An Interview With Mike Burnam
Mike Burnam is CEO of Storage Trust, a real estate investment trust based in Columbia, Mo., where he was born and raised. Mr. Burnam graduated from the University of Missouri with a degree in agricultural economics and spent his first year out of college working in the Eli Lily division of Elanco in Illinois. In 1976, he returned home to work with his wife in the family real-estate business, managing apartments, selling real estate and operating the single self-storage property the company owned at that time.
During the following eight years, the company expanded its self-storage portfolio and explored several other businesses, including Budget car rental, tool and equipment rental and insurance. When the tax-law change became imminent in 1986, it was decided that the company would sell all but two of its self-storage properties, until 1987, when all of the unprofitable subsidiaries were closed and the development and management of such properties were given the company's full attention. Mr. Burnam worked on capital raising and 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 with management.
The company's self-storage portfolio grew from two properties in 1987 to 58 in 1993 when the process of going public was begun. In March of 1994, the Burnams joined with Everen and Morgan Keegan Securities with an IPO that raised $108 million in November of that year. The market capitalization of the company has since grown to $600 million with 228 properties in 16 states.
Mr. Burnam has been involved with the National Association of Home Builders, the Apartment Councils and the Self Storage Association (SSA) where he assisted the passing of several state self-storage statutes, served on the central region board of directors and became president of the central region in 1992. In that same year he became a member of the 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 is a senior at Colorado State University and his daughter, a sophomore at Texas Christian University. 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 and multi-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 by and visited with the owner/manager several times. He finally rented a unit. It was the only way the owner would give him a lease. He took the idea back to Missouri and talked his local banker into loaning him the money to build one of the first self-storage properties in the Midwest. During college, my wife and I were assistant managers at apartment complexes, and after a brief stint away from home, we came back to become resident managers again and begin our careers in the real-estate business in 1976. The office for Storage Trust is still at the same location as our original real-estate office and mini-storage office.
In 1976, our local banker sold his bank and offered capital to us to expand our now-successful business outside the confines of Columbia, Mo. We had a very strategic marketing strategy at that time. Our banker liked to quail hunt in South Carolina, so we built a property in Columbia, S.C. My father liked to play golf on the Mississippi Gulf coast, so we built there. Consequently, my kids' earliest memories are going on spring break and dad spending time opening up a new self-storage property while they and their mother spent time in a hotel. Between 1976 and 1986 we developed 14 properties in six different states. On the eve of the tax-law change, we sold all but two properties and started all over again in 1987. At this time we also had several other businesses (At IPO we actually counted 42 different business we had been in before finally settling on self-storage). We closed all of these businesses except the insurance and real-estate and decided 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 insurance and real-estate offices until the self-storage operation demanded more time, at which point we shared responsibilities for the self-storage operations. We built the company from two stores in 1987 to 22 owned and 36 managed just prior to going public in 1994. All of this was done from a very small investor base within Columbia, Mo., and hard work by our family.
What is your perception of the people who run self-storage facilities now vs. in the past?
The self-storage industry is still made up primarily of small entrepreneurial operators, and I really do not think that will change. The business is a three-mile business and it takes local knowledge to get the right zoning and knowing the right engineer to get the right store built and rented. Yes, I can spend more money and probably do the same, but the local operators are generally more efficient. To this point, we have supported this type of development, but now we are seeing some bulges in supply in certain markets and are changing our opinion that the locals are almost too efficient at deploying capital, especially when it is fueled by a new breed of bankers with very short memories.
Small entrepreneurs getting into the business now are much more educated to the process and history of self-storage, due to the various trade organizations that have taught them the lessons we had to learn the hard way. The new people in our industry are probably better capitalized than we were and, of course, we have spent the last 25 years educating the 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 willing to share their ideas than 20 years ago. There are still some people in our industry who think they are the only ones who know the secret.
Can you explain the differences between Storage Trust today vs. before it went public?
Focus. We are extremely focused toward the bottom line now, more than ever before in our history. Before, we did the best we could with what we had. We knew we would have to talk 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 opportunity we can take advantage of it immediately.
We are more focused on our management talent. Probably the biggest benefit of going public was to add Storage Trust University, one of the only dedicated training centers in the self-storage industry. This allowed us to bring every new manager into the home office to be trained in exactly the same manner, to follow every procedure the same and learn how to sell self-storage. The on-site manager is still the most important element of this business, and increased training is the most important attribute you can provide the managers.
Focus on putting consistently better numbers up every month. The public market is not very forgiving, and if you estimate that you will buy $50 million in properties during a quarter in an upcoming year and produce a certain amount of FFO and you miss it, watch out. 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 simply benefit the short term when you know that in the long term the short-term sacrifice will be 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, there were 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 good or bad is yet to be determined. I hear people like Chuck Barbo and Harvey Lenkin talk about 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 see the amount of money invested in self-storage by the public market at its present proportions, and I realized the face of the industry has changed. If the continued interest in self-storage continues, and the current wave of bankers do not exhibit discipline regarding over-supply of markets, we could see some real changes. We have done too good of a job helping the average developer by making self-storage a reality in the eyes of the lender.
