At the recent REITWeek 2013 Investor Forum, David Rogers declared that technology, Internet advertising and revenue management tools have enabled the country’s four publicly traded self-storage REITs, which make up 10 percent of the U.S. market, to “distance” themselves from mom-and-pop facilities, which constitute 90 percent of the U.S. market.
“It’s really become an industry of haves and have nots,” said Rogers, chairman and CEO of Sovran Self Storage Inc., one of the four publicly traded self-storage REITs.
Rogers said Sovran is one of the “haves.” Sovran, which does business as Uncle Bob’s, posted revenue of $236 million in 2012. The REIT owns or manages more than 470 self-storage facilities in the U.S.
Here’s a rundown of some of the topics Rogers covered at REITWeek.
“We’re impervious to downturns.”
With an incredibly broad customer base, self-storage operators can survive severe economic downturns. Even in 2009, at the peak of the economic downturn, the four publicly traded self-storage REITs weathered the storm.
“Demand has been very strong,” Rogers said. “We had a bit of a dip in 2009, like everyone did. Our dip amounted to about a 3 percent drop in revenues. It was the only time in our 29 years when we had a backward step in same-store revenues.”
The self-storage industry is particularly resilient because customers come from all geographic areas and every socioeconomic sector. Rogers attributes the constant demand to life changes (such as marriage or divorce). According to Rogers, 68 percent to 70 percent of Sovran’s tenants use storage for residential purposes, with the rest of the customers coming from the business world.
Despite all the newfound attention from institutional investors, there’s been a lull in self-storage construction.
“Over the last decade, ending in 2008 when the last (self-storage supply) surge happened, most of the low-hanging fruit has been taken,” Rogers said. “The available zoned land that was of reasonable cost certainly has been built on.”
That being said, Sovran has sold about 30 facilities over the past few years, partly because of new competition entering those markets. Hence, some new facilities are being built, and larger operators are actively acquiring mom-and-pops.
The publicly traded self-storage REITs now compete with a slew of new investors to buy self-storage facilities.
“We’re seeing all-time low cap rates. We’re seeing a lot of money chasing different types of properties. Third-tier suburbs, smaller markets and lesser-quality properties are commanding good prices. Certainly major markets and Class A properties are in the 5½ cap range,” Rogers said.
The four self-storage REITS–Sovran, Public Storage Inc., Extra Space Storage Inc. and CubeSmart–actively bid on properties, but they pull the trigger only when the numbers make sense, according to Rogers.
“We’re seeing a lot of interest from institutional and private capital (investors). The last package we bid on I think there were 19 bids that went in. We’ve been in this business a long time, and we couldn’t even name 15 that were in there,” Rogers said.
Although it hasn’t been aggressively acquiring facilities, Sovran has purchased a few mom-and-pops in the past year. For the most part, these acquisitions were sparked by families and individuals concerned about the 2013 rise in tax rates.
So if Sovran isn’t spending much on acquisitions, where’s the money going?
According to Rogers, Sovran is improving 30 to 35 of its facilities by adding climate control. He estimates these renovations will yield 10 percent to 12 percent for every dollar put into a property.
Generally speaking, Sovran uses joint ventures sparingly.
The REIT prefers to buy properties on its own; however, it occasionally will enter a joint venture on a facility that can be purchased with a great deal of secured debt that can’t be prepaid.
“We like to keep our balance sheet as clean and lean as possible,” Rogers said. “We have a $3 billion enterprise value company; we have $4 million worth of mortgage debt, and we prefer not to even have that.”
“It’s not a picnic.”
Although its third-party management business has extremely low margins and no meaningful effect on operating funds, Sovran still has about 80 third-party management deals in place. Why? According to Rogers, these deals offer a lot of side benefits. For one, these deals allow Sovran to attach its brand name to high-quality facilities in more markets. Also, he said, third-party management deals have been “an acquisition feeder for us.” In 2011 and 2012, Sovran acquired 23 facilities that it had managed under third-party agreements.
These deals afford Sovran the opportunity to comb through the facilities’ financials. “This industry is notorious for not providing operating statistics and metrics. (Third-party management) has given us an awful lot of intelligence,” Rogers said.
Revenue Management Software
Rogers attributes Sovran’s higher occupancy levels to its new revenue management software. In most markets, 90 percent used to be Sovran’s normal peak occupancy; now, it’s more like 93 percent to 94 percent. In addition to enabling effective pricing and rent increases, the software helps the company gauge when and where to spend Internet advertising dollars.
The Yellow Pages are a thing of the past for Sovran, as only 3 percent or 4 percent of its tenants find facilities through the phone book. “We think 30 to 35 percent are walk-up customers, and for sure we can say at least 65 percent of our customers get in touch with us through the Web,” Rogers said.
Sovran currently spends $5 million to $5.4 million a year on Internet advertising. What’s more, it has 10 in-house employees and three outside consultants devoted solely to online ads.
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