A wave of new supply in Texas is dampening revenue growth for Buffalo, NY-based Life Storage.
“Houston, Dallas, San Antonio, and Austin are our most challenging markets, and with 20 percent of our stores there, it’s had an outsized impact on our same-store results,” said CEO Dave Rogers during the company’s recent earnings call.
The company increased same-store revenue 4.5 percent during the quarter, and net operating income by 5.8 percent. During the third quarter of 2015, the company grew revenue 6.5 percent and NOI by 8.4 percent.
To maintain occupancy during the most recent quarter, Rogers said the company was aggressive with incentives, such as offering a month’s free rent.
“When you give up the free month, you’re giving up a third of the quarter’s potential revenue on that space and it makes for an instant and brutal comp over the prior year,” Rogers said.
As a result the Rogers said the company was “downshifting” its near-term expectations for the Texas markets.
The Wild West
Competition from new supply is casting a dark cloud on Life Storage’s growth prospects in Texas markets, especially in Austin where a large of number of stores have opened recently, Rogers said.
“That’s a market where the problem is virtually all oversupply,” Rogers said.
For Houston, Dallas and San Antonio, Rogers said most of the new supply is still looming.
“A lot of it isn’t even in place yet,” Rogers said.
In those markets, competitors have been aggressive on promotions, forcing Life Storage to do the same, Rogers said.
In Houston, Life Storage’s largest market with 41 same-store locations, revenue grew just 1.9 percent during the third quarter. Revenue grew 3.6 percent in Dallas, 1.8 percent in Austin and 3.3 percent in San Antonio.
Despite the recent deceleration, Rogers remains optimistic on the long term prospects for the Texas portfolio.
“Just a couple of years ago, Atlanta, Phoenix, and many parts of Florida were dragging us down. Now, we’re enjoying real success in all those markets. So, Texas is down this year and probably next, but long-term, the four markets in that state are going to be fine. They’re made for self-storage users,” Rogers said.
Integrating new facilities
In addition to its same-store locations in Texas, Life Storage is also concerned about its 19 newly acquired facilities in the state. Those are part of the 83 facilities it acquired, along with its new name, earlier this year.
Other markets in the Life Storage portfolio meanwhile are performing to expectations.
“We love Sacramento, Los Angeles, Las Vegas, the three markets we underwrote 10 percent growth for, we’ll get that. The Life Storage in Chicago, Florida, Denver, they’re doing fine. We underwrote those less aggressively and should hit it,” Rogers said.
Life Storage continues to change over its Uncle Bob’s Self Storage locations to its new brand identity.
“We changed over the 14 stores in the Buffalo beta market, learned what we liked concerning the signage, media coverage, and the web marketing transition, and we’re ready to go starting this month in Chicago, Denver, and Los Angeles,” Roger said.
The company expects to have all 650 stores rebranded as Life Storage by April.
As part of the LifeStorage purchase, which closed July 15 for $1.3 billion, the REIT assumed contracts for three certificate of occupancy developments in Austin at a cost of $44.8 million. The three stores are expected to open in 2017.
Considering the state of oversupply in the Texas capital, Rogers said the company is evaluating whether to keep them or not.
“Austin’s actually strong, it’s just that there is a lot of supply diluting it. So, the market’s good, the supply is killing it,” Rogers said, “We inherited these, we liked them, in normal times they’d be good. We have some options we’re looking at.”
Outside of the LifeStorage portfolio, the company acquired facilities in Denver, CO and Ft. Myers, FL. The company also purchased a certificate of occupancy development in Charleston, SC. Together the three properties cost $28 million.
The company also has contracts to purchase three new developments at C of O between next quarter and the end of 2017 for a total cost of $31 million. Two are in Chicago and one is in Charlotte, NC.