The Military Mindset Behind Choosing Self Storage

Want to know how a crack house led to a self-storage empire? 

Scott sits down with Scott Lewis of Spartan Investments to discuss his incredible journey from flipping houses in Washington, D.C. to building a nationwide self-storage empire. 

The duo dive into the evolution of Spartan's strategy, the decision to incorporate third-party management alongside their own operations, and the lessons learned along the way. 

They explore the flexibility needed to thrive in the competitive storage market, the role of REITs, and the importance of balancing self-management with outsourcing for growth and efficiency.

WHAT TO LISTEN FOR
01:55 - From Crack House to Seed Money – How it all Started
06:42 - Self-Management vs. Third-Party Management – the Big Debate
18:40 - Building Investor Trust Through Operational Excellence
26:58 - How Technology and AI are Shaping the Future of Storage

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Chapters

• 1:55 From crack house to seed money – how it all started
• 4:42 Self-management vs. third-party management – the big debate
• 18:40 Building investor trust through operational excellence
• 26:58 How technology and AI are shaping the future of storage

Transcript

Announcer (00:03):

This is the Self Storage Podcast with the original Self storage expert, Scott Meyers.

Scott Meyers (00:10):

Hello everyone and welcome back to the Self Storage Podcast. I'm your host at Scott Meyers, and we have another special episode as we are here onsite live at the Self Storage Mastermind. And I have my co-host at the front of the room at Mr. Scott Lewis of Spartan Investments. Scott, welcome to the podcast.

Scott Lewis (00:25):

Scott, thank you for having me. It's going to be a lot of Scots in this. There's

Scott Meyers (00:30):

A lot of Scots in this podcast and there's a lot of Scots in this room. Is there?

Scott Lewis (00:33):

There's a lot of Scots in this room. I think we were up to five at one time.

Scott Meyers (00:36):

Yeah, exactly, exactly. But as we grow, it's inevitable. That's such a great

Scott Lewis (00:40):

Name. Anyways, right? That's it, right? We'll have to start going by letters or maybe symbols. Maybe Prince was onto something.

Scott Meyers (00:46):

I think T-shirts. There

Scott Lewis (00:47):

We go.

Scott Meyers (00:49):

Well, I wanted to do a deeper dive into, well, first of all, I want to set the background. Tell us a little bit about your yourself, how Spartan was founded and your journey from 2014 up to this point to give everybody some background and some context because it's an amazing story. So

Scott Lewis (01:03):

Spartan was, we didn't start in self storage. We started flipping residential houses and it was really, my partner and I lived in an up and coming neighborhood in the district of Columbia, and we were in a row house on L Street, Southeast, maybe a mile from the Capitol, and there was a crack house in between ours. My partner was at 1350. I was at 1354. 1352 was a crack house. Literally it was an abandoned house that folks would come and do crack and stuff like that. And one day my wife was just like, you need to do something about that. I was like, sweet. What? She's like, I don't know, fix it. Do something. I was like, well, so long story short, we were able to find the owner and make the best offer that we could scrape together the money. She accepted the offer and we renovated that house.

(01:55):

So not only did we turn a blighted property into something nice, it gave us some seed money and we did four or five more deals in dc. But flipping houses really wasn't for us. So we decided that commercial real estate in some sort of form with cashflow and larger assets, and to elevate us out of the, I'll say the trenches of single family flips was the way to go. And we used a process called the military Decision-Making process. I'm an army guy. So we used this process to kind of evaluate our decision, and the mission was to figure out what commercial real estate asset class we were going to pivot to. So as a part of this process, you come up with some evaluation criteria, and for us, we've now colloquially called them the three Es, easy to evict, easy to maintain, easy to operate.

