Ask Mike Burnam how his year's been going and he's likely to tell you he's weathered a storm; but blue skies are back in the forecast. In fact, despite the fact that he lost the battle to keep control of Storage Trust, a real estate investment trust that first went public in 1994, he's won the war and is back in business once again the way he likes it--far from Wall Street.
By his own account, Mr. Burnam, 46, is a self-storage guy through and through. After graduating from the University of Missouri and working a short stint in the Eli Lily division of Elanco in Illinois, he returned home in 1976 to work in the family real-estate business, 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 sizeable empire from scratch. In addition, Mr. Burnam became active in the Self Storage Association, assisting in the passage of several state self-storage statutes, serving on the central region board of directors, the national board of directors and, ultimately, as the SSA president in 1995.
That same year, things began to heat up, and Storage Trust embarked on its Wall Street adventure--a roller-coaster ride of raising capital, bowing down to investors, watching the 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 and tears. Still, he's grateful for the experience, and even more grateful to be right where he 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, his acceptance of the past and his clear optimism for the future. If you've spent any length of time with him in his 20-plus years in the industry, you already know him as a man of determination, vision, good nature, positive attitude and wit. Either way, we invite you to 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 a little history of the merger with Public Storage.
Well, in 1976, I came back into the business, and between that year and 1986 my father and I, and one partner, developed 14 self-storage properties around the Southeastern United 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 that real 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 my brothers and sister (Tim, 42, Kim, 37, and Chris, 35) back into the business, and formed a new company called Burnam Holding Companies.
Previous to 1986, the self-storage business was transacted on a limited-partnership basis that was all tax advantaged. They did away with all of the advantages, and so we started raising all of our money in times where every property had to stand on its own economically. All the properties that we developed between 1987 and the time we went public were strictly economic partnerships designed to make as much money as possible for our partners. We had 78 different partners in about five or six states, and built the portfolio from two properties up to 58 in '93.
We ended up going public in November of 1994 with 88 properties--our original portfolio, 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 new assets, which almost doubled the capitalization. From that point in time until the date of merger, we built the company from a $100 million market capitalization to a market capitalization 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 and raise $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 you have 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 that stage, we were midsize players with about 50 to 60 properties. To go public, you bet the ranch to do it. You mortgage everything you own and hire the best attorneys and the best accountants and you hope that you make it. We were very fortunate in that we were one of the 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 unique opportunity. From my standpoint, I wish I had paid better attention in my college corporate-finance classes so that I would have understood how this was supposed to be done. We knew how to run self-storage properties, and we knew how to build them, etc., but we 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 was to prove that we had somebody on our board that had public-market experience. So, we went after the best possible board of directors. We got some of the best and brightest people in 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 conforming ourselves into a public company, to make ourselves look like a company the public market understood.
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 operating the 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 did OK.
How did things go initially when you entered the market? What types of adjustments did you have to make?
For the first two years of going public, we were consistently at the top of our sector with 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 to how it performed this year, quarter over quarter. So, as a public company, you no longer operate 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 that you'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 cap rates you're going to buy them. Then, your success as a public company is based upon how well you attain those targets. The people who are the best guessers, win. It was a whole different evolution for somebody coming from the private side to public side to have to operate a business that way.
Were you intimidated by the prospect of it all? How does one from the self-storage industry bridge the gap?
No, because we still had good ole' self-storage to fall back on. We'd been in the industry for 20 years before going public. I've met a lot of wonderful people in this industry through the years as the past president of the SSA and up through the ranks with ISS and everybody else in this industry, so I always knew we could go back to those basic roots, which is what this business is about. You build the business from the lowest common denominator: how to best take care of the customer. As long you keep yourself in that perspective 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 the public markets, because they tend to look down at self-storage as compared to big fancy office buildings or apartment complexes or research development or strip centers. They look at self-storage as the red-headed step child. You need to put on your ego when you talk to these people. You may walk in the door right after that office-building guy was there telling them about how beautiful his office buildings are. You might walk in and say, "Hey guys, I've got these buildings that have all these doors on them, and we rent them for lots of money and don't have much maintenance. But, we put more money to the bottom line." And that is the lowest common denominator for them.
What was happening in the marketplace and with Storage Trust previous to the buyout period?
First, you need to look at the whole picture and understand the fragmentation that is very evident among the self-storage owners; meaning there are lots of small, independent operators around the country. The consolidation that took place between '94 and '97 basically funneled billions of dollars into the public companies to go out and buy properties. And, so long as the public and institutional buyers of REIT stocks remained happy 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 basic economics of supply and demand took over, and because the capital was available, they started paying a little too much for properties. At the same time, if you can't get your yield in the acquisition properties, you have to get them through internal generation of yield, which means you have to push rents.
In our case, in 1996, we had gone through and had six or eight great quarters. We saw the acquisitions dropping off, but we couldn't buy great properties at good yields anymore. So we figured we had to start pushing internally. We pushed rents so hard that we actually started dropping occupancies. When you start doing things like that, the public market gets very upset. For three quarters, we were in the cellar of our sector, with almost 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 to help 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 the demand for that storage unit. The situation forced us to become more technologically advanced 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 were pushing ourselves. We had bought some nice packages of property and were building a major presence in several major markets but, unknowingly, we had painted a big target on ourselves. In 1997, Harvey Lincoln came to us and said, "Why don't we go and make a very 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 was the best thing for our shareholders at the time. Still, we maintained a very friendly posture and said, "Thank you very much. We're honored that you've considered discussing these things with us, but it's not the direction we want to take the company at the 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, and I 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 of property that were very undervalued as a result of the RTC days, etc. But they truly were growth 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 have known that it really couldn't happen. Real estate is not a growth industry. It never has been, and never will be. It is an income-generating industry. We take huge amounts of capital and deploy it into big assets that have the capability of creating a long-term income stream. But, everybody forgot that. We're all coming full circle back to understanding that now, though.