We have also created an exit strategy. Not too many years ago, the average age of a member of the Self Storage Association was 58, and the average number of properties they owned was two. At the trade shows, I am now beginning to see some second generations staying in the business, but I am also getting calls from owners who see prices higher now than 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 9 percent of the total number of self-storage properties (this is admittedly an unknown number, but we assumed approximately 25,000 properties). Now the REITs control about 13 percent. So after four years and several hundred million dollars, the number has only increased 4 percent. This number may be a bit off because no one really knows how many self-storage properties there really are. We think there are approximately 25,000 stores with at least 40,000 square feet. This is in comparison to the 25 percent of the shopping malls in the United States being publicly held, 10 percent of the apartment industry and only 5 percent of office buildings.
The REITs will definitely play a larger role in the future of the industry, both in acquisitions and development. The nature of the REIT beast is to spend money acquiring and developing, and then go back to the market for additional equity to start the cycle over again. So long as capital remains available, there is incentive for REITs to continue growing. 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 store is only as good as its management. The management, if given the proper incentives and support, will run the store within certain parameters. The key is to make sure you have goals 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 immediate supervisor decide what the budget for their store will be. We, of course, make sure that every estimate is "slightly sweaty."
Create a program whereby the manager participates in the success of their store and achievement of their goals and budgets. Most of all, give them support and encouragement and make sure they are enjoying what they are doing. We offer all of our managers health insurance, 401K programs, stock options and $2,000 worth of company stock, which is vested over two years. If the stock goes up, they can cash out or let it ride. We want them to be a part of their store and make sure they run it like it was their own. They need to realize the company is made up of many small pieces, and each piece is very important, so make sure your piece is profitable.
There is no way a large company can possibly run a store as efficiently as a single owner/operator who sits and talks with their customers every day, so we simply try and replicate 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 training centers each with a 10-day training curriculum in place for making new managers ready to take over a store. For the regional manager, which is the next level above a store manager and who typically controls 10-15 stores, we have an MBA course we designed with case studies of actual stores, which we set up for them to fine-tune their decision-making skills. We teach them how to identify a unit-mix problem, when it is right to do a climate-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 percent of our customers from the Internet and look to expand that number through interactive Web pages. 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 not just in the storage business, but we are helping people who are in transition. What can we offer 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 22 core markets with specific concentration on purchase of "A"-quality assets in 10 key 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 -two player in each of these markets. This allows us to become a dominant market force creating operating synergy's enabling us to better control income and expenses. We have achieved this in Kansas City, Atlanta, Chicago, St. Louis, Mobile, Ala., and Greenville and Columbia, S.C.
How do you set rates?
We use a demand-based pricing strategy whereby we set rents daily based upon individual occupancy on individual units. This is done through a system of knowing our competitors and the availability of units in the market of each store. We raise rents based upon the longevity 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 a prospective customer when they call the store. We believe in empowering our managers to offer additional discounts depending upon the situation. Obviously, if a customer pulls up in a U-Haul truck, no discounts apply. However, in a telephone situation where they can tell a customer may be shopping, managers have the ability to go outside the dedicated pricing.
The way you keep the manager from giving away the bank is that approximately 25 percent of his compensation is based upon income collected and increases of the income on a monthly basis. So if a manager is tempted to "cut a deal," in the back of their mind 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 a considerable amount of time and money in obtaining. The second is to make sure the training is based primarily on customer service and particularly on the telephone techniques of the manager. We also do a large amount of referral marketing through the telephone and from visits to surrounding apartment communities within our markets. We offer bonuses to the leasing agent if they send a customer to one of our stores. We are also experimenting with cross-marketing agreements in certain markets with some of the quality apartment REITs. Additionally, we are experimenting with billboards and telemarketing to introduce new customers to self-storage and to increase our referral business.
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 an equilibrium with the acquisitions of REITs and other major players in equaling the new construction. 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 some bottom-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 than the 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 have certain return requirements, and those yields do not start with a nine. If we can develop and get 300 to 400 basis-point premium yields over similar acquisitions and get quality properties, why should we buy? There are very few markets where we have not had this discussion. We are prepared to use development as a weapon in certain markets where quality acquisitions are not available at a reasonable price.
At this point in time, the REITs and major players own a very small percentage of the total, but this amount will double in the next few years. The fragmentation experience in the self-storage industry is still greater than almost any real-estate type, but that will change in the future. I see this as becoming a much more professional industry with the implementation of additional technology and better-trained managers and owners versed in the art of marketing.