(02:46):

Eviction kind of stood out to us. Sounds like self storage might be an option. Yeah, that's the surprise ending here. We are self storage, right? So very easy to evict. It's the easiest asset class fairly to maintain if you've got some of the more simple properties, easy to operate, not so much. We could talk about that later, but we heavily focused on being able to evict folks. And not that we want to be jerks, we just have a belief that if we provide you what we said we were going to provide, you need to do what you need to do or there's remedies for that. And we didn't really want anybody to step in and stop us from being able to do that. So that's kind of how we made the pivot. We did that in late 2016. We spent all 2017 learning. That's actually when you and I met at the Best Ever conference, had a great dinner on a very snowy night, took Wednesday and I two and a half hours to go 17 miles.

(03:36):

So you were gracious enough to stick around. I think you'd had a lot of red wine by the time we got there. Had to do so. Yep. That's quite all right. But took a year to learn, went to conferences, did all the things that you're supposed to do. Actually bought our first property in August of 2018, little 13,000 square foot property in counter for Colorado, completely stick built. We've since expanded, we doubled that size and then sold that one. But our first real facility, I'll say we bought in 2019, that's in corset Can Texas home of the fruitcake, this FYI, that's a 80,000. It was an 81,000 square foot with a carwash. We added 40,000 square feet. We actually still own that property today. And then since there, we've bought and sold probably 75 properties, and today we're sitting at 68 properties, 14 states in about 150 team members.

Scott Meyers (04:31):

Well, it's been incredible to watch the meteoric rise of Spartan along the way and then have you as part of the mastermind every quarter to you get the updates and then in between to be able to share best business practices and commiserate and challenges. And we come over those as well and different viewpoints. Because as static as our industry is, it still changes quite a bit and we have to keep an eye on things. And so you've been quite a confidant because both of us keeping area to the ground and making us abreast of what's going on has been helpful. And as we share, I mean at the end of the day, we love to grow and we'd like to go fast. And we set these goals and the goals that you have set and the pace at which you've not only set them and achieved them has been just incredible to watch as well.

(05:14):

And what I wanted to focus on is something that you shared today is that there's no one size fits all. There's no one way to manage these facilities. There is certainly best business practices, but there's not a best way to do it for all properties and for all companies. And as we've navigated the operational challenges, if you will, I mean, it's one thing to go buy 'em and go fast. And I'm a hunter. I am not a gatherer, I'm not the farmer. Just as soon as we're done with the deal, it's just like, sure, let's go on to the next, somebody else clean that mess up and make it sing and then we'll sell it in five years and let me know what the profits are. It's not the exact way that I operate, but I would rather do that other side. And so we understand that we're rewarded for being the best operators in the industry.

(05:57):

We haven't done that so well. We know that in the beginning you have to self-manage from the get go unless you're just your first facility happens to be in another market, which isn't really a good strategy, but you do it your own on your own in the beginning, and you hold it close to the vest, you learn what that looks like. And then when you begin to branch out, well, you're probably going to have to hire third party management companies. We look at what that looks like and no offense to any third party management companies, and as a matter of fact, they are our partners in ease. We see that okay, their goal is as we view, is to maximize their returns and profitability. And sometimes many owners think it's at our expense. So we structure these so that they win when we win. And if we have mutually designed goals, then that is the best scenario to get to.

(06:42):

But at the end of the day, if we're raising private equity, we want that to just be a pass through. We won't have to pay any more for managements and be vertically integrated. And it's a great story to tell to our investors to say, we have control over all of this and it helps us to raise capital. And then at some point then you get to realize that this is probably not the best. And if we make a couple of bad hires in director's roles or in that area, and we miss the marks for our private investors because we think we know everything and we're not the best operators, things go south in a hurry. And then it affects us for years to come to raise capital. And so all that to say, we're coming full circle now to looking at the folks that do things of the best and delegating the rest, which is what we do in every area of our business. And so you're kind of at that place right now at the precipice of bringing in third party in habit, bringing third party in after being vertically integrated. So kind of walk through the decision making process and how that looks and what it looks like this year and going forward.

