ONE ON ONE

An Interview With Mike Burnam

Mike Burnam is CEO of Storage Trust, a real estate investment trustbased in Columbia, Mo., where he was born and raised. Mr. Burnam graduated from theUniversity of Missouri with a degree in agricultural economics and spent his first yearout of college working in the Eli Lily division of Elanco in Illinois. In 1976, hereturned home to work with his wife in the family real-estate business, managingapartments, selling real estate and operating the single self-storage property the companyowned at that time.

During the following eight years, the company expanded its self-storage portfolioand explored several other businesses, including Budget car rental, tool and equipmentrental and insurance. When the tax-law change became imminent in 1986, it was decided thatthe company would sell all but two of its self-storage properties, until 1987, when all ofthe unprofitable subsidiaries were closed and the development and management of suchproperties were given the company's full attention. Mr. Burnam worked on capital raisingand management in the sunbelt markets of the southeast, while his father and brother, Tim,continued work on development and construction, and his sister, Kim, worked withmanagement.

The company's self-storage portfolio grew from two properties in 1987 to 58 in 1993when the process of going public was begun. In March of 1994, the Burnams joined withEveren and Morgan Keegan Securities with an IPO that raised $108 million in November ofthat year. The market capitalization of the company has since grown to $600 million with228 properties in 16 states.

Mr. Burnam has been involved with the National Association of Home Builders, theApartment Councils and the Self Storage Association (SSA) where he assisted the passing ofseveral state self-storage statutes, served on the central region board of directors andbecame president of the central region in 1992. In that same year he became a member ofthe SSA's national board of directors, and in 1994 he was named SSA president.

Mr. Burnam currently makes his home in Columbia, Mo., with his wife while his son isa senior at Colorado State University and his daughter, a sophomore at Texas ChristianUniversity. When he is not traveling with Storage Trust, he enjoys skiing, hunting,fishing, yard work and spending time at home with his family.

We are honored to present an interview with Mike Burnam...

How did you land in the self-storage industry?

My father was in the real-estate business, but predominately single-family andmulti-family development. In 1972, while on a family vacation in South Texas (without me),he saw several rows of buildings. And due to it raining most of the week, he stopped byand visited with the owner/manager several times. He finally rented a unit. It was theonly way the owner would give him a lease. He took the idea back to Missouri and talkedhis local banker into loaning him the money to build one of the first self-storageproperties in the Midwest. During college, my wife and I were assistant managers atapartment complexes, and after a brief stint away from home, we came back to becomeresident managers again and begin our careers in the real-estate business in 1976. Theoffice for Storage Trust is still at the same location as our original real-estate officeand mini-storage office.

In 1976, our local banker sold his bank and offered capital to us to expand ournow-successful business outside the confines of Columbia, Mo. We had a very strategicmarketing strategy at that time. Our banker liked to quail hunt in South Carolina, so webuilt a property in Columbia, S.C. My father liked to play golf on the Mississippi Gulfcoast, so we built there. Consequently, my kids' earliest memories are going on springbreak and dad spending time opening up a new self-storage property while they and theirmother spent time in a hotel. Between 1976 and 1986 we developed 14 properties in sixdifferent states. On the eve of the tax-law change, we sold all but two properties andstarted all over again in 1987. At this time we also had several other businesses (At IPOwe actually counted 42 different business we had been in before finally settling onself-storage). We closed all of these businesses except the insurance and real-estate anddecided to focus on self-storage. At this point in time my brother, Tim, and sister, Kim,also joined the business to fulfill roles in the construction and accounting offices.

During the next eight years my other brother, Chris, came back and ran the insuranceand real-estate offices until the self-storage operation demanded more time, at whichpoint we shared responsibilities for the self-storage operations. We built the companyfrom two stores in 1987 to 22 owned and 36 managed just prior to going public in 1994. Allof this was done from a very small investor base within Columbia, Mo., and hard work byour family.

What is your perception of the people who run self-storage facilities nowvs. in the past?

The self-storage industry is still made up primarily of small entrepreneurialoperators, and I really do not think that will change. The business is a three-milebusiness and it takes local knowledge to get the right zoning and knowing the rightengineer to get the right store built and rented. Yes, I can spend more money and probablydo the same, but the local operators are generally more efficient. To this point, we havesupported this type of development, but now we are seeing some bulges in supply in certainmarkets and are changing our opinion that the locals are almost too efficient atdeploying capital, especially when it is fueled by a new breed of bankers with very shortmemories.

