally, it's not that we won't sell, but I do not underwrite a sell. And the reason I don't underwrite a sell is because I'm like, I feel like you're just making up numbers, right?

DJE Texas (21:45.933)
Like, I don't know if I'm going to sell this at that rate, at that time, or that anything else, but the actual refinance is more standardized within the banking industry. So if markets are hot and you're like, oh, I'm going to underwrite selling it at a four cap, a bank's going to refinance it at a six cap. They're not going to give you a four cap, right? Well, then today, if it's a seven cap, the bank's probably still going to refinance it at a six or 6 .5. So that creates a baseline of value for me.

And I can say in four years, if I can refinance and I can get 130 % return, then that means that if I ever sold it, I could get much more, right? So that's why we do it that way and build it that way. The debt structure that we're looking at right now, we're about six and a half, I think generally on debt. Construction is different, obviously construction loans, but fixed rate 10 years.

And we're doing a 20 year amortization, but it's nothing bad. I refinanced pretty much all our assets in 2021 out 10 years. So we don't even have anything coming due. Everything else we still do fix 10 years. I have no floating rate. I never did anything like that. We went through 2008. I went through the great financial crisis. We saw what short term things in real estate do to real estate investors. So I've never.

been a fan and we don't like that. So we're very conservative on that front. Our opportunity to get yield is through our ability to improve revenue. It is not nearly as focused on market conditions and creative structuring. Yeah. Love it. Love it. What is your role? What does a week look like for you now running this company?

DJE Texas (23:35.085)
What's a tip?

spent? What do you enjoy doing in the business? Yeah, so we've got in our companies about 100 plus employees. And when, when I started, obviously, I did everything I was out shoveling snow at our facilities. Today, I had a mostly the private equity side, I also sit on the board of our tech companies. And I'm also my CEO, a few of those. But we actually outlined this year, and we call it the three C's. So my three C's, which

follows along the three C's of my company's name, Cedar Creek Capital. So it's three C's of Cedar Creek Capital and the three C's of AJ. And my three C's are connections, capital, and culture. Those are my three focusers and my time is divided up mostly into those. So I spent a lot of time developing out connections and working with people that can bring us opportunity, more larger connections. The next side is more capital capital structure. So I'm working with.

either small family offices or I'm doing the things that would cause us to attract capital, which is things like content, right? Like what I'm doing right now. The last part is culture, where I've taken a much bigger, this year one of the focuses, the culture of our company and saying, this is who we are, this is what we do, right? In a time where a lot of people may have been struggling and have been struggling, it's really important for us, because we're trying to leverage up, just like we did after 2008, that we're all united.

and that we're all together and we have a good company culture around that. So those are my three C's, my focus areas right now and for 2024. I view things on what I'm supposed to be doing is predicated on impact that it has on the company, which I actually measure out. I actually have a system that I use to figure out what are the things that I do that have the largest impact on our company. And I need to be focused and be doing those. Everything else we need to take away from me so we can, my job is to get the company to the next level.

DJE Texas (25:33.325)
And so that is my focus area and what I'm doing currently in 2024. My days and my weeks generally look, I'm traveling right now. So I went to Phoenix, we did a meetup. I'm doing a very large development down here. So we're meeting with partners, things out there, meeting with my, meeting with a whole bunch of investors, then Pace Morby's friend, we're doing content. And so like, we'll come and I'll do these, a lot of these trips. So this year, I think a lot of times I'm trapped.

So traveling much more than I used to in the past, it's just kind of come with the job. But then when I'm at the office, everything to me is ran by my calendar and I have people that manage every aspect of my life. So my executive assistant, then I have my COO, who's also an attorney or general attorney, they really map out my days. They sit and plan, but I plan on 30 minute increments and we map those out and allocate what is needed. And then they'll discuss and then they'll take away the things that...

we need to be dispersed down to different departments. So it is very, we've tried to become very efficient and I do what I'm told. So I'm like, this is what we need to do, right? To put it, you know, kind of, anyway, but it's, we are very, my time is very important to me and I only have so much of it and the needs of our companies are obviously great. So it's like, we got to look at what are the most impactful things.

And then the timeframe in which I have to do those things.

sense. What does the corporate team look like? You said 100 employees. Is some of that on site management folks or is this all, you know, kind of operations, construction, corporate level folks? What does that, how does that break down? So in our umbrella of companies, we have our, we have our private equity site, we have the actual property management site. Those are all housed with me and our architecture and development side and our debt side.

DJE Texas (27:33.997)
those are all housed with me in Boise, Idaho. So those corporate jobs are in our Boise, Idaho office, which consists of 55, 60 people, I think there's something like that, around 50 people that are headquartered there. Then we have management and on -site management, regional management across the states that we're in, across 10 different states. We also then have our subsidiary companies that are under me.

including my software companies, my educational company. And those are, we have some employees through California, a few on the East coast. So we have offsite employees, meaning not based at the location they are, but those are not a lot. So that makes up probably 15 % of the workforce. Everybody else is working at a location or in the operations.

AJ, this has been a great look at the business. I appreciate you carving out some time for us in the audience today. If somebody listening wants to learn more, where do we send them? Yeah, so easiest way to get ahold of me is you can, you know, Instagram AJ Osborne, but you can also just go to our websites, Cedar Creek Capital or Self Storage Income. But if you Google AJ Osborne Self Storage, I apologize. There's just so much crap out there. You're going to see a lot of it. But, you know, we try to do a lot on the free resources, the podcast, YouTube, everything else.

but you can literally just go to our site and you can look me up, you can DM me or email us from our sites. Either way, you're going to get ahold of us. Yeah, awesome. We'll link to that in the show notes. If you're listening, click through and check that out. AJ, thanks so much. Really appreciate your time and wish you guys continued success. Awesome hearing the story. Thank you. Appreciate you having me on. All right, we'll see you. See you.

Thank you for listening to the DJE Podcast. For more information, please go to djetexas .com.