Mickey (00:10)
Good afternoon, ladies and gentlemen. My name is Mickey. I am your host of Beyond Page One podcast. I’m thrilled to welcome Jeff Humphrey to the podcast today. He’s the senior vice president at Devon Self Storage. Jeff has been a pivotal figure in the commercial real estate industry for over three decades. His role involves everything from facility reviews to financial modeling to securing financing and managing property insurance. Beyond his role at Devon, Jeff is a prominent figure in the self storage industry. He shares his knowledge and experience.
by presenting at national conferences, co-instructing this national self storage associations, acquisition and evaluation course for 14 years and publishing in real estate publications. There’s nothing that this man has not done. I’m excited to dive into his journey and gain valuable insights from his impressive career. Jeff, welcome to the podcast. I’m happy to have you here. You’ve had a fascinating career path. What made you kind of go from switching gears from the satellite systems of the world?
to the commercial real estate side of the world.
Jeff Humphrey (01:12)
Thanks, Mickey. It’s been a fun experience. If it’s okay, I’d like to back up just a little bit. So my sophomore year in college, we knocked on Brother Mel Anderson’s door, president of St. Mary’s College. And we said, we’re accounting majors. You’re remodeling your campus. I’m a woodworker. Would you like to trade labor for education? Two days later, he got back to us and said, sure. That’s how I got through college. We built a registers counter, all the student lounges. We lived there during the summer.
Our rent was $2 a day and we lived out of a hot pot in Hibachi and ate a lot of cereal. After graduating accounting, I worked for Sacramento Satellite Systems, selling cable TV systems to apartment and condominium owners. At the time, there was no cable TV in Sacramento. So our game plan was to tie up large residential complexes before the city cable system could be built. In the end, unfortunately, we sold our company to the owner of HBO for our cost and went home.
know, sales to me was like, what’s it gonna take to drive the car off the lot today? So to answer your question, how I got from cable TV to real estate, the answer is baseball. So when I moved home after cable TV going broke, my dad said, when are you gonna get a job? I got it. I built two boats in the parents driveway, one in high school, one in college. I took over their garage with my woodworking tools.
Then I went to Mexico and hitchhiked the Yucatan Peninsula down to the Mayan ruins. Then I got back and went to Hawaii and hitchhiked a few islands and hiked the Nepali Coast Trail. Yep, I got it. I needed to find a job. So my solution was baseball. Across the street from the Oakland Ace Coliseum was the headquarters of Equitech Financial Group. So I tried to interview around 11 o’clock and go to the day games. Dad was happy.
I was happy. Then in 1985, I got a job as an acquisition analyst. Didn’t go to many more games. After a year, I was one of three lead underwriters for office, retail, industrial apartment projects across the US. Then a year or two, they asked me to create the property tax department. You know, with real estate, I found something that clicked in my brain, which was exciting.
Mickey (03:34)
That’s awesome. That’s quite the journey to go from one place to the next. What are some of your objectives of the asset management department and maybe a few high level things?
Jeff Humphrey (03:44)
Thanks.
You know, in asset management, one of our primary focuses is preparing projections. The better we understand how to make our projections, the better we can run our business and make a profit. Anybody can make projections, but making projections and achieving those projections are two separate events. I say buy to sell, don’t buy to buy. If you value with an eye on selling, you tend to get a better deal.
Don’t fall in love with the deal. I hear too often. It’s the best deal in the history of mankind. Real estate’s not like other consumer goods, where everybody wants to sell you a used car or a used mattress. So, with real estate, what are the three main questions? What does it cost? What do I get in return? And how long does it take? These questions are best answered by a discounted cash flow financial model.
There’s also three other important questions in real estate. What are the risks? What are the financing options? What is my exit strategy? So with real estate, who sets the value? The seller? Yeah. They have an asking price, but it’s not a sales transaction. The buyer? Sure. If they’re all cash or low leverage, who sets the value of many real estate transactions? It’s the major component of the capital stack.
which is the lender. Self storage is one of the more challenging assets in real estate to value. And the reason is promotions. We have 30 day rental agreements. Customers can move in and vacate over 30 days and we receive an admin fee. This is like no other commercial real estate. So with promotions, the questions are, what are they? How long do they last? How many units rent with a promotion?