Small entrepreneurs getting into the business now are much more educated to the processand history of self-storage, due to the various trade organizations that have taught themthe lessons we had to learn the hard way. The new people in our industry are probablybetter capitalized than we were and, of course, we have spent the last 25 years educatingthe bankers, so money is much easier to come by.

I also think the people in the business have changed in the way they are more willingto share their ideas than 20 years ago. There are still some people in our industry whothink they are the only ones who know the secret.

Can you explain the differences between Storage Trust today vs. before itwent public?

Focus. We are extremely focused toward the bottom line now, more than ever before inour history. Before, we did the best we could with what we had. We knew we would have totalk with our investors if we wanted to expand a store or add climate-controlled units,and then I would have to beg them for additional dollars. Now, when we see an opportunitywe can take advantage of it immediately.

We are more focused on our management talent. Probably the biggest benefit of goingpublic was to add Storage Trust University, one of the only dedicated training centers inthe self-storage industry. This allowed us to bring every new manager into the home officeto be trained in exactly the same manner, to follow every procedure the same and learn howto sell self-storage. The on-site manager is still the most important element of thisbusiness, and increased training is the most important attribute you can provide themanagers.

Focus on putting consistently better numbers up every month. The public market is notvery forgiving, and if you estimate that you will buy $50 million in properties during aquarter in an upcoming year and produce a certain amount of FFO and you miss it, watchout. You may just watch your stock price drop before your eyes.

Focus on the long term. Many times you will be tempted to make a decision to simplybenefit the short term when you know that in the long term the short-term sacrifice willbe well worth it in enhanced shareholder value.

How have the REITs changed the face of self-storage today?

Quite simply, the REITs have made the market more aware of self-storage. Before, therewere very few people and companies who were capable of tapping the public market, but now,through years of work by Public Storage and others, we have arrived. Whether this is goodor bad is yet to be determined. I hear people like Chuck Barbo and Harvey Lenkin talkabout how difficult it was to get institutional investors to even talk to them years ago.Now I see Finova and Heller taking an active role in the financing of self-storage and seethe amount of money invested in self-storage by the public market at its presentproportions, and I realized the face of the industry has changed. If the continuedinterest in self-storage continues, and the current wave of bankers do not exhibitdiscipline regarding over-supply of markets, we could see some real changes. We have donetoo good of a job helping the average developer by making self-storage a reality in theeyes of the lender.

We have also created an exit strategy. Not too many years ago, the average age of amember of the Self Storage Association was 58, and the average number of properties theyowned was two. At the trade shows, I am now beginning to see some second generationsstaying in the business, but I am also getting calls from owners who see prices higher nowthan ever before and are looking into their retirement strategy.

How much weight do the REITs carry in the industry, now and in the future?

When we went public in late 1994 the public companies controlled approximately 9percent of the total number of self-storage properties (this is admittedly an unknownnumber, but we assumed approximately 25,000 properties). Now the REITs control about 13percent. So after four years and several hundred million dollars, the number has onlyincreased 4 percent. This number may be a bit off because no one really knows how manyself-storage properties there really are. We think there are approximately 25,000 storeswith at least 40,000 square feet. This is in comparison to the 25 percent of the shoppingmalls in the United States being publicly held, 10 percent of the apartment industry andonly 5 percent of office buildings.

The REITs will definitely play a larger role in the future of the industry, both inacquisitions and development. The nature of the REIT beast is to spend money acquiring anddeveloping, and then go back to the market for additional equity to start the cycle overagain. So long as capital remains available, there is incentive for REITs to continuegrowing. I believe the REITs will double the market presence in the next three years.

What does running a quality facility entail?

1. Get a great manager.

2. Keep it clean.

3. Make it have a nice curb appeal, a retail appearance.

4. Get a good location.

5. Take care of the manager through incentives and support.

6. Control expenses.

7. Push rents when you can.

What are the keys to structuring management to run so many facilities?

You need to make sure you touch stores the maximum number of times possible. Each storeis only as good as its management. The management, if given the proper incentives andsupport, will run the store within certain parameters. The key is to make sure you havegoals adequately in place to make sure the management knows what is expected of them.Together, we create a business plan for each store. The manager and his immediatesupervisor decide what the budget for their store will be. We, of course, make sure thatevery estimate is "slightly sweaty."

Create a program whereby the manager participates in the success of their store andachievement of their goals and budgets. Most of all, give them support and encouragementand make sure they are enjoying what they are doing. We offer all of our managers healthinsurance, 401K programs, stock options and $2,000 worth of company stock, which is vestedover two years. If the stock goes up, they can cash out or let it ride. We want them to bea part of their store and make sure they run it like it was their own. They need torealize the company is made up of many small pieces, and each piece is very important, somake sure your piece is profitable.

