In less than six months, Self-Storage Talk (www.selfstoragetalk.com), the self-storage industry’s newest online forum and community, has surpassed 2,000 member posts. Launched in January by Inside Self-Storage (ISS), this free, interactive website allows users to share information, ask questions and network with community members.
 
Site participants discuss a diverse range of industry issues, from day-to-day management challenges to legal questions to construction- and development-related items. Self-Storage Talk also includes state-specific forums in which users can communicate about issues and developments within their local areas, and forums for several countries outside the United States.
 
Participation involves a simple registration process in which members create a username and password and provide a valid e-mail address. Once registered, they can create new or respond to existing threads on numerous self-storage topics, including customer service, collections, staffing, insurance, financing, software, lien sales, marketing and more. They can also post photos of self-storage projects, highlight facility employees, share tenant horror stories and exchange info on educational resources.

ISS has provided the self-storage industry with publications, tradeshows and education for more than 17 years. In addition to Self-Storage Talk, it operates Inside Self-Storage Expo and the Self-Storage Training Institute. For more information, visit www.insideselfstorage.com.

U.K. self-storage provider Big Yellow Group reported financial results for the first quarter of 2008, with a 7 percent increase in profit. Revenue of the 32-facility portfolio for 1Q was £14.5 million, up from £13.5 million a year earlier. The average rental rate per square foot increased 9 percent. Average occupancy of all stores dropped to 1.81 million square feet from 1.82 million in the same quarter of 2007. For more information, visit www.bigyellow.co.uk.

If I could offer you a product to substantially increase your ability to easily collect rents every month, with the potential for less “missing” money and mistakes, would you buy it? Ironically, it’s not for sale, and it may be something already in your office, but you’re afraid to use it. What is it? It's a request for tenants to provide credit/debit card numbers to pay rent.

Before you say, “There’s no way renters will pay by credit/debit card,” you’ll want to read the results of our client survey. Moreover, you’ll need to learn the right way to request and get a credit/debit card number.

Jim Chiswell has always called this “the guaranteed no late-fee program,” because you can sell the idea of requiring a credit/debit card two ways. The first is a flat-out requirement that a card number be provided for monthly rental charges. Along the East Coast, the practice has been commonplace for several years. However, you can also take a credit/debit card number under the pretext of protection against late fees (the guaranteed no late fee).

Here’s what tenants are told by managers: “We keep your card number as a service to you. Your credit/debit card is only used if rent is late. Let’s say you get sick or must travel and forget to pay your self-storage bill. Before you know it, you could owe a late fee, maybe an overlock fee, lien check fees, letter fees, you name the fees. The charges are all small, but they add up quickly.”

Some storage owners create a document that explains to tenants “the high price of being late” as another means in which to coax a card number from them. Unfortunately, some facilities may have clientele that does not have or will not give a credit/debit number but, realistically, that population is getting smaller by the day.

Consumers are accustomed to having to provide credit cards for services. Have you tried to reserve a hotel room or rental car? Perhaps you’ve rented a tool from your local hardware store. Not one will rent to you without getting all the necessary information, including a credit/debit card number. Yes, sometimes it’s possible to secure services for a large cash deposit, but for some, that’s not an appropriate measure.

The On-Time Rent Payment

A credit/debit card gives you the closest guarantee to on-time rent payment and, because numbers are programmed into your software, there’s less chance of misappropriation of occupant funds. Software reports reveal how many accounts are charged and the amount deposited each by date, making record-keeping a snap.

In the past, we typically prepared rental agreements with a credit/debit card addendum: a place for the operator to “offer” the occupant the convenience of credit card payment. However, for the last several years, we have actually been requiring a credit/debit card to pay rent or “back up” late payments in the language as an included provision.

As you know, many people signing a self-storage rental agreement have mentally committed to renting from you; the truck may be outside idling, and they need to get property moved in. This is the perfect time to “ask” for the credit/debit card number, as if it is required. Do you have to require a credit/debit card? Certainly not, but you can give the appearance it’s necessary to move on with the leasing of the premises.

Recently, we began informally polling clients using the “built-in” provision for credit/debit cards rather than a separate addendum and have discovered that compliance has jumped dramatically—from 25 to 75 percent—merely by making a provision part of the rental agreement.

