And The Beat Goes On!
August 03, 2020 | by Ken Nitzberg, Chairman & CEO
Covid 19, Investment, Self Storage
We are now five months into the COVID-19 pandemic with the business world still struggling to adapt to the “new normal” in this ever-changing environment. In the self storage world, we have embraced the “no contact” rental experience as a way to operate our stores even if the rental office to “walk-in” traffic is closed. In the first six months of 2020, despite the difficulties all businesses are experiencing, our 41 operating stores managed to gain 1,053 net units and 93,202 net square feet of rented space, an increase of 3.14%. It is a great achievement on the part of our Operations team and our store managers to have been able to not only manage through the pandemic but to actually gain occupancy.
In April, Devon was successful in obtaining a Payroll Protection Loan (“PPP”) in the amount of $1,128,499. Devon used these funds to cover the payroll for the employees at our stores thus benefiting our capital partners. We also used a portion of the funds to cover the eligible payroll costs of our corporate employees. Although it was a bit of a struggle to obtain the loan originally, our investment partners, our shareholders, and our employees realized substantial benefit from those efforts. The PPP also allowed Devon to retain essentially the bulk of its workforce.
The industry itself has experienced back-to-back trade-show cancellations, along with the re-scheduling and “virtual” reorganizing of annual events, association gatherings and conferences. The Self Storage Association (“SSA”), the industry’s not-for-profit trade association, normally has two large conferences each year. The Spring Conference & Trade Show, scheduled for San Antonio in April, was cancelled and, following suit, the largest conference and trade show, which normally draws more than 2,500 attendees, which was scheduled for the early part of September in Las Vegas, was also just recently cancelled. Devon usually takes six to ten of our officers and key employees to the Fall trade show as it is an excellent place to make connections with brokers, sellers, vendors, lenders and others in the self storage industry; it is a cauldron of ideas that everyone is willing, even eager, to share and a conference that I have personally not missed in over 25 years. Additionally, many of the state associations hold annual events, but again, all of those since March have been either cancelled or postponed indefinitely.
The advent of the pandemic has proven beyond a doubt the wisdom of the company (and its key employees) over the past several years to move ever deeper into the use of the internet to operate our business. We have been able to continue our leasing activity with the use of on-line rentals and on-line rent payment programs. Prior to the onset of the pandemic and the various shelter-at-home orders, approximately 97% of our actual new leases were generated in person at the counter of each store with the balance coming directly from the internet.
With the closure of our leasing offices in certain locations due to the shelter-in-place edicts, coupled with the social distancing requirements, Devon got creative in finding ways to market and rent units to new tenants and collect the rents. Through the first several months of the pandemic the percentage of our leases that have come directly from on-line activity has risen to over 90% and we believe this trend will continue throughout the foreseeable future.
Let me take a moment to explain what I mean when I say our stores were closed. Our store managers were still present at the site, but in the office with the door locked. We posted signs on the door letting anyone coming to the site to rent a unit know that they could go on-line to accomplish the rental or could simply call the office from their cell phone and the manager, ensconced in the locked office, would complete the rental. The same went for the payment of rents. If an existing tenant showed up at the site to pay their rent, they were instructed to either go on-line to pay their rent, drop their rent check in the mail slot, or, better yet, go on line and put the rent on their credit card and simply have the site charge their credit card each month going forward.
From the middle of March through the end of June the company made a conscious decision not to pursue any auctions and to limit collection activities, Instead we made a concerted effort to connect with our delinquent customers to create a payment program that would allow them to stay in the facility until they got back on their financial footing. We recently announced to our tenant base that effective July 1 we would resume the implementation of our foreclosure process. Once we made that announcement our seriously delinquent accounts declined by more than 30% as tenants did not want to risk having their stored goods auctioned.
During that same period, and again to not risk violating any governmental emergency orders, we did not raise the rents on any existing tenants. Given the strict liability associated with price gouging statutes in most states, we did not want to have a disgruntled tenant file a claim against the company and we wanted to be as compassionate as possible with any of our tenants that were experiencing financial difficulties. That has also recently changed with our first set of rent increases scheduled to take affect on August 1st. However, we are limiting our rental increases to 9.9% to make sure we stay under the “gouging” guidelines set by most of the states in which the company operates.
From a growth perspective, the company is moving forward with our acquisition program as aggressively as possible. We have a conversion site in Grand Rapids – a former Kmart store – that will open on or about August 1st adding 82,000 square feet in 840 units to our total inventory. We are working on the conversion of a former furniture store in Orlando, FL that is slated to open by the end of the year, which will add approximately 97,000 square feet in 1,250 units. We have four additional conversion projects under contract that we anticipate closing prior to the end of the year. Interestingly, we have an existing, two-property portfolio in the greater Grand Rapids, MI market scheduled to close on or about August 1st. This will add 97,480 net rentable square feet in 781 units. This will be the first acquisition of an operating self storage asset in three years.
The primary holdup keeping us from moving quicker on more of the conversion projects is that we are often not able to close on those vacant properties and begin the conversion process as, more often than not, we need to get the asset rezoned for use as a storage facility. While that can take a bit of time and cost a few dollars, the biggest delay has been that many zoning boards are simply not meeting during the pandemic, thus all zoning change requirements are not able to be achieved as quickly as we may have wanted. That backlog is starting to break up a bit, but with the recent resurgence of the COVID-19, we may be back to the original problem. We continue to push on that effort, nonetheless. A significant part of the eventual profit in the self storage conversion projects is Devon’s ability to acquire the underlying asset at a greatly discounted price, with much of the value coming from being able to change the zoning and build a successful self storage project.
I have been exceptionally pleased with the way the company has performed during the initial stages of the pandemic. Our employees, across the board, have stepped up and shown a great deal of commitment and strength with respect to husbanding our capital partners’ assets and our shareholders’ assets. We have all learned a great deal about ourselves during these past few months and we believe we are well positioned to deal with whatever comes our way going forward.
Stay well and stay healthy!