The self-storage real estate investment trusts (REITs) do more than just operate their own businesses. Some of them also offer business solutions to smaller operators including third-party management services and industry exit opportunities. Here are some things to consider if you’re planning to hire a REIT to manage your facility or you’d like to sell your property to one of these publicly traded companies.
Third-Party Management
The decision to turn over the day-to-day operation of your storage facility to a management company should come only after intense research, consideration of your long-term goals and an understanding of what you hope to gain from the relationship. Then the real work begins. You must decide which firm will best meet your needs and desires.
With many great companies in the industry from which to choose, the task may seem overwhelming. An owner must determine if a smaller company is the right choice or if he’d like to capitalize on the brand name and economies of scale that come with larger teams. Three of the four publicly traded REITs—CubeSmart, Extra Space Storage and Sovran Self Storage (Uncle Bob’s)—offer management services, which can bring an independent operator new growth opportunities, an expanded Internet presence and greater revenue.
Management by a REIT comes with a number of benefits, in large part because of the firm’s sheer size. A bigger company translates to better economies of scale on many fronts including marketing, manager hiring and training, and other operational tasks. “These benefits translate into higher occupancy, revenue and net operating income,” says Guy Middlebrooks, vice president of third-party management for CubeSmart.
REIT management companies are also backed by a big name. “The property instantly becomes part of a nationally branded storage provider with a solid reputation. The owner may then take advantage of the breadth of the REIT’s marketing, revenue-management and technology capabilities at a fraction of the cost of attempting it alone,” says Dale Payne, client relations and sales manager for Uncle Bob’s Management. “Further, the audit controls that apply to a REIT also apply to the stores it manages. This provides an owner the peace of mind that his facility is being watched with a high level of scrutiny.”
When real estate investment firm NitNeil Partners began its search for a management company to oversee its new facility in Chattanooga, Tenn., its executives sought a partner with a national presence under a single brand name. “The REITs had the technology, marketing and management infrastructure necessary to keep our properties competitive in their respective submarkets,” says Neil Sapra, principal.
Ultimately, NitNeil turned to Uncle Bob’s to operate the property. Giving up control of the day-to-day operation freed NitNeil to focus its time and resources on developing new properties, Sapra says.
Similarly, Johnson Development Associates Inc. turned to CubeSmart to oversee its American Storage Rental Spaces brand. “By using a REIT to manage our facilities, we are able to leverage their platform and experience to manage our stores in a very competitive manner,” says David Berry, asset manager. “The access to the REIT’s marketing and revenue-management professionals provide our facilities and employees with the tools necessary to compete with all other facilities in the market place and region.”
Another bonus to hiring a REIT management company is obtaining a “second set of eyes” on the property, Berry says, to ensure it stays in superb shape and capital improvements are well-funded and not overlooked.
Finding the Right Partnership
Even with all the potential benefits, hiring a REIT to manage your multi-million-dollar asset should be based on more than a brand name and potential cost savings. Naturally, you should seek a company that has a proven track record of success and has shown steady growth year over year; but there’s much more to it.
“Occupancy is only one component of the equation,” says Noah Springer, vice president of strategic partnerships for Extra Space. “Operators need to look at the sophistication of the third-party management company’s operation—strength of online presence, ability to drive rates to achieve optimal occupancy, field personnel availability, skills, training and corporate support.”
Because the fee schedule—which is generally a percentage of the business’ revenue—among REITs and independent management companies is fairly comparable, owners looking for a partner can instead focus on finding the right fit, rather than scrutinizing out-of-pocket costs.
“Look for a third-party management company that considers you a partner, not a client,” Springer advises. “It’s critical the operator really understands how the management company operates. A good management company will have proven proprietary systems in place so they are not experimenting with your facility.”
Springer also suggests owners consider the company’s operational footprint. “The right management company for you should currently operate in your area or within a short drive from your facility,” he says. “If it doesn’t currently have properties in your market, it probably isn’t the right fit.”
Costs and performance aside, the true factor to choosing one REIT over another lies in the nitty-gritty details. “Relationships are key for working with a third-party management group,” Berry says. “Make sure the relationship is a good fit for your organizations. Be sure not to solely focus on revenue or budget projections provided by the third-party group management group.”