The change could be due to the tight economy, increased acceptance of providing credit card information, more sophisticated operational procedures, better software, etc., but it’s possible that by making it a requirement tenants will simply abide. Few people walk away from a rental car counter or hotel because a credit card is needed; the same could hold true for self-storage.

Yes, the added step of collecting card information may be a drag for managers to enforce, so consider rewarding them for every rental agreement they obtain with a valid credit/debit card. Remind them that this one step could save them from late-fee headaches later on. Plus, it frees them up for other activities—marketing and the like.

Consider speaking to your attorney about adding a provision that makes a credit/debit card a requirement to your rental agreement. It’s a simple idea but can be very beneficial.

This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.

Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati, representing owners and operators of commercial real estate, including self-storage. He is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail [email protected].

Marcus & Millichap, a nationwide provider of real estate investment brokerage services, released its Special Research Report for mid-year 2008, which provides an in-depth analysis of the economy and the fallout from the commercial mortgage-backed securities market. It also contains forecasts for the four primary commercial real estate property types: apartment, retail, industrial and office. The report is intended to assist clients in developing future investment strategies.
 
Marcus & Millichap provides research reports for numerous investment-property types through the “Research Services” page of its website, www.marcusmillichap.com. For details on a particular market, contact a local office and speak with an investment specialist.
 
For more information, contact John Chang, national research manager, at 602.952.9669, ext. 669, or [email protected].

Many self-storage managers have the distinct advantage (or disadvantage, depending on how you look at it) of living on the property where they are employed. If this applies to you, I hope to give you some hints on how to make your home and business just a little bit nicer. For the most part, management companies concentrate on the business and sometimes forget that an onsite apartment’s maintenance can be just as important as maintaining the storage facility.

Open and Shut Case

Let’s start by looking at what I call the seals. Windows and doors are main areas where blowing dust and dirt can penetrate if the proper seal is not maintained. Start by checking around windows for caulking that has cracked or been penetrated. If necessary, I recommend removing the old caulk and starting fresh. Be sure to buy quality product and apply it meticulously. If done correctly, it’s possible to prevent dirt and debris from coming into your home/office and will save money on heating and cooling. Mention these points to your owner to justify the work.

How about your door openings? Again, check to see they are properly set, thresholds are firm and all screens and windows are in good shape. If a screen or window is torn or broken, now’s the time to replace it. If your threshold is not properly seated, install a new one. These tasks are relatively simple, and your local hardware professional can provide proper instructions on how to replace them.

If you live in a particularly dusty environment, contact your local heating-and-cooling contractor about duct cleaning. Each year I have a company “vacuum” the ducts to remove dirt and dust, which helps my air-conditioning unit and heater work more efficiently and longer.

Of course, I also maintain a regular monthly schedule of changing return-air filters (usually, my electric bill reminds me). Based on advice from several contractors, I use a good but inexpensive filter, which goes a long way in keeping the premises fresher. Last but not least, have your heating and cooling systems checked annually by a professional. The service cost is easily justified when one considers the price tag of a new unit. A quick checkup can prolong the life of your system for months, even years.

Pesky Critters

I also take a monthly tour around my house on the lookout for unwanted birds, bees and wasp nests. Armed with my can of spray (check with your local pest-control company for the best kind), I cautiously destroy any bee or wasp nests under my roof eves. If I have birds’ nests, especially invasive woodpeckers, I relocate them to safer quarters where they can’t harm my home.

The same goes for rodents (such as pack rats or mice) or reptilian creatures (snakes and lizards). It’s amazing how these critters can make your home theirs. They’re fast to set up residence, so be sure to check regularly and act promptly. Of course, use caution in doing so. If this task makes you uncomfortable or jeopardizes your safety, call your local pest-control company pronto.

Walkways and Driveways

Don’t forget to put your personal sidewalks and driveways on your maintenance list as well. Cracked asphalt allows water to permeate underneath and compromise the structure. Filling the cracks is an easy application process—a quick do-it-yourself project—that goes a long way in preventing further decay and people tripping and hurting themselves. If this is beyond your skill level, contact a local masonry contractor for professional service.

While I’m checking the sideways and byways of my property, I also take the time to freshen up planters with new flowers or plants. It’s amazing how many people will take notice of these, especially during the spring and summer.

