Hot off the heels of a $1 billion-plus deal to buy a large competitor, Extra Space Storage is bullish on its future.

In June, the Salt Lake City, UT-based REIT struck a deal to add 122 SmartStop Self Storage facilities to its portfolio. The $1.4 billion deal is set to close before the end of the year.

“Customer acquisition on the Internet is about size and scale,” Extra Space CEO Spencer Kirk said July 30 during a conference call with Wall Street analysts. “Expansion of our physical and digital footprint allows us to reach more customers than ever before and increase operational efficiencies.”

During the second quarter, Extra Space completed the purchase of 29 existing facilities for $240 million as well as the purchase of two brand-new facilities for $22.4 million. Kirk said he expects his company’s acquisition spending to top $1.8 billion this year. At that time, the company will surpass 1,300 owned or managed locations.

“By the end of 2015, we will have closed on $4 billion in acquisitions over the last five years,” Kirk said, “and there is still room to grow.”

‘Unprecedented market’

During the second quarter, Extra Space boosted revenue by 11.4 percent compared with the same period last year, reaching $185.8 million. Net profit rose 32.5 percent to nearly $61 million.

The company attributes the continued growth to higher rental rates, higher occupancy rates and reduced discounting. The company ended the quarter with record same-store occupancy of 94.5 percent. Same-store rent climbed to $15.26 per square foot in the second quarter, up from $14.34 during the same period a year earlier.

SmartStop
Extra Space Storage is bulking up with its purchase of 122 SmartStop facilities.

Kirk expects that sort of solid performance to continue.

“With no new supply and our ascendency on the Internet, I don’t see anything that is disruptive … in the next 12 to 18 months,” Kirk said.

“I am bullish,” he said. “This an unprecedented market we are operating in, and we are going to take every advantage to maximize the result.”

Limited development

Kirk continued to downplay the threat of new supply in the industry, a position he has maintained for a while.

Rising land costs and the current lending environment are restraining development, he said. Furthermore, since self-storage facilities don’t generate a lot of jobs or tax revenue, communities typically aren’t rolling out the red carpet for them, Kirk said.

According to Kirk, the biggest factor putting the kibosh on development: It just isn’t worth it for smaller players.

“The risk-versus-reward curve has shifted,” he said, “and it is not in favor of the developer.”

self-storage construction
Extra Space Storage CEO Spencer Kirk continues to downplay the threat of self-storage development.

Risk vs. reward

If a developer is fortunate enough to get a project entitled and get it built within budget, Kirk said it’s left with the task of operating the facility.

“They can’t take out a Yellow Pages ad anymore, and [they are] in no man’s land,” he said.

If a developer hires a third-party management company to run a facility, that only eats into the returns.

“The return on these investments for these guys going out trying to get a permit, I think there is some hesitation,” Kirk said. “This is not easily done in some locations.”

C-of-o still a go

Meanwhile, Extra Space is looking to buy newly built facilities from developers that do manage to get projects up and running. Extra Space has 16 so-called “certificate of occupancy” deals under contract for a total of $172.3 million.

So far this year, the company has opened three such facilities — in Thousand Oaks, CA; Dedham, MA; and Berwyn, IL. It plans to open seven more by the end of 2015, three of which are part of joint ventures. The remaining 10 certificate-of-occupancy deals in its pipeline are scheduled to open between 2016 and the first quarter of 2018.

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Alexander Harris