An Interview with Mike Burnam

Ask Mike Burnam how his year's been going and he's likely to tell you he's weathered astorm; but blue skies are back in the forecast. In fact, despite the fact that he lost thebattle to keep control of Storage Trust, a real estate investment trust that first wentpublic in 1994, he's won the war and is back in business once again the way he likesit--far from Wall Street.

By his own account, Mr. Burnam, 46, is a self-storage guy through and through. Aftergraduating from the University of Missouri and working a short stint in the Eli Lilydivision of Elanco in Illinois, he returned home in 1976 to work in the family real-estatebusiness, managing apartments, selling properties and operating a self-storage facility.One thing led to another and, before long, he and his family were building a sizeableempire from scratch. In addition, Mr. Burnam became active in the Self StorageAssociation, assisting in the passage of several state self-storage statutes, serving onthe central region board of directors, the national board of directors and, ultimately, asthe SSA president in 1995.

That same year, things began to heat up, and Storage Trust embarked on its Wall Streetadventure--a roller-coaster ride of raising capital, bowing down to investors, watchingthe rises and dips of the market and making hefty decisions with the stockholders'interests in mind. With the highs and lows, the ride was undoubtedly a bumpy one,eventually ending in a buyout by Public Storage in March of this year.

According to Mr. Burnam, the whole adventure totaled a lesson in blood, sweat andtears. Still, he's grateful for the experience, and even more grateful to be right wherehe is today, sitting tight in another family-run self-storage business, StorageMart.

It was a pleasure to catch up with Mr. Burnam and learn of his accomplishments, hisacceptance of the past and his clear optimism for the future. If you've spent any lengthof time with him in his 20-plus years in the industry, you already know him as a man ofdetermination, vision, good nature, positive attitude and wit. Either way, we invite youto listen into our recent one-on-one interview--our visit with Mike Burnam ....

Just to get things rolling, please sum up your self-storage background and give us alittle history of the merger with Public Storage.

Well, in 1976, I came back into the business, and between that year and 1986 my fatherand I, and one partner, developed 14 self-storage properties around the SoutheasternUnited States. On the eve of tax-law change, we sold all but two of them.

Up until that time, we had been in lots of different businesses. As a matter of fact,when we went public, we we had been in 42 different businesses. It just so happens thatreal estate is the only one that's ever made us any money.

Anyway, in 1987 we closed all of our unprofitable other businesses, brought all mybrothers and sister (Tim, 42, Kim, 37, and Chris, 35) back into the business, and formed anew company called Burnam Holding Companies.

Previous to 1986, the self-storage business was transacted on a limited-partnershipbasis that was all tax advantaged. They did away with all of the advantages, and so westarted raising all of our money in times where every property had to stand on its owneconomically. All the properties that we developed between 1987 and the time we wentpublic were strictly economic partnerships designed to make as much money as possible forour partners. We had 78 different partners in about five or six states, and built theportfolio from two properties up to 58 in '93.

We ended up going public in November of 1994 with 88 properties--our originalportfolio, plus we picked up an outside portfolio, as well as our chief financial officer.And so we started public life with 88 properties.

We closed the deal Nov. 8, 1994, then during '95 immediately added $65 million in newassets, which almost doubled the capitalization. From that point in time until the date ofmerger, we built the company from a $100 million market capitalization to a marketcapitalization of almost $600 million.

What led up to the decision to go public?

In 1993, the year before we went public, we worked our tails off to do two deals andraise $3 million. In the year after going public, we did 30 deals and raised $60 million.The only reason anybody should even consider going public is access to capital. And if youhave access to capital, there's no need for you to go public.

All through the 1990s, any type of capital was very difficult to come by. At thatstage, we were midsize players with about 50 to 60 properties. To go public, you bet theranch to do it. You mortgage everything you own and hire the best attorneys and the bestaccountants and you hope that you make it. We were very fortunate in that we were one ofthe last companies to go through the public window for almost nine months.

What did you learn from the experience of going public?

Migrating from the private side to the public side of doing business is a very uniqueopportunity. From my standpoint, I wish I had paid better attention in my collegecorporate-finance classes so that I would have understood how this was supposed to bedone. We knew how to run self-storage properties, and we knew how to build them, etc., butwe didn't understand the public market.

What were some of the hoops that you had to jump through?

