Being Managed by a Self-Storage REIT: Executives Discuss the Benefits, Challenges and Transition Process
Copyright 2014 by Virgo Publishing.
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Posted on: 12/03/2012



 

Several of the self-storage real estate investment trusts (REITs) provide third-party management services to independent operators nationwide. If you're a facility owner, you may be wondering what it's like to be managed by a REIT and how it can benefit you. If you're serious about signing on with a REIT, no doubt your managers have questions as well.

In a recent series of interviews, Inside Self-Storage asked REIT executives to provide insight to their management services. Our participants discuss the advantages, the challenges, the transition process, what to expect and more. Our panel includes:

  • Clint Halverson, vice president, corporate communication and investor relations, Extra Space Storage Inc.
  • Dale Payne, client relations/sales manager for Uncle Bob’s Management, Sovran Self Storage Inc.
  • Carol Shipley, vice president of third-party management, CubeSmart

For an independent self-storage operator, what are the advantages of hiring a REIT to handle third-party management?

Halverson: There are many advantages to hiring Extra Space as a third-party manager, with the top two being our people and our platform. Our senior management team has worked together for more than a decade, so we’re well-versed on the company and industry trends. We also hire exceptional team members at the store level.

Our technology platform has been a consistent key driver of our success. Smaller mom-and-pop stores simply can’t compete with the depth of what we can provide in terms of systems and marketing power. We spend more than $25,000 per day on keyword search terms alone and have 42 folks working for our organization on Internet strategy. We bid on 12 million search terms per day to find the right customer at the right time and at the right price. We know what our potential customers are searching for and can deliver the top results.

Payne: The biggest benefit is the ability to take advantage of the size, scale and reputation of a national brand. REITs have the resources to execute effective and far-reaching Web and mobile marketing programs, as well as the infrastructure to support doing business through Web and mobile—all emerging trends that can be cost-prohibitive for a smaller operator. Further, REITs offer in-house call centers with highly trained sales reps and extended hours, thereby capturing more rental inquires; sophisticated revenue-management systems to increase revenue; solid accounting and audit functions; and regional oversight for day-to-day operations.

Uncle Bob’s also includes a centralized human resources department and a comprehensive manager-training program that combines one-on-one training with a Web-based learning-management system that delivers more than 500 standard and proprietary training modules.

Shipley: The advantages of professional third-party management are numerous. Independent operators are becoming increasingly aware of the reality that marketing dynamics in self-storage have evolved, and it now takes scale and sophistication to compete. The primary advantage of REIT third-party management platforms is they provide that crucial scale and sophistication.

What are the potential disadvantages?

Halverson: Extra Space has very established processes and reporting. Some owners who are first-generation entrepreneurs are used to running and being involved in every decision for their property on a daily basis. When you engage a larger operator, that level involvement is simply not possible.

Payne: For the hands-on owner/operator, it can be a difficult and an emotional reality check to step away from daily operations. It is also essential to the success of the newly formed agreement. The new management company needs the flexibility to implement the programs deemed necessary to achieve the owner’s goals. This is one reason it is so important for an owner to have a strong level of trust in the management company’s ability.

Shipley: It requires buy-in. The extent to which this is a disadvantage really depends on the preferences and objectives of the facility owner. Some owners are unwilling to relinquish control. If the owner is unwilling to cede significant control to the third-party manager, the relationship may be challenging and results may be impacted.

Another disadvantage is that third-party management, in many cases, prevents the development of a unique identity and brand equity. Certain providers such as CubeSmart do, however, give owners the option of maintaining their unique identity while still benefiting from the full scale and sophistication of the REIT platform.

What questions should an operator ask when evaluating a REIT’s third-party management service?

Halverson: It’s critical for an operator to not only look at the management fee and concessions. The ability to grow revenue must be evaluated. An operator should also talk with references and others who use the same management company. Being able to effectively communicate and partner with a management company is key to success.

Payne: [They should ask] what is the term of the agreement and termination fees to get out of the agreement? What level and type of communication will be available to the owner? Is there a regional manager responsible for the store, and the frequency of property visits/inspections? What’s covered during those onsite meetings? What types of audits are done at the store and by whom? What’s included in the management fee? What’s the policy on tenant insurance and how are commissions/proceeds paid out as ancillary income?