Scott Lewis (07:33):

So we're going after an and strategy. We are fully integrated. We are fully vertically integrated. We have a construction company and we have free up storage, which is our brand. The reason that we looked at bringing in third party management this year is we were buying a deal, and it's a competitive market out there. These were class A properties in Portland proper about as core as you could get. That's not our bread and butter. But we liked the deals and it was one of those that it was a unique buying opportunity, but we didn't have the ability to have the margin of error that if we got it wrong, this would go south pretty fast. And it was a large deal. And the REITs extra space is actually managing for this. They're in that market. I would say that trying to compete with the REITs, if you're a smaller mid time operator, there's some things that you're going to be able to do better, but there's other things you're not going to be able to do as well as a strategy for our management company, we have just decided that competing with the REITs probably not a great idea.

(08:39):

So we're going to manage properties where they aren't and they don't go because we can operate as well as any other mid-tier operator out there and achieve what we need to achieve in those smaller markets. And frankly, especially the larger REITs, they have brand standards that you may or may not want to meet. So for us, we really went at this as an and strategy to open up the entire United States. We don't invest in certain places, but in a lot of places we do. And if we don't have any resources there, it's very expensive to try to manage a single property out in the middle of nowhere. It doesn't work that well. So we just decided this was probably a mistake. If I could tell myself in 2017, I'd say manage the first few to yourself, but sprinkle in some REITs almost right away, that would've been a really good learning opportunity for us.

(09:33):

It's hindsight bias. Us looking back at that, I don't even know if the REITs would've even really played ball with us. Now that we have scale, they're much more willing to play ball. So it is a double-edged sword there. But I would say that anybody that's out there looking at buying storage, leveraging a third party manager, yeah, you give some money back, but pigs get fat, hogs get slaughtered. It's a great way to learn. It's a great way to get insight as to what other operators are looking at. And everybody kind of does it differently. I'm not going to say one is better than the other. There's ups and downs for both of 'em. So that that's kind really how we came to that decision is I read a paper in my master's degree and it was the power of and versus the tyranny of or, and that just like we use that strategy here, we manage and we use third party management that really enables you to go everywhere.

(10:25):

So you might argue, well, you're out here giving out your secret sauce, this is storage. There is no secret sauce. At the end of the day, the secret sauce is being able to get a capital stack and an investment thesis that is able to win the rezo underwrite for everybody. So that's kind of really what it's going to be about. So that's just something that we have found some success with early on. We've only started that in 2024. I don't have a lot of history to give the listeners a yes or a no as to whether this was a good idea or not.

Scott Meyers (10:56):

Well, I think there's a lot of trepidation, and I think what I wanted people to hear is that especially for those that are starting out fresh, or even if in the beginning stages I'm scaling a property and that're looking at third party management companies, we go to the trade shows and you hear the conversations in the networking and at the bar now, well, the REITs came in and they did this and that to the market and they've done this and nobody ever wants to talk about the good things, but they always want to talk about the bad no matter what. And so I think many times these third party management companies, the larger national players or even the REITs, they get demonized for doing this, that, or other right or wrong, or whether they do it or not. And I want folks to recognize that, first of all, we love it to be in a market where the REITs are because they're pushing rates.

(11:43):

They may come in and lower rates for a little while, but they're going to be pushing rates after that. They bring legitimacy to a market and they probably bring legitimacy to our deals or to your deals that you're working on at the time. And also they're going to be our buyers. I mean, we are the first people that we contact whether we're going to have them manage it or not. If we got a development, we got a portfolio is we're going to reach out to them and say, Hey, are you interested in managing? In other words, hey, we got these properties here and just want to you to know and have on your radar that we've got these properties and if you want to buy 'em at some point we will probably want to sell to you. And so in the case in which we want to have them manage it, then hey, do you want to manage it?

(12:20):

And let's manage it with the understanding that at some point you will be buying it because then those are some of the assurances that you can put in place that they're going to make the thing operate well because they also have to get funding. In many cases, they're not all cash buyers and they have a vested interest in making sure that this thing operates well as well. So for the folks out there though that are still in that camp of skeptics and saying, well, they just want fees and what if Scott, you bring 'em in and they drive the value down so that they can buy it from you on the cheap or the economies of scale that you mentioned. So having them on the platform and getting all the marketing, well, what happens if calls go into the call center and then they funnel it to the corporate owned properties, things that they own versus yours? Tell me how you've combated that and what put your mind at ease to maybe qualm any fears that you may have unfounded or not.

