I love the self-storage industry. There are so many ways to make money, and some of the smallest facility improvements can really drive valuation.
My company recently acquired a storage facility and is in the process of transitioning it from a single-owner operational model to our multi-facility, process-driven model. As with all change, it’s been difficult because the two managers have their own way of doing things, but they aren’t optimizing operations.
Case in point: Recently, in walking the property, I noticed a bright orange tractor sitting alone in a 10-by-25 unit. I thought it was strange. An hour later, I saw our maintenance guy driving it around, so I knew it was ours, not a tenant’s. This facility also has a large shop where we store tools, the golf cart, and our inventory of packing and moving supplies. While it was decently organized, I thought we could do better.
Later that day, I asked the maintenance guy if we could reorganize the shop to fit the tractor and free up that 10-by-25 for rent. He protested a bit, but the next day, it was done. We now had another unit back online. The whole conversation only took a minute, but it earned us nearly $17,000 in facility value. How?
That unit rents for about $150 per month, or $1,800 per year. Assuming a 35 percent expense ratio, that puts our net operating income (NOI) on the unit at around $1,170. This facility is the nicest and largest in the market, but it’s a secondary market, so we figure an exit capitalization (cap) rate of 7 percent. When you divide NOI by the cap rate, you get $16,714. Not bad for a 60-second conversation! Now, here are two lessons self-storage owners should glean from this experience.
Lesson 1: Know Your Facility
Most likely, your management staff doesn’t have a full picture of the operational finances of your facility. Most don’t understand cap rates and real estate. They have no idea how much small things affect valuation. By being on site, walking the property, getting your hands dirty, you’ll be able to identify areas for improvement.
For example, during another site visit to the facility mentioned above, I got an opportunity to see it during a torrential downpour. I went out and looked around. Was it miserable? Yep. I was freezing and got soaked; but I also got to see how all the property drains work under the worst conditions and other rain-related issues.
My firm operates storage properties all over the U.S. and we can’t be there daily. When we take over a site, we make it a point to have boots on the ground as much as possible for the first 90 days and then at least quarterly thereafter. How else do you get to know your facility, especially if you’ve just purchased it? If you’re a real estate investment trust and have resources upon resources, then sure, you have property insight all over the place. For those of us with smaller operations, it’s up to us. The goal is to discover what you can do to quickly implement improvements and drive new revenue. Here are a few tips:
1. Identify all units that aren’t producing revenue. At lot of mom-and-pop operators use several of their own units to store whatever. At one site we purchased, we discovered that one of the best climate-controlled units was being used to store the facility’s old electronics. Straight to the dumpster it went! How many units are being discounted for the previous owner’s friends and family? Well, they’re not your friends and family. I’m not saying to throw them out, but you aren’t obligated to continue those discounts.
2. Compare the number of delinquencies to late-fee revenue. Your facility manager may be waiving late fees. Except for extenuating circumstances, we don’t waive fees at our facilities. When we do, it’s only for customers who haven’t been late at all in the previous year. Late fees can be an easy source of significant revenue, hence value.
3. Make sure you’re selling tenant insurance or a tenant-protection plan. Both can be a great source of revenue and will protect you and your customers when disaster strikes. These programs are easy to implement, and there’s usually very little resistance on either side of the counter.
Lesson 2: Prep Your Staff for Change
Change is hard. No one likes it. As a matter of policy, we don’t do any staff changes at an acquired self-storage facility for the first 90 days unless we absolutely must. We always give the current managers the opportunity to adapt to our way of doing business.
The facilities we purchase are usually mom-and-pop sites that have been owned by the same owner for many years. In every case so far, we’ve found our operational model to be difficult for existing staff to embrace because it’s such a change from their current way of doing things. Most owners just don’t spend the time and effort to truly maximize operations. It’s extremely tough to eke out that last 10 percent of performance.
Make no mistake: When you purchase a facility and keep the staff, you’re leading a change effort. We use Beer’s Law to guide our process. Simply stated, the law says that to overcome the resistance of the status quo, you must first create dissatisfaction with the status quo; next, you provide a model (vision) of a desirable future state; finally, you provide a process or plan for the change.
We walk the staff through our transition plan and allow them to comment and give input. This increases the probability for buy-in. Then we talk them through the implementation process. This allows them to visualize the entire journey and what the end state will be. Finally, we show them how the new systems and processes will eliminate pain points. I’m not going to say this is full-proof, but so far it’s helped us make the transition less distressing.
Knowing your facility inside and out and having a solid plan to manage the transition will enable you to find small things that can add up to huge valuation increases—and fast. In a one-minute conversation with my maintenance manager, I discovered something that ultimately allowed us to add nearly $17,000 to facility value. What can you find at your property?
Scott Lewis is the co-founder and chief executive officer of Spartan Investment Group LLC (SIG), where he’s responsible for developing business strategies and overseeing all operations and business activities. Scott has led several successful real estate projects ranging from single-family flips to ground-up self-storage developments. He’s also a major in the U.S. Army Reserves and a veteran of Operation Iraqi Freedom. SIG has completed $9 million in development projects, with $70 million underway. For more information, call 866.375.4438; e-mail [email protected]; visit www.spartan-investors.com.