And what is the average length of stay in that market? Thanks. I just wanted to go over some high level things about valuation.
Mickey (05:47)
That’s
a fantastic answer. Managing a $2 billion portfolio in Equitech is no small feat. Can you share what are two property tax battles that you’ve conquered and the strategies that you’ve used behind it?
Jeff Humphrey (06:02)
Yeah, I led the property tax department for four years. So they put me in charge of the department. So I started reading a lot of real estate appraisal books. There was one book I wanted called the property tax manual out of print. So I tracked down the author in New Jersey and he sent me a copy of his book. After a while, we started taking over some of the tax appeals. You know, in some states, you purchase your facility every 20 years and property tax dollars.
Property taxes, they’re not like federal income taxes. Counties determine your assessed value, typically using one of three methods, the cost, the income, or the market methods. In the some states like Texas, there’s a fourth value called uniformity between similar properties. So eventually we grew the tax department to three people and saved about five million cash over four years. If it’s okay, I’ll share two quick stories. Yeah, please.
So in 1987, the Houston Appraisal District first started using a discounted cashflow model for office buildings. So I went to Houston and met with the assessor. They put our building, our office building through their new program and said the value needs to increase by millions. I said, your program has an error. Just my luck. The writer of the program was in their office. So I met with them. In the end, their program was wrong and they agreed. We got a good size reduction.
And then before I left, they asked me to be a reviewer of the county’s program the following year. We managed the World Trade Center in Los Angeles. A firm called the Recon Group handled the tax appeal. So the value issue we faced was the tax assessor wanted to increase the assessment, assuming the building was 10 stories taller, saying it was not built to the highest and best use. I think the revenue enhancement department was working overtime on this one. So in the end,
We won the case show and the foundation could not support 10 more floors. So fast forward a couple of years, the recon group who was part of Earth and Young at the time wanted to change a scenery. So they left Earth and Young and I provided the introduction to join our firm, Devon, and they did. Later, we added a tax compliance firm out of San Antonio, Texas and grew the staff to about 50 consultants and sold the tax department. Over the years.
I think I’ve testified in tax appeals in about 20 states. You know, when you get off the freeway, sometimes there’s a guy with a sign. Mine says, well, a praise for food. Please toss me a quarter. Awesome.
What?
Devin.
they have. Ken Nisberg, he was one of the two founders of Equitech financial group. So in 1990, when Equitech was being purchased by Pacific Core out of Portland, Oregon, Ken was starting Devon Capital Management. Equitech at the time had about 1500 employees. So Ken asked me to be part of the team. I was employee number two. So at the start, we focused on pension funds to acquire commercial real estate.
challenge we faced was, pension funds were hesitant to place money with consultants unless they’ve been in business for five years. So how do you remain in business for five years? So we started doing tax appeals, acquired the two tax groups, and we were lucky to find the state of Hawaii and the state of Michigan retirement systems as our clients. And that’s how we got a foothold in the business.
Mickey (09:50)
Well, that’s very cool. Sounds like Devin entrusts you with a wide range of responsibilities, know, facility reviews, investor relations, financial modeling. Can you walk us through your approach to effectively leading and managing the asset portfolio?
Jeff Humphrey (10:09)
Just some simple things I do. Be honest and upfront with good news and the challenging news. You know, once the team understands the challenge, you can prepare a game plan. Stay focused on the projects that move the needle and have confidence in your staff. Those are the top four things I focus on.
Mickey (10:31)
Make sense. When you’re looking at storage facility to purchase, what are some of the things that you focus on?