Scott Lewis (13:11):

Yeah, we've heard that too. And I'm not going to say that I wasn't in that camp a while back, but as I thought more and more about it, number one, these are publicly traded companies. Now that doesn't mean that they're not going to do bad stuff. There's plenty of publicly traded companies out there that do, but I've met now we have extra space public CubeSmart, and I've met the executive teams from public. I've met the executive teams from Cube Mart. I've met the senior leaders for the third party management for cube. None of these individuals are bad folks. Are these guys maximizing the properties? I don't know. But what I do know is when you sign up for the third party managers, they give you a proforma. If you like the proforma, then okay, cool. So I think a lot of owners, especially ones that are not scaling or not necessarily they're being short-term greedy versus long-term greedy, they're like, oh, well maybe they could do better.

(14:13):

Okay, so what do you like the proforma or not? If they give you a proforma and you're excited about it, okay, hold them to the proforma. So if they're eeking back 20%, they want a value, so who cares? You could argue that that's a bad attitude. If you have one facility, that's fine. But if you go in with an agreement or if you don't like their proforma, then push back on it and tell 'em to add 20% to it or pay attention and then challenge them on the proforma. And if they're not doing it, fire them and terminate your contract or don't sell to 'em. At the end of the day, extras, managing in their entire ecosystem, 4,000 properties if you're an individual owner, the probability that let's target that guy.

(15:01):

I mean, these are public companies, they're slow moving ships. They're very, very intelligent and they're very good at what they do. But I don't know that they're exactly paying attention to your facility as being like, all right, man, really hit that guy. Let's cut it by 40%. So we get that one facility is a deal. These guys measure their acquisitions targets in billions. So for the most part, if you're an owner, and even if you're an owner and you have the largest transaction that ever happened was an extra space managed facility of 91 million in California, that 91 million doesn't move the needle for a REIT acquisition. So whether it's 91 million or 94 million, it's not going to move the needle for them. So I would say that so far our experience is pretty good. Each one of them has benefits, each one of 'em has negatives, and you still do have to pay a lot of attention and review your data and making sure it's not just a fire and forget it can be, but just know there's some risk there.

(16:01):

And I would say that if you're a small operator and you just have one or two facilities, if you're in an area where a REIT will manage for you, I would say that you're going to have a hard time doing it better than them. There's probably some nuances that you can do. You might be able to dial in revenue management a little bit better because you're one property more. I would say that if you start to get to scale, it's going to be harder to beat them in the long run on that side of the house. I would say that I don't know that to be true though. That's a big thing that we're paying attention to now is with our smaller portfolio, can we dial in our revenue management better than the REITs that are managing by algorithm because they're doing it for 4,000. There's an argument that a little bit more curated, but again, if you have a revman team, you push back on the REITs and you show them the data, there's a decent chance that they'll move. There's a decent chance to tell you to jump in the river too. They know what they're doing. And so

Scott Meyers (17:10):

I think that's probably the biggest benefit is what they bring to the table is the data set that they have. We're not going to be able to do that better, but really even more so we put more merit on the fact that this game is won online and those who spend more money get the eyeballs when people are searching and you pay for traffic, which means you pay for rentals, it's a commodity. We're not going to win on anything else. And so my one facility versus the marketing dollars that they have on their five driving to their one website that they have, there was no way that we were ever going to win that game. So from that standpoint, we don't even try. We don't even attempt to, that's theirs. They're going to win that game every time. But again, I think something that I want people to hear is that it's not a one size fits all and it's not a one contract fits all for these folks.

