While self-storage development has been the buzz at recent trade shows, Extra Space Storage CEO Spencer Kirk says he isn’t seeing a significant number of projects getting off the ground.
“Everybody wants to get on the self-storage train because it’s a great business,” Kirk told Wall Street analysts April 30. “I would say talk is cheap and execution is really tough.”
Kirk said any new development that is coming in the self-storage industry won’t affect his REIT’s financial performance for at least the next two years.
Fraction of the supply
Not only is it still difficult to obtain construction loans and find suitable yet affordable sites, but Kirk also said new facilities face outsized competition from the publicly traded self-storage REITs.
“One of the biggest things I’m not sure everyone has calculated is … once you get built, how are you going to compete against the REITs?” Kirk said.
We feel like it’s going to be a good summer. Our internal estimates feel like we can top out just over 94 percent [occupancy].
— Scott Stubbs, chief financial officer of Extra Space Storage
Kirk said that the cost to compete, including management fees, has shifted the “risk vs. return curve” for smaller operators and made new development less compelling than it was in the past.
“We are at a fraction of the supply we saw eight to 10 years ago,” he said.
In the mid-2000s, Kirk said, close to 2,500 facilities were being built each year. Meanwhile, he said, the number of construction starts today is in the hundreds.
“In 2016, it will still be a fraction, and in 2017, it will still be a fraction,” he said.
In the meantime, Extra Space is pursuing a fairly aggressive pipeline of certificate-of-occupancy deals. Under these arrangements, Extra Space enters contracts to buy brand-new facilities from developers.
The company has 16 such facilities under contract at a total purchase price of $175.4 million. Nine are scheduled to open this year, five in 2016 and two in 2017.
The facilities opening this year will cost $91 million. Three are part of joint ventures in which Extra Space has a 10 percent stake. The facilities will span 656,389 square feet, with locations in Arizona, California, Colorado, Illinois, Massachusetts, North Carolina and Texas.
The remaining certificate-of-occupancy deals will add more than 500,000 square feet and include locations in Florida and Georgia.
During the first quarter, Extra Space bought seven facilities in South Carolina, Texas and Virginia for about $73.6 million. The company also bought out a joint venture partner in one of its California facilities for $10.5 million.
Since the quarter ended March 31, the company closed on the purchase of 24 facilities in Arizona, Georgia and Texas for $192.4 million. That pool includes 20 facilities acquired from Assured Self Storage in the Dallas-Fort Worth, TX, area.
Kirk said the Assured acquisition involved transferring operating units in Extra Space to the seller. Operating units are similar to shares of common stock.
Extra Space has four more locations under contract for about $32 million. The deals in Georgia, New Jersey and North Carolina are expected to close by June 30. The company expects to spend $500 million on acquisitions in 2015.
During the first quarter, Extra Space boosted its profit by 42 percent compared with the year-ago quarter, climbing from $41.2 million to $58.6 million. First-quarter revenue grew by 13.5 percent to $173.2 million.
The ability to raise rents while increasing occupancy during the industry’s slow season helped boost performance in the first quarter. Rents per square foot during the quarter grew to $14.22 from $13.66 a year ago.
Extra Space also has seen success with hiking rates on existing tenants. About 10 percent of its customers get a rate increase of almost 10 percent each month.
“Our goal … is to deliver the right customer at the right time with the right concessions at the appropriate price to maximize our revenue, and that is what we have been doing, “ Kirk said.
Revenue at the company’s 503 same-store locations (the company has 996 facilities overall) rose 8.3 percent in the first quarter. Same-store income rose 11.4 percent.
Pushing occupancy higher
Extra Space reported record occupancy of 92.5 percent at the end of the first quarter. Scott Stubbs, chief financial officer, said the company expects occupancy to climb even higher heading into the second quarter, which is peak rental season in the self-storage sector.
“We feel like it’s going to be a good summer. Our internal estimates feel like we can top out just over 94 percent,” Stubbs said.