Jeff Humphrey (10:38)
For self storage, there’s 12 possible revenue sources. A facility might have six, seven to maybe nine of these. It’s important to remember, all revenue items grow at their own rate and have their own vacancy and collection amounts. So the main drivers are storage rents, of course. Then we have boat and RV parking stalls. Now for us, we separate storage rents from everything else because that’s the primary driver of the model.
You know, have admin fees, tenant storage, insurance, truck rentals, cell tower billboards, and some ancillary things. For expenses, we focus on what I call the big eight. These are expenses which impact the transaction. These expenses can be site specific, owner specific, or both in county specific. So we have utilities, which of course are site specific.
You have repairs and maintenance and credit card site and to some degree owner specific. You have advertising, property insurance, property management, fee and payroll owner specific based on your business plan. And you have real estate taxes, which are county specific. Expenses, they all grow at different rates, not the same rate. You know, if I can leave you with just one thought today, underwrite to your operations.
Not the sellers. Don’t duplicate the seller’s financials.
Mickey (12:07)
That makes sense. You’ve spent over three decades with Devin. What are some accomplishments that you’re the most proud of of you and your team?
Jeff Humphrey (12:17)
There’s many things I’m glad to be associated with. This many years is still standing as one of them. Building a strong team. Being asked to teach by the National Self Storage Association. Being part of Devon, we started with one facility in 1993 in the Woodlands, Texas. And now the portfolio is 185 properties in 32 states. Being involved with the sale of
Devon to the Inland Real Estate Group in February of 24. You know, now we have a larger platform. There’s more resources. And really important is there’s more opportunities for our employees. Most proud of? Valuing a lot of properties with a team who has a can-do attitude. I’ll say enough for that.
Mickey (13:04)
Awesome. What has been some of the most inspiring aspects of teaching future self-storage professionals through the National Self-Storage Association’s course?
Jeff Humphrey (13:14)
Yeah, I’ve had the pleasure to teach the evaluation and acquisition course for the National Association for 17 years. Years ago, I helped write the course. Over 900 students have taken the course. Classes are kept kind of small. It’s typically offered twice a year. Some of the cities were Boston, Orlando, Seattle to San Diego. The reason for San Diego,
Jeff lobbied to go see the zoo. My co-instructor for 11 years was Bob Francis. He was the past chair of the National Association and a member of the Self Storage Hall of Fame. My current co-instructor is John Dario, CEO of Edison Properties in New York. People might know the name Manhattan Mini, which was part of Edison Properties and sold the storage mark for a little over three billion in December of 21. The course itself is 16 hours over three days.
About 10 % of the students come back more than once. The Association over the years asked me to speak at the national conferences on valuation topics. One topic I typically speak on is property taxes, which is the 600 pound gorilla in the room. For real estate taxes, many consultants will prepare a best and worst case estimate. But do you weigh it 70, 30, 60, 40, 50, 50? We look at it a little differently.
We try to replicate what the tax assessor most likely will do in their valuation in that county using the method that assessor will use. You know, for self-storage there’s two occupancies. There’s the occupancy pay and rent, and there’s the square feet occupied. You know, the difference typically is promotions, any comp units, and past due tenants. Self-storage can afford more rental rates, such as the web rate, the come to our facility rate.
The street walk-in rate, might be different. The face rental rate before promotions are considered. Or the effective rate where we account for the promotions. There’s a lot of moving parts with valuation.
Mickey (15:22)
Yeah, it sounds very complex. When assembling your team, do you prioritize any specific skills or certain asset management mindset, so to speak?
Jeff Humphrey (15:34)
Well, you know, if you’re going to run a department, know, first of all, have a solid game plan. Stay focused. Work on what matters first. Don’t go down side streets. And this one’s hard. Tackle the more challenging projects sooner rather than later. Don’t put it off. Tackle it today. Share stories, what’s occurring in your area. You know, because some of the best ideas come from the team.