Last Steps

The summer is the best time to inspect water valves, too, checking for exposed piping and damage that occurred over the winter or spring. I keep an eye on all irrigation connections, valves and sprinkler heads, replacing them if needed. Check around the water meter for leaks. If something is awry, repair it immediately. This simple step can save hundreds of dollars.

Finally, make sure electrical wiring is not exposed anywhere. Even properly installed wiring can make an appearance now and then. While you’re at it, check all exposed conduit and assure it’s still in good shape.

After a good week of fixing and inspecting, I plan on sitting on my front porch with a cold beverage in hand while my wonderful wife fixes up the hot dogs, baked beans, corn on the cob and, of course, freshly cut watermelon. Even if she doesn’t, I still know our home has been maintained and is ready for us to enjoy this wonderful time of the year. I hope you can do the same, in your own self-storage home.

Mel Holsinger is the president of Tucson, Ariz.-based Professional Self Storage Management, which offers self-storage facility management, consulting and development services. He is also a frequent speaker at industry conferences and a regular contributor to Inside Self-Storage. For more information, call 520.319.2164; visit www.proselfstorage.com.

Self-storage is increasingly considered an investment-grade sub-sector in the European market, thanks to industry growth and the success of the major operators. The business is fundamentally a retail operation that is closely aligned to the real estate from which it operates. This relationship has been recognized by the broad range of investors who have tried to gain access to the self-storage market in the last 12 months, seeking to align themselves with more profitable operator income vs. conventional property returns.

Recent evidence has shown that storage operators are prepared to pay more for a well-located site than traditional investors and developers of industrial real estate. This demonstrates an ability to achieve a sufficient return on capital to cover costs. Any over-payment for land is made on the presumption that a storage operation will generate greater cash flow than conventional businesses, particularly once occupancy has stabilized and created a greater value as a real estate investment.

Performance

In recent years, property has delivered strong investment performance against other asset classes. The occupational basis of the storage business means its performance is linked to that of the wider real estate market. Total returns in the U.K. property sector have slowed in 2007, but previously, there had been continual downward pressure on yields. For self-storage businesses and investors, this meant a higher entry price and greater competition for well-located properties.

In recent years, we’ve seen significant capital flowing into the U.K. commercial real estate market from local and foreign investors. This has served to increase competition for assets and further depress yields. It was not until investors began to question forecast returns early in 2007 that this changed, compounding the recent turmoil in the U.S. sub-prime mortgage market and ensuing “credit crunch” and, as a result, re-pricing.

The U.K. self-storage market should not be affected by the slowdown in the real estate market (though falling real estate prices will be welcomed by operators). Over recent years, storage properties have outperformed others and sustained returns. Management teams have been able to actively manage assets to achieve maximum occupancy and rental rates.

Management

The result of the growing awareness of self-storage is it is gaining momentum with investors. Where traditional real estate assets have re-priced against void risk, self-storage businesses continue to thrive, benefiting from the opportunity and cash flow generated by risk management.

But because storage is a retail business, the importance of the management team increases in line with the risk related to sales/leasing. In this way, the quality, experience and capability of a facility’s managers act as a “guarantee” for an investor that can’t rely on traditional real estate returns.

Real estate investments traditionally rely on long-dated leases with term-specific rent reviews to lower a property’s periodic cash flow; when the economics of divesting the property become more attractive, the property is sold. By contrast, self-storage operators can actively and periodically manage rental rates. Yield management combined with the physical management of space is why self-storage easily outperforms traditional real estate.

The Issue of Valuation

As a property-centric retail business, self-storage is unique, and surveyors have tried to assess facility value using standard property-valuation methods. But because storage businesses are operational platforms, it can be argued that corporate-valuation techniques are more appropriate, even for a single site.

Perhaps the most widely adopted valuation method is discounted cash flow (DCF) analysis, which is used to value all types of assets. Both surveyors and mainstream investors seem comfortable with this technique.

However, the inputs are open to manipulation to produce the desired result. Most influential is the discount rate applied to future cash-flow receipts, which provides the present cash-flow value. The discount rate estimates the required return of an incoming investor; typically, this is a function of the weighted average cost of the buyer’s capital (i.e., the weighted average of debt and equity finance). Perhaps the more controversial component is the value of the property at the end of the investment period, or the terminal value.

