Owner’s Alert

Undercurrents That Facilitate Optimum Asset Values

A series of undercurrents influence executive decisions in the board room, especially with the myriad of asset classes and wide array of business models that permeate the self-storage industry. Some invest long term for a quarter of a century, while some have a five- to seven-year exit strategy in mind, and everything in between. There is no exacting process with so many various strategic nuances, but we can still visualize an outlined contour of some founding principles that lead to strong yields.

Begin With Underwriting
The underwriting process is where we will begin, because I firmly believe it can save time and money on the front end. Skillful planning through mapping out a thorough market analysis will help you project the property’s prospective rents and assemble a dynamic unit mix table. You want to realistically roll out a proforma that will translate into the real world. What looks good on paper may only look good on paper, and streamlining your market analysis based on the latest trends is tricky business. If you are not soberly approaching the underwriting process, it can stagnate the stabilization timeline. An example of this would be in context of your unit mix and prospective rents. These play a huge role in potential income for the property and are easily overlooked. Developing spaces that yield a higher price per square foot with less demand, rather than spaces that are in demand where supply lacks, reveals that you glossed over the due diligence. Maybe this error is not intentional. I know this is a tough one, because we like streamlined product roll outs, like a one-size-fits-all approach. But self-storage is not a cookie cutter business. Success materializes through regular recurring cycles of change and is a tailored creation that should support present and future demand, especially if you plan on penetrating new markets. My rambling point is that economic needs should drive innovation and not the other way around.

Pushing Rents
Another worthy attribute that gives headway to value deals with the ability to increase your price per square foot, in combination with pushing existing rents. Growing your economic occupancy is a quintessential step that will result in additional cash flow. Any decent operations team possesses this framework. There is only so much net leasable square footage on your land; as you absorb more occupancy, make sure you keep a hand on the pulse regarding revenue management. These revenue management systems are good to have in place, but they require a cunning adaptation based on the dynamic variables outlined below.

The table below is an example of a formula that gives insight into specific dynamics that help quantify good processes in place, whereby facilitating healthy revenue management practices. It is important to filter your algorithm with the art of human touch, because every market is completely different, and some facilities have a lesser or greater incremental approach. Coupling these data points with human discernment renders added texture to the elements. These elements give bearing on what eligible tenants receive what percentage increase and how often.

The idea here is to move the ball forward in shrinking your “Loss to Lease” or, in other terminology, your Occupied Rate Variance, while capitalizing on your “Actual Occupied Unit Rates”. This process eases your “Actual Occupied” closer to your “Gross Occupied”. Once your actual exceeds your “Gross Occupied Unit Rates”, your “Actual Occupied” will reveal a “Gain to Lease” versus a “Loss to Lease”. Essentially, you are doing a dance, swaying back and forth between recalibrating your “Gross Potential Income”, through boosting market rents, all while closing in on your “Gross Occupied”, through managing tenant rents.

This equation leads to fractional gains in your net rental income, in addition to long term increases that impact total revenue.

People Over Product
There is also a symbiotic relationship within your price per square foot, reciprocal in nature to your conversion percentages that imposes mutual respect. Measuring your conversion ratios is helpful, in that they weigh in on how well you are performing with in-store sales. If you are trying to increase your “actual rents,” it is crucial that managers close deals. This is where a “personnel assessment,” versus a “product assessment,” comes into play. Remember, we are discussing undercurrents that influence optimum asset values. Having a good product is substantial, but investing in the people who daily grind it out, owns equal, if not further, merit. As a business owner or leader, we should exemplify organizational balance by placing the just of our emphasis on people over product. There are few business models in which the success or failure of the business is so clearly and intricately intertwined with the manager’s skills, personality, customer service attitude, and common sense. Staffing needs to possess professional skill sets that directly contribute to the successful management of the facility every day. Cultivating these skills is ongoing, requiring energy, involving training, and constant goal setting. The effort must be intentional and strategically laid out. I have discovered over the years that your investment here will never return void! Once you know that you have a solid sales-oriented team in place, it will become easier to focus on financials as you scale up.

Robust returns are always directly linked to excellent stewardship in property management. It is the cornerstone that drives growth. There is more complexity in brokerage than simply dividing the net operating income by the capitalization rate in the valuation. A considerable volume of new supply has enveloped beyond that of the top 20 markets. Therefore, it is imperative to remain competitive in the marketplace by understanding the concept of upkeep as it relates to your product. The emphasis here would be placed more on stabilized assets of course. The condition of your property is important. It sounds basic, but it will help you negotiate from higher ground at the end of the day. Take a good glance at your repair and maintenance budget this year. Are you allocating the cost? This can potentially be indicative of how fit your facility is or is not. Don’t let this fee scare you just because it is above the NOI line. Skimping on routine repairs, simply because you did not figure it into your projections, is short-term thinking. I would argue this in a rural or tertiary asset class setting too, even in the face of less margins on your debt service coverage spectrum. My point is, make the right choice that will lead you to long-term profits. You can feel the pinch now by soberly anticipating this operating expense on the maintenance line or suffer on down the road. The last thing you want is excessive capital deductions from undone projects and/or being dinged on deferred maintenance items due to responsibilities that lingered unchecked at the point of liquidation.

Brand Awareness
The last point I want close with has to do with brand awareness. The best way to position yourself for growth after all the blood, sweat, and tears from either acquiring or building, is to effectively establish a connection with your target audience so that they are aware of your services and your brand. Utilizing current technologies can be a powerful vehicle to help you accomplish that connection. Diversify your communication platforms with aggressive online campaigns coupled with community-driven grassroots outreach campaigns to help you build a database of contacts to jump start traffic generation. One to three percent of your total revenue should be devoted to advertising. It takes money to make money. Investing in advertising will always result in your property becoming stronger financially because it drives action on the leasing front.     

In retrospect, each property’s growth has a flux in strategy from one market to another. Whether you are contending with stabilized assets or entering markets with new supply, your operational tactics should have an ebb and flow to them based on the seasonality and location of the project. There is a time and place for everything; it takes a team effort at the end of the day to see it all come to fruition. Hopefully, this outline will lend you an architectural footprint that reveals some key performance indicators that will keep your asset values staying financially strong and attractive. Cheers!

Cody Reynolds is regional director of operations for The Sterling Group, an Indiana-based real estate investment firm that specializes in self-storage and multi-family housing properties. The family-owned company owns and manages both property types, with a concentration in the Midwest and Southeast. Cody got his start in self-storage in 2006 and has held resident, area, and district-manager positions. To reach him, call (469) 955-2837, e-mail creynolds@thesterlinggrp.com, or visit www.ministoragedepot.com.