What the public market wanted before they would give us the high sign to go public wasto prove that we had somebody on our board that had public-market experience. So, we wentafter the best possible board of directors. We got some of the best and brightest peoplein all of "REITdom," if you will. They helped us perform the public function:They groomed us, they beat us, they whipped us--basically browbeating us into conformingourselves into a public company, to make ourselves look like a company the public marketunderstood.

Self-storage is an industry of entrepreneurs, an industry of very independent people.That's what we were accustomed to. All of a sudden, though, we were no longer operatingthe business from the standpoint of, "How can we do this the best way?" but,"How can we do it to make it acceptable to the market?" Needless to say, we didOK.

How did things go initially when you entered the market? What types of adjustmentsdid you have to make?

For the first two years of going public, we were consistently at the top of our sectorwith same-store performance, which is the gauge by which they measure companies.Same-store performance compares the performance of one store that you owned a year ago tohow it performed this year, quarter over quarter. So, as a public company, you no longeroperate in terms of annual; you operate in terms of quarters.

As a public company, you must tell the analyst a year in advance about properties thatyou're going to buy--properties that you may not have even met the owners of yet. Still,you must forecast who the owners are, where the properties are going to be and at what caprates you're going to buy them. Then, your success as a public company is based upon howwell you attain those targets. The people who are the best guessers, win. It was a wholedifferent evolution for somebody coming from the private side to public side to have tooperate a business that way.

Were you intimidated by the prospect of it all? How does one from the self-storageindustry bridge the gap?

No, because we still had good ole' self-storage to fall back on. We'd been in theindustry for 20 years before going public. I've met a lot of wonderful people in thisindustry through the years as the past president of the SSA and up through the ranks with ISSand everybody else in this industry, so I always knew we could go back to those basicroots, which is what this business is about. You build the business from the lowest commondenominator: how to best take care of the customer. As long you keep yourself in thatperspective while operating your business, you'll do OK.

Of course, you have to take that hat off and put on your ego when your go talk to thepublic markets, because they tend to look down at self-storage as compared to big fancyoffice buildings or apartment complexes or research development or strip centers. Theylook at self-storage as the red-headed step child. You need to put on your ego when youtalk to these people. You may walk in the door right after that office-building guy wasthere telling them about how beautiful his office buildings are. You might walk in andsay, "Hey guys, I've got these buildings that have all these doors on them, and werent them for lots of money and don't have much maintenance. But, we put more money to thebottom line." And that is the lowest common denominator for them.

What was happening in the marketplace and with Storage Trust previous to the buyoutperiod?

First, you need to look at the whole picture and understand the fragmentation that isvery evident among the self-storage owners; meaning there are lots of small, independentoperators around the country. The consolidation that took place between '94 and '97basically funneled billions of dollars into the public companies to go out and buyproperties. And, so long as the public and institutional buyers of REIT stocks remainedhappy with the returns they were getting from their investments in the public companies,they kept putting more money out there. As they bought more properties, the basiceconomics of supply and demand took over, and because the capital was available, theystarted paying a little too much for properties. At the same time, if you can't get youryield in the acquisition properties, you have to get them through internal generation ofyield, which means you have to push rents.

In our case, in 1996, we had gone through and had six or eight great quarters. We sawthe acquisitions dropping off, but we couldn't buy great properties at good yieldsanymore. So we figured we had to start pushing internally. We pushed rents so hard that weactually started dropping occupancies. When you start doing things like that, the publicmarket gets very upset. For three quarters, we were in the cellar of our sector, withalmost 0 percent same-store increases.

With anything, you have to hit bottom or really tough times before you become creative.For us, it forced us to be creative with our rollover phone center, which allowed us tohelp our managers take more phone calls. And, we developed the demand-based pricing model,where we re-priced every single storage unit at every property, every day, based on thedemand for that storage unit. The situation forced us to become more technologicallyadvanced to help run our company better.

What kind of position was Storage Trust in then?

We were under the gun for three hard quarters. Our board was pushing us; we werepushing ourselves. We had bought some nice packages of property and were building a majorpresence in several major markets but, unknowingly, we had painted a big target onourselves. In 1997, Harvey Lincoln came to us and said, "Why don't we go and make avery strategic investment in your company, whereby you change the name of your properties,but still run them for us?"