Part of what was taking place this whole time was the capital markets were so enamoured with growth stories they were being told that they were just throwing huge amounts of capital. But when they started realizing that they can't continue this double-digit growth, the capital markets started drying up, and so did acquisitions as the price for good properties became too expensive. You couldn't get the yields, and therefore, all the numbers 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 REITs meant something was going to happen to one of us. We had just taken down a major portfolio, had purchased it in a very heavily bidded acquisition that was in Chicago. We beat Public Storage out of the acquisition, and I think that painted an even bigger target on our back. At about the same time, everybody's stock price started taking a hit, and it became very simple mathematics: It became cheaper to buy a company on Wall Street then to buy 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 they didn'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 were forced 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 they picked the most perfect time--ever--to go through and make this offer. Almost simultaneous to 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 a two-sentence offer. Nevertheless, even when you're dealing with somebody as strong and as honorable as Wayne Hughes, you don't accept a two-sentence offer. Therefore, we were forced to put into effect a system called a poison pill--which forces the bidder to negotiate in a business-like manner, instead of a hostile takeover.
We hired Merrill Lynch to look at our strategic alternative. Whenever you see that a company has "retained council to look at strategic alternatives," that is synonymous with hanging a "for sale" sign on it. But you hire the investment bankers to look at your alternatives and open up communication. In our case, our board felt that we were too emotionally attached to our company. Therefore, all negotiations were taken out of our hands, and we were only involved peripherally. Logic will tell you that this is probably the legally and morally correct thing to do. But from a real-estate-guy point of view, who can best sell your property, somebody who doesn't know it, 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, we swallowed our own poison pill. We had given up a lot of rights as independent business people when we went public. It was not an easy thing to do, but it was the right thing to do.
I still would have loved to have been able to sit down and negotiate because what took place during negotiations was that while the CMBS markets went into collapse, the stock market on REITs likewise started going down. And so the timing was absolutely perfect for Public Storage. Wayne Hughes is one of the smartest guys that I've ever met. He did everything right in his negotiations.
After operating under this cloud of strategic alternative for several months, you can imagine what it was like for our employees--being taken over by their most dreaded competitor was the way they looked at it. To us, it was just another company, but they were scared to death. We were operating under a high degree of stress ourselves, and our board felt it was time to act. Finally, we decided to strike an exchange ratio. Then the argument 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 nearly high enough. We had a lot more to lose than anybody else on the board, but the entire board represents all of the investors, not just us. Nevertheless, there was a majority vote, 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 a share. 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 the company. Hindsight being what it is now, we're much better off, personally. Still, the hardest thing we had to deal with was all of the people--our 600 employees. We operated on a very personal level with all of those people. And we operated the company much differently than how Public Storage operates a company.
What was Public Storage seeking to accomplish--diversify its portfolio, have more dominance in the market, or what?
Well, they didn't diversify; they acquired dominance. For the properties that we bought during the first quarter of last year, they paid about 80 cents on the dollar for them by buying our stock--because they bought us at one of our lowest trading dollar amounts for a year. That's just the way it happened.
They did what was the smart thing for them. They have all of their shareholders to think about, too. You have to make the decision, not based upon long-range thinking, but based upon what is happening right then. At that time, the Russian ruble was going in the dumpster, Asia had the Asian flu, the market was going in the tank. Our board was forced to make a decision about which company would prosper. In periods of downturns, the market always migrates to size and quality. Public Storage is, I believe, the fifth largest REIT ever, of all of the REITs. They are really big. If you combine all the other self-storage REITS together, they're still not as big as Public Storage.
After the merger took place, if you overlaid our properties and Public Storage's properties, you would see some definite outlyers, places where we had properties and they didn't. They are very much a dominant market player; meaning they wanted to come in and dominate a market, which we did, but on a smaller scale.
Tell us about your newest ambition--StorageMart. What's on the horizon for this new venture?
We're going to do it all again. Not go public--that is a third on the list of potential exit strategies, if you will. But, having the comfort now that once you've gone public, we know 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 of this year with 600 employees, and opened up March 15 with eight. After the closing, we had the opportunity to go through and buy back some of our old properties that were in non-common markets with Public Storage. Just recently, we closed on a transaction of 14 properties that we're buying back. From those 14, we've built up to 23 properties, just 60 days after closing. So, a lot has taken place.
We're also managing an additional nine properties, and four properties are under contract for development. Our business plan for StorageMart entails going back into 10 major markets in the country, establishing a dominance presence of seven to 15 properties in 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 national buyers are, we want to be prepared to flip our portfolio on a market-by-market or an entire company basis when the time is right. We're getting ready to raise $50 million in the 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 the self-storage industry?
Oh, I knew all along. This is the only real-estate business that we'd ever want to be in. I have so many friends in this industry, friends who called and gave me support and said we, at Storage Trust, had done it right. We had a lot of investors call us and say we could have gone through and made this a real tough transaction, but long-term, this will be 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 we had 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 and depending upon when areas are right for sale--whatever we can do to make the most money for our investors. Plus, based on our experience, we're doing consulting and startup services. If somebody wants to do a site, we'll come in and do the design work, all the proformas, 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 20 years and will continue doing that ... helping people get into the business, helping them do it the right way. This really is a great industry made up of some wonderful people. I'd never consider doing anything else.