There is no way a large company can possibly run a store as efficiently as a singleowner/operator who sits and talks with their customers every day, so we simply try andreplicate that situation and make the manager more like an owner.

What types of training programs do you use initially and ongoing?

As mentioned previously, we have a training center, and now we have 10 remote trainingcenters each with a 10-day training curriculum in place for making new managers ready totake over a store. For the regional manager, which is the next level above a store managerand who typically controls 10-15 stores, we have an MBA course we designed with casestudies of actual stores, which we set up for them to fine-tune their decision-makingskills. We teach them how to identify a unit-mix problem, when it is right to do aclimate-control conversion, how to fix a visibility problem--all through case studies.

What type of innovations in technology do you foresee?

The Internet will play a much bigger part in the future. We already receive 3 percentof our customers from the Internet and look to expand that number through interactive Webpages. Marketing and media advertising will play a much bigger role, but it is expensive,so only the big players will have access. In the future we will understand that we are notjust in the storage business, but we are helping people who are in transition. What can weoffer to our customers to maximize the potential of each customer?

What is your position in the marketplace?

We have positioned ourselves to be a super regional player concentrated in about 22core markets with specific concentration on purchase of "A"-quality assets in 10key markets. Those markets are Houston, Dallas, Kansas City, St. Louis, Chicago, Atlanta,Orlando, Fla., Southeast Florida (West Palm Beach, Broward and Dade counties), Tampa,Fla., and parts of North and South Carolina. Our goal is to become the number-one or -twoplayer in each of these markets. This allows us to become a dominant market force creatingoperating synergy's enabling us to better control income and expenses. We have achievedthis in Kansas City, Atlanta, Chicago, St. Louis, Mobile, Ala., and Greenville andColumbia, S.C.

How do you set rates?

We use a demand-based pricing strategy whereby we set rents daily based upon individualoccupancy on individual units. This is done through a system of knowing our competitorsand the availability of units in the market of each store. We raise rents based upon thelongevity of a customer in correlation to the occupancy on the individual unit size.

Each manager has a set of rules that tells them how much discount, if any, to offer aprospective customer when they call the store. We believe in empowering our managers tooffer additional discounts depending upon the situation. Obviously, if a customer pulls upin a U-Haul truck, no discounts apply. However, in a telephone situation where they cantell a customer may be shopping, managers have the ability to go outside the dedicatedpricing.

The way you keep the manager from giving away the bank is that approximately 25 percentof his compensation is based upon income collected and increases of the income on amonthly basis. So if a manager is tempted to "cut a deal," in the back of theirmind they are saying, "If I give this discount, how will this effect my bonus?"If they are $1 below a certain level, they get no bonus and vice-versa.

What marketing methods do you employ?

The best marketing method anyone can have is a well-trained manager, which we spend aconsiderable amount of time and money in obtaining. The second is to make sure thetraining is based primarily on customer service and particularly on the telephonetechniques of the manager. We also do a large amount of referral marketing through thetelephone and from visits to surrounding apartment communities within our markets. Weoffer bonuses to the leasing agent if they send a customer to one of our stores. We arealso experimenting with cross-marketing agreements in certain markets with some of thequality apartment REITs. Additionally, we are experimenting with billboards andtelemarketing to introduce new customers to self-storage and to increase our referralbusiness.

What do you see in the future for the self-storage industry?

There is no doubt that consolidation will continue. At this point, we are in anequilibrium with the acquisitions of REITs and other major players in equaling the newconstruction. I see the balance switching to more supply, which will do two things:further depress some of the already soft markets, and allow those with capital somebottom-feeding opportunities to take over stores that have not met their rent-up goals.These owners do not have the staying power to wait for a three-year rent-up rather thanthe 18-month rent-up the consultants have told them they will get.

I also see the REITs and other well-capitalized companies doing much more development.Prices are at an all-time high and I don't see them going any higher. We do not havecertain return requirements, and those yields do not start with a nine. If we can developand get 300 to 400 basis-point premium yields over similar acquisitions and get qualityproperties, why should we buy? There are very few markets where we have not had thisdiscussion. We are prepared to use development as a weapon in certain markets wherequality acquisitions are not available at a reasonable price.

At this point in time, the REITs and major players own a very small percentage of thetotal, but this amount will double in the next few years. The fragmentation experience inthe self-storage industry is still greater than almost any real-estate type, but that willchange in the future. I see this as becoming a much more professional industry with theimplementation of additional technology and better-trained managers and owners versed inthe art of marketing.