Well, that wasn't exactly the vision that we had and we didn't really think that wasthe best thing for our shareholders at the time. Still, we maintained a very friendlyposture and said, "Thank you very much. We're honored that you've considereddiscussing these things with us, but it's not the direction we want to take the company atthe time."

What was the status of the REIT world at that time?

The market had progressed to the point that the REITs did themselves a disservice, andI went along with all of this--as well as most other people. Let me explain: During the'90s the REITS were growth companies that could go out and buy enormous amounts ofproperty that were very undervalued as a result of the RTC days, etc. But they truly weregrowth companies, actually showing double-digit growth year after year after year.

There was a lot of hubris involved in all the public companies whereby they thought,"Gosh, we've done it in the past and we know we can do it in the future." Still,looking back now, knowing the basic laws of economics of demand and supply, we should haveknown that it really couldn't happen. Real estate is not a growth industry. It never hasbeen, and never will be. It is an income-generating industry. We take huge amounts ofcapital and deploy it into big assets that have the capability of creating a long-termincome stream. But, everybody forgot that. We're all coming full circle back tounderstanding that now, though.

Part of what was taking place this whole time was the capital markets were so enamouredwith growth stories they were being told that they were just throwing huge amounts ofcapital. But when they started realizing that they can't continue this double-digitgrowth, the capital markets started drying up, and so did acquisitions as the price forgood properties became too expensive. You couldn't get the yields, and therefore, all thenumbers of a lot of the companies within the REIT world were not quite there.

Where did that position Storage Trust's REIT?

We started looking over our shoulders. We knew that being the fourth out of five REITsmeant something was going to happen to one of us. We had just taken down a majorportfolio, had purchased it in a very heavily bidded acquisition that was in Chicago. Webeat Public Storage out of the acquisition, and I think that painted an even bigger targeton our back. At about the same time, everybody's stock price started taking a hit, and itbecame very simple mathematics: It became cheaper to buy a company on Wall Street then tobuy assets on Main Street.

When did Public Storage first position itself for a buyout?

I don't know when Public Storage started buying stock in our company because theydidn't have to let us know they were buying our stock until they achieved 5.9 percent.Still, they had quietly acquired 5.9 percent of our company. At that point they wereforced to file and alert the world that Public Storage was a major owner of our stock:"And oh, by the way, we'd also like to buy all the rest of your stock."

What was your reaction to the timing of this?

I'd always rather be lucky then smart, but I think they were a lot of both in that theypicked the most perfect time--ever--to go through and make this offer. Almost simultaneousto them making this offer, there was a collapse of the CMBS market.

When they made it known that they wanted to buy our company at $25 a share it was atwo-sentence offer. Nevertheless, even when you're dealing with somebody as strong and ashonorable as Wayne Hughes, you don't accept a two-sentence offer. Therefore, we wereforced to put into effect a system called a poison pill--which forces the bidder tonegotiate in a business-like manner, instead of a hostile takeover.

We hired Merrill Lynch to look at our strategic alternative. Whenever you see that acompany has "retained council to look at strategic alternatives," that issynonymous with hanging a "for sale" sign on it. But you hire the investmentbankers to look at your alternatives and open up communication. In our case, our boardfelt that we were too emotionally attached to our company. Therefore, all negotiationswere taken out of our hands, and we were only involved peripherally. Logic will tell youthat this is probably the legally and morally correct thing to do. But from areal-estate-guy point of view, who can best sell your property, somebody who doesn't knowit, or somebody who really knows it?

How did the story unravel from there?

We started out as 10 percent owners and ended up as 4 percent owners. Basically, weswallowed our own poison pill. We had given up a lot of rights as independent businesspeople when we went public. It was not an easy thing to do, but it was the right thing todo.

I still would have loved to have been able to sit down and negotiate because what tookplace during negotiations was that while the CMBS markets went into collapse, the stockmarket on REITs likewise started going down. And so the timing was absolutely perfect forPublic Storage. Wayne Hughes is one of the smartest guys that I've ever met. He dideverything right in his negotiations.

After operating under this cloud of strategic alternative for several months, you canimagine what it was like for our employees--being taken over by their most dreadedcompetitor was the way they looked at it. To us, it was just another company, but theywere scared to death. We were operating under a high degree of stress ourselves, and ourboard felt it was time to act. Finally, we decided to strike an exchange ratio. Then theargument within the board was, "Is this exchange ratio the right ratio?"

