Decryptfying The Reit Strategy

In recent technology news, Samsung and Apple have been battling back and forth over patents, trade secrets, and questions regarding design infringement.  These companies operate in a highly clandestine fashion in order to conceal technological advances and future product offerings.  Only time will reveal the next impending move for either company in the digital realm.

Just like the storage industry, right?  Nobody knows what the public companies are going to do next… it’s a big secret, isn’t it…?

The answer is:  no way!

This last month, the “Big 4” publicly traded self-storage REITS released their Q1-2014 profit and loss data.

Concurrently, they conducted their quarterly earnings calls and fielded questions and comments from representatives of big name companies in the investment world.  The past strategies for these self-storage REITs have not been secretive.  And the companies are not afraid to disclose their future battle plans.

The predominant self-storage REIT strategy goes something like this:  increase street rates, minimize move-in discounts, and raise rates for current tenants.  The Big 4 might be more conservative in what they share publicly concerning subjects like future portfolio purchases and construction-development plans.  But, their operational strategies are spelled out in plain, unencrypted language.  And, it would not be an over-generalization to say that the operational strategies (as a whole) for the four companies are nearly identical.

The CEO’s of Cubesmart, Extra Space, Public Storage, and Sovran often speak of “size and scale” when referring to themselves.

With the publicly traded REIT’s still only controlling around 10-12% of the total self-storage market in the United States, they are able to enjoy some operational and scale-driven advantages in a landscape of immense remaining fragmentation.  But what exactly are those advantages?  And are smaller operators forced to “bite the REIT-dust” as a result?

For one, the REIT’s state that they have great advantages in marketing and obtaining new business through their developed and ubiquitous web-presences.  The companies do spend piles of cash on Google advertising.

With each company garnering more than 500 facilities under their management belts (PS is at 2,200 and ExSp recently passed the millennial mark) they are able to dump web-advertising dollars into a centralized (virtual) location to publicize their name brands to prospective storage renters.

A Google-search of the terms “self storage Los Angeles” reveals the dominance of these REITs on the web.  When performing that exact search the following results are seen on the first page:  the second highest listed paid link to appear is the Public Storage website; the top natural search option that populates is also the Public Storage page; and the second and fourth options that muscle themselves to the top of the Google Places results belong to Extra Space.  Uncle Bob’s and CubeSmart populate highly on searches for East Coast cities as those two companies are headquartered there (PS and ExSp being on the West Coast).

Secondly, aside from apparent advantages in the web realm, the REITs also boast of operational advantages that are seemingly achieved through their advanced revenue management softwares.

But, is this really the case?  Is Public Storage’s software more advanced than the leading competitor self-storage softwares of the day like SMD Sitelink, Domico, Storage Commander, Centershift, etc.?  Most big-name self storage management / accounting softwares now contain advanced and mostly automated revenue management capabilities.  SMD Sitelink, for example, first enacted its revenue management module in 2010.  Four years later, updates have been made and the software has been refined further.  Also, SMD Sitelink licenses software to over 11,000 locations worldwide.  That is five times the amount facilities of Public Storage’s 2,200.  Given these facts, it would be difficult to defend the argument that Public Storage’s software gives such a clear advantage in the revenue management realm.

At the end of Q1-2014, the occupancies for the four REITs were 89.5% (Cube), 90.4% (ExSp), 89.0% (Sov) and 93.9% (PS).  It must be stated that the collective REIT strategy (of reducing discounting, and increasing street and tenant rates) is most assuredly predicated upon running at high occupancy.  It goes without saying, that a facility operating at 60% occupancy would be foolish to blindly execute an aggressive rate increase flurry directed toward its fledgling current tenant base.  A lower occupancy (like 60%) instead requires a strategy focused on gaining new tenants, offering more discounting, and focusing highly on retention.

But the point is this:  if your facility is running at the 80-something percent occupancy mark, you can and should be emulating the REITs in your operations.

But are only the most elite facilities at the 80-percent level in occupancy?  No.  According to the SSA, the average facility occupancy in the United States was just above 87% after Q3 of 2013.  So, what are you waiting for?!  Raise your standard rates, lower your discounts and pump out the rate increases.  Sovran is sending out rate increases every 10th month to tenants at a rate hike of 11%.  Public Storage stated that many of its customers are currently paying 10-15% over the average street rate.

The age-old conception that “customers will move out if we send out rate increases” is passé.

“We haven’t raised our regular prices in five years” is a reason to blush, not a means for boasting.  “50% off the first six months” may be a loss-leader discount as opposed to a profit-generating promotion.  Contrast those old strategies with the following:  Cubesmart stated during its investor call that total current move-in discounts were equal to only 5% of the monthly rent roll amount.  That is very low and very efficient!

Whether you are an owner managing one facility or a large owner-operator managing 100 facilities, the strategy you should be aiming toward is clear.  Let Samsung and Apple grapple over trade secrets and design innovations; focus your time on simple but thorough revenue management.

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