Extra Space Storage is entering a new era: Spencer Kirk, CEO of more than seven years, will retire at the end of the year. Chief Investment Officer Joe Margolis will succeed Kirk.

Margolis will take the reigns as the company approaches a new challenging period—one of deceleration from all-time industry highs and facing a record-setting surge of new development.

Slow growth ahead

Same-stores revenue grew 6.1 percent during the most recent quarter, while net operating income grew 7.8 percent. That is a noticeable decline from the gains reported a year ago: same-store revenue grew 9.9 percent from the previous year in the third quarter of 2015, and same-store net grew 12.6 percent.

“Our view is that the deceleration is going to moderate and flatten out and revert to normal rates of growth, self-storage normal, which has traditionally been higher than other property types,” Margolis said during the company’s recent earnings conference call.

Margolis was a board member of Extra Space for 10 years, up until his appointment to the CIO role in 2015.

A healthy report card

Kirk said despite the slowdown in growth, self-storage is still one of the best performing asset classes, and will continue to be in the future. Kirk said over the last 10-plus years the storage sector has grown NOI on average 5.3 percent.

“That is a very healthy report card in the world of REITS by any measure. Extra Space has done a bit better than that, we have averaged about 6.7 percent over that 10-plus year period,” Kirk said.

Kirk said he has a “high-degree of confidence” that the company will continue to be an outperformer in the REIT sector.

“Yes, we have seen some deceleration, personally I am a little bit surprised by the negativity.” Kirk said, “Reverting to more normal historical trends, it’s still impressive.”

After his resignation Kirk will be a board member and also the company’s largest shareholder.

Supply oppurtunity

As for the rise in new supply, Margolis said the current pace still remains at a “moderate and manageable” level.

“We are seeing some instances where it affects our operations, and some instances where it doesn’t,” Margolis said.

Margolis sees increased development activity as an opportunity for the company to expand its third-party management business.

“The vast majority of our pipeline of managed stores are new development,” Margolis said. “We will grow that business as a revenue generator, source of additional data and as a pipeline for future acquisitions.”

Acquisition and development

Extra Space has acquired 67 operating stores through the end of the third quarter for a total investment of $706.6 million. The operator purchased another five stores since the end of the quarter for $46.8 million and has contracts to purchase an additional 18 stores by the end of the year for $239.37 million.

Acquisitions during the the third quarter include a buyout of joint venture partner Prudential Real Estate’s interest in 23 properties. Another 11  buyouts are planned by the end of the year. At the same time, Extra Space sold its stake in 42 jointly owned properties with Prudential—representing 4.4 percent of asset value—for $35 million. Extra Space will continue to manage those stores.

Meanwhile Extra Space is on track to purchase nine recently constructed facilities from developers upon completion this year for a total investment of $86.9 million. The company has agreements to purchase 11 more stores upon completion through 2018. Extra Space will pick up another bucket of recently constructed stores with joint venture partners, a total of 10 this year and nine more planned through 2018.

Performance

During the third quarter, Extra Space collected $257.2 million in total revenues compared to the same quarter the previous year, an increase of 30 percent. Net income grew 63 percent over the same period, totaling $127.22 million during the third quarter.

Occupancy slipped slightly from the previous period last year, coming in at 93 percent as of September 30, compared to 93.4 percent previously.

Rent per occupied square foot increased 5.8 percent for all stores during the third quarter compared to the previous year.

 

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Alexander Harris