(17:59):

You should self-manage so that you understand it's no different. When we started in houses, both of us have a similar path when the contractor comes over and says it's going to be $3,000 to rip out your kitchen, 5,000 to finishes, it's like $3,000. My wife and I can rip this thing out in four hours. I know what it takes. So you do those things. You manage yourself so you understand so that when those fees come back across, you can say, well, that seems to be a little egregious and it's a little out of line from what I've seen. So maybe we can massage these numbers here or the overall management. And so you can have those conversations and the folks that we talk to at the companies you just mentioned, we just say, Hey, we're going to still have a hand in this, and you don't hire third property management companies and then fire your asset managers.

(18:40):

There still has to be asset management of the property managers and the site level. And so if you're not at the site level, it's third party, well you still, there's KPIs that have to be met for our investors and corporately, and now they report to this asset manager and there's where the conversation lies. And so there is no replacement for that. Those conversations still happen. And we've modified some of these contracts to say, I would still like to incentivize the folks that are at the site level. It may not be in your package. Do I have permission to do so? And we'll create a structure. And so even if it's an additional incentive that's on top of the management costs, if you get up to a certain level, this site manager or site managers, they get up occupancy up to a certain level by this state, I'm going to bonus some 500 bucks. I'm going to take 'em out to debt. We're going to do this. Whatever that takes, whatever motivates them. And we can add some of those motivational pieces to a structure that's already in place. And so they're not inflexible. What are some of the one-off customizations or some of these conversations you've had with folks or maybe some examples of how they've been flexible enough to really kind of fit into the Spartan structure that's been in place for a while?

Scott Lewis (19:43):

I don't know that we've done a lot of customizing on their rental agreements, to be completely honest. They're pretty inflexible on the tenant insurance stuff,

Scott Meyers (19:52):

Unfortunately.

Scott Lewis (19:53):

Yeah, and there's good reasons for that, right? There's insurance infrastructures that these guys have that are hugely accretive to other parts of the balance sheet in their businesses. I would say that the best, I don't know that we get super creative there if we're using a reit, we don't want anything to do with HR stuff. We don't want to mess with their managers, we don't want to even know their managers. We want them to take them. That's kind of a big bonus of not managing your own stuff. And depending on what state you're in, the labor laws can be pretty arduous in certain states. So letting a REIT take the risk of an employee going sideways, there's a nice little re to that. Have it. There you go. I would say that we negotiate management fees, especially on scale,

(20:48):

But for the most part, their agreements are not egregious by any means, not to us. And if you have a lot of scale, I wouldn't say going over there, and if you're going with more of a mid-market manager, you probably have some more flexibility and there's some really good ones out there, and there's some that own and some that don't own. So just pay attention to that. There's some that have concentrations and some that don't, some more flexibility there. We only use one kind of, I'll say free up esque manager out there. Argus is managing one property for us in Texas. And I mean those guys are a little bit more flexible in that, and they're more collaborative along with the REITs. And the REITs are pretty prescriptive because they have a formula that's worked for them. And if you're going to bring them a hundred facilities, like, okay, you're probably going to have a seat at the table, I would not necessarily expect, nor do I personally expect to go into public storage and tell them I'm going to do this and expect any answer other than jump in the river.

(22:00):

I would respond to them, I would respond to me the same way that they do. It's just that's the nature of the game. So again, we've appreciated our third party, we appreciate learning from them. I think a big thing of self-managing versus the REITs is they won't go everywhere. They won't manage every property. They have brand standards and they'll tell you no in a heartbeat. And they're just like, I really appreciate that about them is they have standards and they enforce those standards. And that's not to say that the other operators don't have standards. That's not what implying they are inflexible in their standards. The others are willing to take on and serve a clientele that has some secondary and tertiary facilities that are more gen one, gen two. And even they have standards. I mean, if you bring 'em a dumpster fire, they're going to tell you no.

(22:51):

Right? They're just not going to say yes. But will they manage a facility just like we will with dirt drive aisles? Yes. Will they take some nuances on, will they do boat and RV and some retail on there for you? Yes. Is public or extra space going to manage that pizza shop that you got in one of your retail? That's not their favorite thing. I probably tell you, we'll manage this and you figure out that, right? But that's what they do. They're very good at what they do. And the mid-market folks are very good at filling that gap from away from operating it yourself all the way up to the REITs.

