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Storage USA shines in a growing business

THE BALTIMORE SUN

Your grandmother's dining room table, college textbooks, old baseball cards, the 20-year-old lawn mower that you're certain one day can be fixed. Americans by nature are a sentimental and optimistic lot, and they prove it by the stuff they keep -- or at least can't throw away.

But where to put it all?

Dean Jernigan has a place. In fact, 175 places. As the head of Storage USA Inc., Mr. Jernigan specializes in owning self-storage facilities that balance the public's inability to dispose of cherished treasures with its equal disdain for clutter.

"People simply don't have the space they want," said Mr. Jernigan, chairman and chief executive of the Columbia-based real estate investment trust.

"And like most businesses, the American consumer has created a need. We're filling it."

Unlike many self-storage warehouse operators, though, Storage USA has translated that need into a growing company with a solid financial performance, by applying business disciplines, computers and professional management techniques.

Thus far, its strategy appears to be working.

In the first half of 1995, Storage USA generated funds from operations -- a key measure of a REIT's performance -- of $15.7 million, a threefold increase compared with the same period the year before, while revenues climbed 314 percent to $28.6 million.

Much of the gains are attributed to increases in its 175-property portfolio, which contains 103,000 self-storage units totaling 10.7 million square feet -- twice the amount of all the office space in Howard County. As of June 30, its properties were 91 percent occupied.

By comparison, when Storage USA executed its $138 million initial public offering in March 1994, the trust owned just 17 facilities.

Most of the portfolio growth has come from multiproperty acquisitions, financed by the proceeds of secondary stock sales. Since the IPO, Storage USA has raised $270 million through two follow-on stock offerings.

Only five of 80 publicly held REITs have raised more than Storage USA in secondary offerings since March 1994, according to data from the National Association of Real Estate Investment Trusts, a Washington-based trade organization.

That access to public capital has allowed the company to balloon its holdings, ranking it the nation's fourth-largest self-storage owner behind U-Haul, Public Storage Management Inc. and Shurgard Storage Centers Inc., a Seattle-based REIT.

"Storage USA has delivered a better performance for shareholders than their competitors, and they've shown more skill at investing in new properties," said Joseph M. Harvey, a vice president of Cohen & Stears Capital Management, a New York investment firm and Storage USA investor.

Since the end of last year alone, Storage USA's assets have grown by nearly 50 percent, to $410 million, according to a recent company filing with the Securities and Exchange Commission.

At the same time, the company's employees have grown to more than 500.

But Storage USA's portfolio -- and earnings -- have grown more because of its professionalism and success in applying systems unknown to the self-storage industry three years ago than vTC because of the additional cash, analysts say.

Among its systems are computers to link individual properties to headquarters that are capable of tracking rent payments, lease expirations and other data.

"They ooze credibility in a business that has not inspired it," said Samuel T. Hillers, an Alex. Brown & Sons Inc. REIT analyst. "And while they have kind of an ugly-duckling property type, a lot of people went broke building glamorous projects. Storage USA's projects are in first-rate locations, very consumer-friendly, in places where a bank or a McDonald's might be."

In Columbia, for example, where the company owns and operates a two-level ministorage facility with 650 units just off U.S. 29, Storage USA has installed security gates, neon lighting and climate-controlled systems. Like other company properties, the 70,000-square-foot project, built three years ago at a cost of $3.8 million, is marketed to new residents and apartment dwellers.

The uses for self-storage are legion. In Memphis, for instance, one man rented a self-storage bay solely to smoke a pipe, after his wife refused to let him light up even outside their home.

Rock group ZZ Top is also a client, using a Storage USA facility to store the souped up cars that have become an MTV mainstay. Even the Baltimore Orioles have stashed equipment at a Storage USA facility near their spring training quarters in Sarasota, Fla.

Like the regional shopping malls of the 1960s and sprawling apartment complexes of the 1970s, the emergence of miniwarehouses is tied to society's vast sociological changes over the past three decades.

Although the most recent numbers available are down slightly, people are still increasingly mobile, more transient, the result of the post World War II economic boom, the emergence of the two-income household and continued financial insecurity. Nearly 17 percent of all Americans changed residences in a one-year period ended March 1994, according to recent U.S. Census Bureau statistics.

That's only one of many advantages.

"Self-storage has a nonvolatile demand growth. It's not sensitive to cycles like other real estate," Alex. Brown's Mr. Hillers said. "If somebody moves, dies or gets divorced, they're a likely customer."

Mr. Jernigan learned the art of developing and managing properties while at Fogelman Properties Inc., a Memphis-based apartment developer, where the 49-year-old rose from an entry-level position to become president and chief operating officer.

But by 1984, the former sportswriter and semi-pro baseball player believed that multifamily development had peaked, because land prices had become too high and the rents needed to cover development were unattainable. So he quit, to search for a suitable product type to develop.

The decision eventually came down to either self-storage facilities or hotels, after Mr. Jernigan became fascinated with the Hampton Inn chain.

"In self-storage, I saw such an unsophisticated business that I could use my apartment expertise in," Mr. Jernigan said, explaining the decision to found Storage USA in 1985. "There was nothing of the Marriott quality in self-storage, and the market really wasn't aware of the product."

Convincing the market, and especially institutional lenders, that owning self-storage facilities was a viable business was another matter, however, and one of the many obstacles the company has had to overcome.

"It's been difficult, but the institutional investors are coming around," said Thomas E. Robinson, Storage USA's president and chief operating officer, and a former NAREIT general counsel. "We don't have the tenant risk associated with retail or the capital risk with apartments. The simplicity of the product and its rent structures are things they can easily understand."

Additionally, Storage USA has had to overcome a perception by zoning boards and other political and civic groups that miniwarehouses aren't the black plague. The demand by commercial customers -- which make up 35 percent of Storage USA's renters -- has helped. Mr. Robinson said many salesman use self-storage because their companies charge them with the responsibility for storing materials and products.

As a result of the growing demand, neither executive sees Storage USA's pace of acquisitions slowing. Mr. Jernigan said the company is focusing on areas such as Las Vegas, where residential development is booming.

Morgan Keegan & Co. Inc., a Memphis investment firm, projects that Storage USA will buy $100 million worth of new projects next year, in part because the industry is beginning to consolidate, and only 13 percent of the nation's 25,000 self-storage facilities are controlled by its Top 10 operators.

The company has even begun developing two new properties, in Virginia, where it will add another 1,400 units.

In all, $20 million has been budgeted for new development, according to Storage USA's most recent annual report.

"We may not be able to maintain our pace of 20 percent growth each year, but as long as we keep doing what we're doing, we'll grow intelligently, and that's the key," Mr. Robinson said.

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