And most important, hire the right people. So there’s two lessons I’ve learned I’d like to share. One was from Keith Borrowman, who I reported to at Equitem. Keith was the former CFO of Ford Motor Venezuela operation. He said, hire people smarter than yourself. This way you can move up because there are people to backfill your position. Another valuable lesson I learned was from Arlen Gallagher.
who had the largest number of states for Exxon, and at the time was the US’s largest firm. He said, don’t get mad at an employee who makes an occasional mistake. Look out for the employee who never makes an error. They’re not working at full capacity.
Mickey (16:47)
Excuse me, I’d like for you, think our listeners would be interested in this. If you can walk them through the process when underwriting a potential acquisition for Devon’s portfolio.
Jeff Humphrey (16:57)
Yeah, I’m going to back up just a little bit and talk about, you know, some skills and then we’ll talk about underwriting and acquisition. first, there’s several skills you need to have for backgrounds, you know, for our area, you know, real estate, accounting and finance tend to be a good fit. Strong computer skills is a must. You know, what you really can’t teach right now is attitude. For me, it’s a simple test.
Is this someone I want to work with in person or on a video call? Or I just prefer to send an email. For my department, I tend to try to be an open door manager. There’s more going on at work than just work. There’s life. So to answer your question, which is a great question, some thought process about underwriting properties, that’s a really great question. Real estate is like individuals. We’re all a little different. So.
The larger firms will mainly use a discounted cash flow model with their own variations. Typically, investors will model holding periods for five to 10 years. But one difference between investors are the return targets. Investors need measuring sticks to compare different opportunities. So what are the four most common measuring sticks? We have an internal rate of return, which we could do leverage through all cash. And by leverage, I mean with financing. And with an internal rate of return,
Time is your challenge. We have what we call cash on cash from operations. And again, we could do this leverage to roll cash. This is really a forward looking measures to where you acquire your property, implement your changes and then gauge the performance. We have something called multiple for operations. And again, leverage to roll cash and a multiple is so Mickey, if I give you a dollar and you give me two dollars back, the multiples two X and a multiple is not time.
And the fourth method is what they call yield on cost. And this we could do trended or untrended. And trended simply means we apply a growth factor to the income. This is a good benchmark for a conversion or a ground up development. The return percentage is based on when the asset reaches stabilization on an all cash basis. So after investors populate their financial models,
Many will just back solve testing different purchase prices until they generate the return target they seek using one of those four measures.
Mickey (19:31)
The sun is in my eyes here and I’m having a hard time seeing. Can you discuss the strategies that you employ to handle the property insurance matters?
Jeff Humphrey (19:46)
Sure. 25 years ago, I left Ken a voice message. Insurance premiums are killing this firm. Words that I regret to this day. Ken stopped by my desk the next morning and said, you really don’t like insurance? Okay. You’re in charge. Turn around and walked away. That’s how I got it. My background’s not in insurance. So I rely on the best brokers I can find. I’ve worked with brokers in many states.
All I’m to say about brokerage firms, they’re not the same. Plain management involves tracking, honesty, good documentation, clear communications, and sometimes just not giving up. You know, with insurance, remember, we don’t insure the land. Because if the land is gone, there’s no one left to write the check.
Mickey (20:39)
Right. Is there a project or something that stands out to you that was the most challenging that you’ve handled at Devon and how did you overcome it?
Jeff Humphrey (20:49)
One
that comes to mind, a while back we received an extremely large portfolio to value located in many states. So I got a Saturday morning call. We need a draft value in 17 days. Ready, set, go. So we divided up the task. One person prepared a valuation template. One person prepared a gigantic data input worksheet. One team member wrote a program to open each model populated with information
close the model and move to the next. This is so we could sleep at night and we plowed through the seller’s materials. You know, this question is a good example why we try to build a team with different skills which can mesh.
Mickey (21:34)
Yeah, and that’s, that’s, think that’s really the importance is bringing a team that has wide skill ranges that can work together well, right? What are some of the popular trends you see shaping commercial real estate asset management in the coming years?