The discount rate is comprised of three elements: the risk-free rate of return, the risk premium and implied revenue growth. The risk-free rate of return is typically a long-dated government bond (30-year term) and relatively easy to quantify, fluctuating with the bond market and strength of the national government where the property is located.

The risk premium is the most difficult and subjective component to estimate, as each investor will have a different return requirement depending on an investment’s perceived risk. Therefore, it is only by comparing the relative returns produced by other investment classes that an investor/surveyor can deduce the risk premium. In addition, most forecast cash flows will include an allowance for the risk surrounding cash-flow growth and the resulting terminal value. Similarly, this risk can prove difficult to quantify.

This is for two reasons: First, the terminal value is predominately calculated on the final period’s revenue, which is potentially an inaccurate forecast depending on the length of the investment horizon (it could be 10 years away). Second is the use of a discount rate to derive the terminal value (commonly the discount rate less the anticipated long-term growth rate). The capitalization rate could be unduly reduced by a high growth rate, increasing the terminal value. The rule of thumb in calculating the long-term growth rate is it should not exceed the average of the final few years nor any individual year leading up to the end period of the investment.

EV/EBITDA

A simpler and sometimes more appropriate valuation method often overlooked by property professionals involves comparing a self-storage business to recently sold peer companies or existing businesses, based on the readily comparable public/private ratio of EV (enterprise value) as a multiple of EBITDA (earnings before interest, tax, depreciation and amortization). This is a standard methodology used to value businesses across industries. It measures the EBITDA produced relative to the adjudged EV. While more suitable at a corporate level, each property is essentially a satellite business producing its own revenue, so the multiple measure could be applied (with some adjustment) to individual properties.

Two issues must be considered with the EV/EBITDA method: the calculation of EBITDA and the ability to draw on good comparable evidence. Accounting practices standardize the calculation of EBITDA, but the actual principles employed by companies can differ. Therefore, to accurately evaluate the multiple, the accounting method used by each company should be clear.

In self-storage, market information is difficult to obtain, and comparable analysis can be limited to larger public operators. The accuracy of the data can also be a problem.

Practical Examples

Recent U.K. self-storage transactions, including the Safestore IPO (initial public offering) and the private sale of Space Maker, prove investors recognize the superior returns produced by quality self-storage businesses. Both transactions involved strong pricing, affirming the cash-generative ability, risk spread and growth potential of the industry.

As of August 2007, stock-market turmoil and credit-market difficulties had pushed Safestore’s share prices to approximately 25 percent below listing price. But both Safestore and Big Yellow, another significant U.K. operator, were given “buy” status by City analysts, demonstrating how robust and attractive their free cash flow should be to investors.

Space Maker is one of the top 10 operators in the United Kingdom, operating predominately in South and Southeast England. The business offers a strong platform for growth. Its value was assessed using various methods, but centered on the DCF approach. The company sold for an EV/EBITDA multiple approaching 18, suggesting that investor sentiment for U.K. self-storage storage remains healthy.

This level compares favorably with Safestore’s EV/EBITDA multiple of 18.2. Interestingly, Big Yellow trades on a higher multiple, indicating the market attaches significant value to the development pipeline and land bank of the company, which offers significant and secure growth potential.

The U.K. self-storage industry is more than likely set for a general consolidation in the next few years. The acquisition of Space Maker by Babcock & Brown, the Australian investment fund, could be the first step toward global consolidation of inter-country or inter-region brands. There are indications that a number of smaller operators are considering exit opportunities, which will be welcome news to those players seeking secure geographical dominance and expansion.

The consolidators see the value in existing operational businesses and are able to apply appropriate valuation methods. Consolidation and organic expansion will become increasingly important, and the accretive value of good operators to the larger players will fuel the growth of this exciting sector.

Tim Edghill and Chris Stevens are with Jones Lang LaSalle Corporate Finance, which provides comprehensive mergers and acquisitions, restructuring and financial-advisory service across real estate sectors. Mr. Edgehill has more than 15 years of experience in real estate and finance, and can be reached at [email protected]. Prior to joining the company, Mr. Stevens was a property finance account manager with a New Zealand bank. He can be reached at [email protected]. For more information about the company, visit www.joneslanglasalle.eu/corporate-finance.