A few years ago, I wrote an episode and a download called the five KPI’s (key performance indicators). These are the five things I always said: if you keep your eye on them, you will have a great self-storage business. If interested, you can download it here.
That episode dealt with what our team, as owners, focuses on and has our managers focus on in the running of the facilities. Each of our managers knew we were focused on these KPI’s, so they were.
There may be some overlap between this episode and that one, but the industry has evolved, and this episode is directed to you as an owner in today’s landscape. You may or may not have managers, but for this episode, it doesn’t matter. These are the metrics I focus on today and know off the top of my head as an owner in the self-storage business.
Metric Number One: Physical Occupancy
There is a lot of storage out there today. In any given trade area (the location of most of the customer base for a given location), multiple facilities, including yours, are competing for the same customer base.
Unless you offer something that would draw customers from a larger trade area than normal, such as boat & RV parking, or indoor car parking, your trade area is likely to be a 3-to-5-mile radius or a 10-to-20-minute drive time.
It may vary from the above, but not by much. So every self-storage facility in a given trade area is competing for the same customers.
If you are new to the market, or opening an expansion you just completed, or turning a facility around you just purchased, you are in “lease-up mode.”
But it really doesn’t matter today if you are in lease-up mode or just replacing the typical churn of customers; the name of their game is to get people in units. You can focus on income per square foot or getting customers close to the street rate once they are in your facility.
So keeping your eye on physical occupancy is critical.
If you are in lease-up mode, the name of the game is to increase occupancy each and every month until you hit stabilization. In today’s world, during lease-up, that is more important than actually hitting your rental rate, in my opinion.
I get asked a lot what a good occupancy stabilization rate is to get to. Well…it depends. It depends on the occupancy rates in your trade area. But as a general rule, I am striving for between 88% to 93% physical stabilized occupancy.
Why not 100%.
Never get to 100%. That means you don’t have any units to rent. If you are getting 95% or so, it’s time to raise rates again, let people move out so you can release the units at a higher rate. You always want to have units to rent. If you don’t, it’s like having a grocery store with no food to sell on the shelves.
Metric Number Two: Economic Occupancy
So what is economic occupancy? If physical occupancy refers to the percentage of units or square feet occupied, economic occupancy is the percentage of revenue generated compared to the gross potential rent if all units were rented at the street rate.
Once we start approaching stabilization, that’s when we start really focusing on economic occupancy. In the end, this metric is more important than physical because it represents how well we are running the business. What good is having 90% physical occupancy if our economic occupancy is 65%?
I am hyper-focused on this once we start approaching 80% physical occupancy in a lease-up situation. The goal of this game is to get current tenants paying close to or at street rates.
In a well-run storage business, stabilized economic occupancy is within 5% or less of physical occupancy. If we have managers, this is one of the KPI’s they know I am focused on. If a stabilized facility is approaching or over the 5% benchmark difference, they know they had better get some auctions happening fast, or we are having some conversations they won’t particularly enjoy.
After stabilization, keep a constant eye on this metric. The next metric we will discuss helps this metric tremendously.
Metric Number Three: Delinquency Ratio
What is the Delinquency Ratio? It is the percentage of the uncollected income divided by the monthly gross potential income.
How does one calculate it?
Divide all amounts owed (delinquency) by the Gross Potential Monthly Income. Many daily close reports have this information. If not, pull a delinquency report, then find the report with the gross potential monthly income and manually calculate it.
A health-stabilized facility should run around a 5% or less delinquency ratio. The 5% takes into account the 0-10 or -15-day, normal late payers who will allow you to collect late fees. Much more than 5% tells me it is time for an auction, or that, however, we are collecting late rent is not working. When the delinquency ratio is over 5% our managers know what’s coming.
I was working with someone I am coaching, who purchased an existing group of facilities in a city that collectively had a 67% delinquency ratio. Why so high?
Poor collections and payment plans. In last week’s episode, we discussed payment plans, (mistake number five). Never, never, never allow them. Number one rule in running a facility.
Let me show you two different management summary reports for two different facilities. The first one is one I looked at a few months ago.
You can see in the right column “Bad Debt” in the amount of $5,513.60. That’s all the money owned by the facility at the end of the month. Then, at the bottom of the left column, the gross potential monthly income is $48,272.
To get the delinquency ratio for this project that day, just divide 5,514 by 48,272, and you get 11.4%.
I’ve seen a lot worse, but there are five units over 30 days. I don’t suspect payment plans, but during due diligence, I would determine if they are in an auction process and, if not, why.
If I owned this facility, I would tighten that up.
Let’s look at another facility and report. Here is one we owned and managed during the pandemic. Here is the June 30, 2020, report. Remember the shutdown?
In the right-hand column, you can see that the total diligence at the end of June was $3,346.40. The GPI number is in the section above the “Unpaid Charges” section and is $114,779 monthly.
Divide those two, and you can see the delinquency ratio at the end of this month was
2.9%. Because I keep an eye on this, our managers do as well.
Keeping your eye on this metric ensures the integrity of your cash flow once your project is stabilized.
Metric Number Four: Actual NOI to Budget NOI
This metric assumes you have a yearly budget. If not, it’s time to start.
I used the Proforma I created as we looked at a deal, which I then modified during due diligence. You don’t have to do this, but this was my practice because this is what my investors and/or partners said yes to.
Now, you may notice that I didn’t mention income or expenses in relation to the budget. I said NOI.
The value of your facility is determined by the NOI (net operating income), which is income minus operating expenses. Given how expenses move around a lot today, specifically insurance and property taxes, I can miss them in real time from a pro forma I may have done a few years ago.
However, by knowing my NOI target, I can adjust expenses and revenue strategies to achieve the desired NOI.
All I do is take the final Proforma and break it down into a monthly budget, year by year. At the end of each month, I check what my actual NOI is compared to the budget NOI. If I need to make an adjustment to hit the end-of-the-year NOI number, I can see that way ahead of time if I have an issue and by how much, so I have time to adjust the dials and levers of operations to hit it.
As an Owner, I feel it is critical to keep this number always in my line of sight because this is where the real wealth self-storage can offer is made. I always know where I am in relation to my target number with this NOI metric.
There are other metrics I follow, but in my opinion, these are the four most critical ones to always know. If you own a facility and don’t know these almost off the top of your head, where you stand in these metrics, I will guarantee you there is gold you can mine by focusing on them.
These key metrics are how the true wealth is created in this fantastic business of self-storage. Go for the gold.