Shipley: It starts with people. Do I trust the people with whom I am entrusting my investment? Will they treat my asset as their own? Who will be managing my relationship? Do I have confidence in their operating platform? What’s their record of improving performance at assets that are comparable to mine? Will they give me a fair shake if I ever decide to monetize my investment and sell? What’s their reputation as a buyer?

What does the contract generally cover? Are there excluded items of which an owner should be aware?

Payne: Most contracts are inclusive of all property functions including personnel management. Store-level expenses are typically the owner’s responsibility, and most corporate-level expenses are part of the management fee. Exclusions to this may include fees or expenses for marketing, call center, software and IT support. There may also be fees associated with new project management as in the case of a property expansion.

Shipley: [It covers] human resources—hiring, training, oversight and career development of onsite staff, administering and managing of all employee payroll and benefits. Marketing—development and execution of a full marketing plan, including local and Internet marketing to drive online visibility and generate as many leads to your facility as possible. Access to national sales centers is also included in management contracts, eliminating the need for an outside third-party call center. Revenue management—continuous monitoring and adjusting, where necessary, of rates, promotions and discounts to ensure the optimal balance of rates and occupancy and maximize every potential dollar of revenue. Risk management—oversight on all legal areas surrounding lien laws, tenant insurance and employee-related legal matters. In addition, support on issues related to general casualty and liability insurance. Accounting—full-service accounting, including payables, sales and other operational-based tax filings, detailed monthly financial statements, lender reporting and, of course, complete audit programs in place to monitor and control all cash and ensure protection of all facility assets. Assistance with real estate tax appeals, often resulting in significant savings in real estate taxes.

What kind of fees can an owner expect to pay?

Payne: Owners can expect to pay a variety of fees and each should be clearly communicated up front. Some may be packaged, others a la cart, including startup fee, management fee, call center, software/IT and support, and Web marketing.

Shipley: Management fees are typically 6 percent of property revenue.

What level of control does the owner retain in the operation of his business?

Halverson: The owner is ultimately in control of his asset. Extra Space manages the day-to-day operation based on an agreed upon budget and plan for the property. All deviations from that plan are discussed with and approved by the owner.

Payne: The owner should always have the ability to discuss questions or concerns with a relationship manager. We discourage direct dialog with the store manager, as it can be counterproductive should he receive conflicting messages. By establishing communication protocol at the beginning of the relationship, the store manager receives consistent communication from his supervisor, based on shared objectives.

With regard to financials and property maintenance, the owner should have a role in the budget review process, the ability to approve and set capital expenditures, and the right to receive all pre-determined financial reports. These are all the details both parties will want defined and agreed upon prior to entering into an agreement.

Shipley: Good third-party managers will customize the relationship based on the preferences and objectives of the owners. That said, the most successful third-party management relationships are those in which the owner, while maintaining a seat at the table for significant strategic decisions, is willing to leave day-to-day operational decisions to the management company.

What reports does the owner receive and how often?

Halverson: There’s a regular reporting package that’s provided on a monthly basis detailing the financial metrics of the property.

Payne: The owner should expect all standard monthly financial reports including a balance sheet, a profit-and-loss statement (compared to budget and prior year) and a cash-flow statement. The owner should also insist on a Web-based application that allows access to relevant financial and operating information. Other reports necessary should also be available via communication with the management company such as damaged-unit reports, space-efficiency reports, etc.

Shipley: The frequency of reporting depends on the provider. The best third-party management providers not only offer periodic in-depth financial reports, but also real-time operational updates. These can include daily e-mail-based flash reports that summarize rental activity and other operational metrics, smartphone apps that provide intra-day rental and phone-call activity, a variety of customizable Internet-based reports with data-export capability, and even access to sales center call monitoring through an online portal. In addition, the third-party management provider should have someone available to answer questions and provide support to you whenever you need it.

How often does your company meet personally with the owner?

Halverson: If the owner desires, Extra Space will have either an asset manager or a district manager meet with them at least monthly.

Payne: Our goal is to meet annually with owners in addition to mutually agreed upon teleconferences. We also take advantage of our time at industry tradeshows, executive retreats and seminars to meet with owners and our clients.

Shipley: The reality is every relationship is unique. We understand this is a people business and always strive to offer an individually tailored, personalized approach to relationship management.

How often does a third-party management contract result in a change of staff at a self-storage facility?