Jeff Humphrey (21:49)
The one that’s on a lot of people’s minds right now today is artificial intelligence is coming into play for real estate valuation. So fasten your seatbelt. The challenge is not really running the financial model. The challenge is what assumptions you place in the model, why you selected those assumptions and how they’re supported. Real estate taxes, that might be a separate challenge. I’m still noodling on that one. One new challenge might be separating what’s useful
from what’s not with so much information. But I think someday fairly soon, artificial intelligence will get us fairly close to preparing a good value range for different types of properties. But you know, AI has limitations. We need to remember we’re smarter than our machines.
Mickey (22:37)
Yeah, that’s for sure. How do you recommend asset managers stay informed and adapt to the constantly evolving commercial real estate?
Jeff Humphrey (22:50)
You know, take real estate courses. But research the course before signing up. Your time’s valuable. Attend conferences, sign up for broker, consultant, and trade association newsletters. Here’s one people typically don’t do. Look at investor reports for what they buy and their returns. Keep in touch with your peers in the industry. Meet people and share stories. You know,
People tend to remember stories more than facts and figures.
Mickey (23:22)
That’s very true. That’s very true. How do you maintain a sense of curiosity and a thirst for knowledge in such a dynamic field as real estate?
Jeff Humphrey (23:33)
You know, it’s the challenge of value in real estate. Each property we underwrite, I still learn something new. I remember years ago when somebody showed me the direct cap value. I thought I solved the puzzle. Then I learned that was step one and there was a lot more to come.
Mickey (23:52)
What is something that’s straightforward in terms of asset management?
Jeff Humphrey (23:54)
I
get that question quite a bit. Asset management is the big-ticket decision department. You know, we model purchase, expand, finance, and sell assumptions. We prepare recommendations for owners and senior management. I offer a suggestion. Keep notes on each property value. Because questions come later like, where did this number come from? Gee, I don’t know. Or, that’s a good question. Typically are not acceptable answers.
Mickey (24:24)
Fair enough. What advice would you give to someone that’s interested in pursuing a career in the commercial real estate asset management space?
Jeff Humphrey (24:31)
You know, in asset management, you’re not a frontline player. Our job is to support. But in asset management, when things get challenging, your phone rings. Real estate offers many careers like lease and agent or broker to property management, construction and maintenance to consulting, accounting to revenue and asset management. These are just some of the careers in real estate, commercial real estate for people to consider.
Mickey (25:02)
And looking back on your career, are there any thoughts that you would personally just like to share?
Jeff Humphrey (25:08)
I have a few. Thank you. Yeah. I started in 1985, Valiant Real Estate using Lotus version one. In the mid nineties, we moved to, you know, to Excel when we were underwriting for Goldman Sachs as an operating partner. was lucky. I started my career when personal computers were first coming into play for real estate valuation. You know, we’ll do the way back machine here. Before personal computers became affordable.
Large firms were using mainframes and smaller investors, they were using multiples applied to the income for assets like apartments. The reason for multiples was simple. There was just too many calculations to do by hand. So over the years, I’ve been writing financial models and value and real estate across the US and a few countries in Europe for close to 40 years. Sometimes the best deal you do is the deal you don’t do.
Your most valuable resource is your time. I’ve been lucky to learn from great people and have the opportunity to underwrite for Wall Street, large banks, pension funds, the hedge funds to individuals. You know, we can run models and make many assumptions, but the success or failure comes down to the rental rate received at the leasing counter. Property valuation many times comes down to three things which I call tipping points.
These are, how fast can we increase the rental rate? What the heck’s gonna happen with the property taxes? And what is our capital stack, which is the return target on the investor equity and our loan parameters? You know, Mickey, it’s been a pleasure.
Mickey (26:53)
Thank you. Thank you, Jeff. Yeah, that’s really the last question. That’s to wrap it all up. I want to thank our listeners and I want to thank Jeff in particular for taking the time to sit down with us today. We will link his LinkedIn and any other of his social profiles in the channel below. So if you have any questions, I’m sure that he’d love to, he would be happy to answer them. So thank you again. Thank you, Jeff.