And, of course, the insiders--my family--thought that the exchange ratio wasn't nearlyhigh enough. We had a lot more to lose than anybody else on the board, but the entireboard represents all of the investors, not just us. Nevertheless, there was a majorityvote, and they accepted the exchange ratio.

What was the exchange ratio?

The original offer--the two-sentence offer, which they never put in writing--was $25 ashare. The exchange ratio was .86--which computes to about $22.75.

How did you feel about that?

It meant that our Storage Trust lives we're coming to an end as we had known them,because this was not exactly the vision we had of how we were going to end up in thecompany. Hindsight being what it is now, we're much better off, personally. Still, thehardest thing we had to deal with was all of the people--our 600 employees. We operated ona very personal level with all of those people. And we operated the company muchdifferently than how Public Storage operates a company.

What was Public Storage seeking to accomplish--diversify its portfolio, have moredominance in the market, or what?

Well, they didn't diversify; they acquired dominance. For the properties that we boughtduring the first quarter of last year, they paid about 80 cents on the dollar for them bybuying our stock--because they bought us at one of our lowest trading dollar amounts for ayear. That's just the way it happened.

They did what was the smart thing for them. They have all of their shareholders tothink about, too. You have to make the decision, not based upon long-range thinking, butbased upon what is happening right then. At that time, the Russian ruble was going in thedumpster, Asia had the Asian flu, the market was going in the tank. Our board was forcedto make a decision about which company would prosper. In periods of downturns, the marketalways migrates to size and quality. Public Storage is, I believe, the fifth largest REITever, of all of the REITs. They are really big. If you combine all the other self-storageREITS together, they're still not as big as Public Storage.

After the merger took place, if you overlaid our properties and Public Storage'sproperties, you would see some definite outlyers, places where we had properties and theydidn't. They are very much a dominant market player; meaning they wanted to come in anddominate a market, which we did, but on a smaller scale.

Tell us about your newest ambition--StorageMart. What's on the horizon for this newventure?

We're going to do it all again. Not go public--that is a third on the list of potentialexit strategies, if you will. But, having the comfort now that once you've gone public, weknow how to do it now, we know what to do and what not do.

The company right now is just my brothers, my sister and myself. We closed March 12 ofthis year with 600 employees, and opened up March 15 with eight. After the closing, we hadthe opportunity to go through and buy back some of our old properties that were innon-common markets with Public Storage. Just recently, we closed on a transaction of 14properties that we're buying back. From those 14, we've built up to 23 properties, just 60days after closing. So, a lot has taken place.

We're also managing an additional nine properties, and four properties are undercontract for development. Our business plan for StorageMart entails going back into 10major markets in the country, establishing a dominance presence of seven to 15 propertiesin those markets, building those properties up, developing and getting them rented up.Based upon our knowledge of the public markets and who the public players and nationalbuyers are, we want to be prepared to flip our portfolio on a market-by-market or anentire company basis when the time is right. We're getting ready to raise $50 million inthe public market to go back and re-deploy, based upon our business plan.

How long did it take you to make the decision to start over again in theself-storage industry?

Oh, I knew all along. This is the only real-estate business that we'd ever want to bein. I have so many friends in this industry, friends who called and gave me support andsaid we, at Storage Trust, had done it right. We had a lot of investors call us and say wecould have gone through and made this a real tough transaction, but long-term, this willbe better for us and better for our shareholders.

I can say right now that I feel better than I've felt in five years. As much fun as wehad at Storage Trust, we are having so much more fun now. My wife thinks I'm a new person.It's amazing how much more enjoyable coming to work is.

What are your goals for StorageMart for the next five years or so?

We'll probably double the company every year, depending upon who the buyers are anddepending upon when areas are right for sale--whatever we can do to make the most moneyfor our investors. Plus, based on our experience, we're doing consulting and startupservices. If somebody wants to do a site, we'll come in and do the design work, all theproformas, everything including managing the site if they want us to.

Any closing comments?

I'd like to think that I've been a big cheerleader for the self-storage industry for 20years and will continue doing that ... helping people get into the business, helping themdo it the right way. This really is a great industry made up of some wonderful people. I'dnever consider doing anything else.