Halverson: Employees are evaluated on a person-by-person basis. They are interviewed and evaluated on the same criteria as every Extra Space employee.

Payne: As with a normal acquisition, we like to keep the existing staff whenever possible. Of course, the decision works both ways. Each associate needs to decide if Uncle Bob’s is a good fit for his career goals as much as Uncle Bob’s needs to decide if the associate can meet our high level of performance expectations.

Shipley: When a third-party management provider takes over management of a facility, staffing is one of the first and most critical areas of evaluation. In a perfect world, the existing staff would meet the job description the REITS have deemed necessary for success and would be interested in joining the REIT. In CubeSmart’s case, we would interview the staff and give them every opportunity to demonstrate their ability to successfully run the facility. Oftentimes, the existing staff is hired by CubeSmart and, with the new tools and systems they’re provided, these managers are very successful and go on to be long-term, happy and instrumental assets to the company.

What advice can you provide to managers that will help smooth the transition after a new management contract goes into effect?

Halverson: We believe in consistent, open lines of communication, so it’s important to meet with your company contact on a regular basis during the transition period. We also make available a wide range of training and transition materials so managers will feel more comfortable during this transition.

Payne: Be flexible, be ready for change and be patient! Keep in mind that all storage REITS have a tremendous amount of experience when it comes to transitioning a property. At Uncle Bob’s, everyone works hard to ensure the changeover goes smoothly for all stakeholders, including the employees and customers. From time to time there may even be a hiccup. That’s normal. What’s important is how that hiccup is handled. A professional management company—particularly a REIT—has likely encountered a similar situation and is poised to correct it without hesitation.

Shipley: Managers become employees of the management company. They should take comfort in the fact that they’ll now be even more empowered in the role—empowered with the support of a robust HR platform, state-of-the-art technology and management tools, upward career mobility, and a fun, service-oriented culture. They should approach the change with open arms, and if they do, they are sure to thrive professionally under the new arrangement.

Is the owner expected to change management software or make any other significant changes in equipment?

Halverson: Yes, at the time the property management is assumed by Extra Space, the technology equipment at the property is evaluated. If it does not meet an established standard, it is replaced.

Payne: Uncle Bob’s uses proprietary operating software at the stores, in our call center and in our revenue-management department. That said, the changeover is necessary for the property to realize the advantages of our systems and management.

Shipley: The owner will be expected to switch to the management company’s chosen point-of-sale system, but this transition process is facilitated by an experienced IT team with an established process. More significant equipment upgrades such as electronic banners and touchscreen displays may be optional but are subject to the discretion of the owner.

What is your training protocol for bringing existing staff up to speed?

Halverson: Extra Space Storage has a robust and experienced training team that’s spread throughout the country. This team has built and established award-winning training programs to work with each level of employee, from store managers to senior management. Career development is a key focus at Extra Space Storage.

Payne: Uncle Bob’s has established a comprehensive training program that combines hands on training with online development through our learning management system, eBob. Typically, we have an onsite certified training manager to train and provide support, at a minimum, the first two weeks of the transition. Based on the needs of the individual, we offer additional support, both in house and via the aforementioned online training tool. After this period, support and development is ongoing.

Shipley: We have a comprehensive training program for all employees new to CubeSmart. This includes one-on-one training with an experienced CubeSmart operations expert who will cover most of the day-to-day operational systems. The district manager will also spend significant time with a new employee acquainting them with strategies, objectives and expectations. Training on our technology and vast resources to empower our people is a critical component of bringing a new employee on board.

What percentage of third-party management contracts at your company evolve into acquisitions?

Halverson: We have a strong track record in converting our management contracts into acquisitions, but it’s really dependent on the performance of the individual store. Last year, 76 percent of our acquisition opportunities, excluding portfolio transactions of 34 properties, came out of our managed relationships.

Shipley: Of the stores that we added to our platform in 2010 and 2011, nearly 20 percent were acquired. This speaks to the efficient path to monetization our platform provides for owners, as well as their confidence in CubeSmart as a buyer of choice who deals openly and fairly. I would encourage owners to take the leap to at least initiate a dialogue to discuss the many ways in which we can improve their bottom line. Although owners are gradually becoming more aware of the scale and sophistication advantages of REIT third-party management platforms, they are generally blown away when we can open up the box and show them why third-party management is a game-changer for them.