Scott Meyers (23:27):

Yeah, I think what we found is that if they are not already in the market or if they can't come to a market and dominate it and get some economies of scale really quickly, I mean their strong suit is economies of scale. And if they can't get it or if they don't have it, then they're usually going to take a pass. So early on in the shift, 2024 is when it started happening. What are some of the wins and some of the positives that make you feel like this is something that's going to work going forward?

Scott Lewis (23:52):

Just that we've been able to win some deals that our team was not comfortable hitting the underwriting that we needed to do to win the deal. So for us, it's been a very interesting thing. I really appreciate some of our team members at Free up because they were, I'll say they were collaborative and they were accepting of an and strategy because we're still adding properties to the free up storage and we're still growing our own brand. That's never going to stop for whatever reason. Maybe we're just sadist or whatever, but we enjoy managing. We have a good team. We appreciate that team, and we're going to continue to add properties to the free up ecosystem. In addition, there's some deals we probably would not have won because we couldn't operate efficiently. We went into a particular market in South Carolina and we didn't have anything around it, but public had a few stores in the market.

(24:49):

They wanted to grow in that market, and now they're being able to share managers and move costs. There's no way we could do that. We would have to assign costs to it, and our underwriting was just broken. And so I would say that that collaborative effort from a portfolio perspective has been really accretive because we are now then being able to move some assets away. We still do a lot of our own capital projects. That's just an area that we're pretty good at. So we've kind of doubled down on that. But just having the stores in the market really a good benefit, I'll say, of the mid-market folks that the REITs will not do for the most part, is if you are trying to create a brand and you want to leverage the mid-market folks, if they have a concentration in a particular area, some of them will operate under your brand.

(25:44):

For us, that's accretive. There's a couple of management companies out there that do that, and we would look at them as well, if we would wanted this storage, this particular store under our brand, and it was in a market where we didn't have anything but a mid-market was, we would leverage them as well. At the end of the day, this is a very competitive market. You got to pull out all the arrows in your quiver, and if you're going to go in and you're going to be very, very rigid in your strategy in a very dynamic operating environment, that doesn't lead to the best results. So having that fluidity in your strategy enough to move kind of off your azimuth, call it 15 degrees in either direction to adjust to any different operating variables out there that are thrown your way, that's how you're really going to wind here. The analogy I like, it's the flexible tree that survives the right. I live in the mountains in Evergreen, and actually about three weeks ago I came out and there was a tree that didn't listen to me and actually fell on my mother-in-law's car. So the good news is we didn't have to sell a minivan.

(26:57):

So

Scott Meyers (26:58):

Sometimes an insurance, I

Scott Lewis (27:00):

Lost thing. Yeah, that worked out pretty well. And I got to use my new chainsaw, so I was like, yeah, bonus, bonus.

Scott Meyers (27:08):

Well, I appreciate you taking the time and especially appreciate the presentation today just to look at the changes and the discussions that we've had in the Mastermind in the past of all the ways to win the game, all the ways to being able to look at things that are now kind of 180 degrees, which is on the operation side, and the shift that you're making that everybody else is looking at as well. Different strategies from a marketing standpoint. And then the use of ai. Again, we talk about doing things that are very dynamic and a very static industry. We are seeing some pretty big changes coming in by way of technology. That's probably the biggest and most interesting piece. But at the end of the day, it is about the people. And as we look at how we shift those resources and how we get it done, it always comes down to and comes back to that. It's one of the biggest, if not the biggest challenge. And so as we continue, as we do in our mastermind to learn best business practices, ways people are doing things, that's how we all win. So I appreciate you sharing again today and spending the extra time.

Scott Lewis (28:07):

Outstanding. Thanks for having me, Scott. Yeah, my pleasure, Scott.

Announcer (28:12):

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