Sapra suggests owners visit the corporate offices and spend time with any personnel with whom they’ll be working on a regular basis. “Each REIT has a different approach to management. Determine which one is the best fit on a property-by-property level,” he says. In addition, ask the company for references so you can get a first-hand account of how it operates and other feedback from its current customers.
Owner Expectations and Input
As with any partnership, owners who hire a REIT should have certain expectations. This will depend on several factors, including how much involvement the owner desires. While some like to have a bit of skin in the game, others feel comfortable turning over operation completely and only seek to be updated on the property’s progress.
“An owner can choose to be completely hands-off or take an active role in the management of his facility,” Middlebrooks says. “This allows the owner to focus on growth, development, acquisitions or spending time away from business.”
In general, the management company should keep you apprised of revenue and expenses, ongoing maintenance or property improvement, competitive market analyses, and staffing concerns. The key to a healthy long-term partnership with your management company is understanding its responsibilities upfront, Berry says.
REIT as an Exit Strategy
There’s yet another component to consider in the REIT-owner equation: potentially selling your business. Often, owners who’ve partnered with a REIT on management will consider the company as their first potential buyer when it comes time to sell their facility. Having an established relationship—and being satisfied with the results—can make the transition from owner to seller a little easier. In addition, a REIT may be more inclined to consider the acquisition if it’s currently managing or has previously managed the property.
Regardless of whether an operator has previously partnered with a REIT, he may consider selling to one when the time comes. He should be aware of the attributes these big players seek when looking for a new investment, including market demographics and property profiles. At the top of the list is a coveted location in a major market. All of the REITs have some presence in just about every large city, so adding a second or third location in a specific market requires a highly desirable property.
“The old real estate mantra is still strong, ‘location, location, location!’ We look for sites that are well-positioned in the market, near central-business districts and other retail corridors, and close to multi-family and densely populated residential neighborhoods,” says Zachary Dickens, senior director of acquisitions for Extra Space.
REITs also seek properties that show growth, or at least have the potential to generate solid revenue. “We love turnaround opportunities, but we’re also exceptional at taking a highly occupied property to the next level—both from an occupancy standpoint but, more important, from a revenue perspective,” says Michael Rogers, vice president of real estate and asset management for Uncle Bob’s.
Getting on the REIT radar for a possible acquisition takes what most owners are already doing—running a successful operation. “An operator considering selling to a REIT should ensure the physical condition of the property is superb, delinquent tenants are vacated, financial records are tidy and deliverable, and the tax consequences of a potential transaction are understood prior to embarking on the process,” says Jonathan Perry, senior vice president of investments for CubeSmart.
Then all it takes is a phone call. “Simply reach out to the REIT via their published Web-based address or by telephone to begin the conversation,” Perry says.
The UPREIT Option
When it comes time to sell your storage facility, there are more options available than just the traditional buy-sell transaction. One alternative method is the use of operating-partnership (OP) units. When a REIT operates as an umbrella partnership, known as an UPREIT, investors have the opportunity to own OP units, which represent limited-partnership interests in an operating partnership that owns the properties.
Typically, one unit is equivalent to one share of common stock in the REIT and, at the discretion of the seller, is convertible into common stock. “Each OP unit receives the same annual distribution, the dividend, of income as a share of common stock, and has the same upside or downside potential as shares of common stock of the REIT,” Rogers says.
The principal benefit of opting for an OP sale is it allows an owner or investor to receive OP units instead of cash or REIT shares and defer his tax liability until he exchanges them for REIT shares or cash, says Charley Allen, chief investment officers for Extra Space. “In most instances where a traditional REIT has competed with an UPREIT to purchase property, the UPREIT usually ends up being the successful buyer if the seller seeks tax deferral.”
The selling option is beneficial to both the owner/investor and the REIT looking to purchase the property. “UPREITs and OP units offer buyers and sellers a unique tool to allow for advanced tax planning, and allows Extra Space Storage the opportunity to work with sellers to work out a transaction that is as unique as the property itself,” Allen says.
Whether you’re looking for a short-term solution for the daily management of your storage business or thinking ahead to the day you sell, the industry’s REITs offer a number of options. Ultimately, your goal is to find the right fit for your business, your family and your future.
