As new supply ramps up in markets around the country and revenue growth slows, Life Storage is plotting a cautious course through 2017.
“Stepping back and looking at the macro picture, the self-storage sector, as has been more than well-documented, hit some speed bumps during the past seven or eight months,” said David Rogers, CEO of Life Storage during the company’s recent earnings conference call.
Rogers said operators in the storage sector are currently faced with diminished pricing power, rising operating costs, and competition from new supply.
“In a number of markets, Texas especially, these factors have given us a reason for somewhat of a pause,” Rogers said.
Headwinds ahead
Life Storage is expecting slower growth ahead compared to recent years, and Rogers said the company won’t be active in the acquisition market—aside from a handful of joint venture and certificate of occupancy deals.
“The strong tailwinds we’ve enjoyed for many consecutive quarters have swung around to present us with a bit of a headwind,” Rogers said, “But we’ve been here before and compared to other challenging periods, the outlook this time doesn’t look nearly as dire.”
The company is forecasting between 3% and 4% revenue growth from its 435-stabilized stores in 2017, and net operating income also between 3% and 4%. Last year at this time, the company, then Sovran Self Storage, projected revenue growth between 6% and 7% and net operating income of 7% to 8% for 2016.
Life Storage fell a bit short of those targets—with same-store revenue up 5.2 % and net operating income up 6.5% year-over-year. Life Storage generated $462.6 million in total revenue, earning a net income of $119.8 million for the entire year.
Occupancy lever
One bright spot for Life Storage is occupancy, which Rogers said hit a record high in December and also during the previous months. The company had a same-store occupancy rate of 90.4% as of December 31.
The company plans to continue to build occupancy during the first half of the year using free rent promotions, then ease off free rent in during the second half of the year.
Andy Gregoire, chief financial officer, said the company intends to also raise rates on in-place customers during the spring busy season. About 60 percent of customers have been renting a unit for more than year, and about 40 percent are currently charged below street rate.
Dealing with new development
The real challenge ahead for Life Storage is how it fares against new competition in overheated markets.
Life Storage has especially run into resistance in Houston, its largest market where it operates 41 stores. Houston revenue growth was among the slowest of the company’s markets, increasing less than one percent during the fourth quarter.
Paul Powell, chief investment officer, said there are 14 new development in Houston within a five mile radius of Life Storage stores: two in planning, two that have opened, and 10 under construction.
“We do know there’s additional development going on in Houston, [but] I think it is starting to slow down to some degree,” Powell said.
Powell said the company has identified 227 projects nationwide that compete with Life Storage in a five-mile radius. Overall the company expects 800 to 900 new facilities will be developed in 2017 and 2018 nationwide.
Going toe-to-toe
Rogers is confident in the company’s ability to compete against new stores, with only temporary setbacks.
“Yes, there is going to be a bit of a price war, but again that’s sort of a temporary position that we have to take,” said referring to new competitors opening stores near facilities in Raleigh and Miami.
For each new facility that opens near a Life Storage, Rogers said they have to go “toe-to-toe” for a while, but eventually the market area will stabilize again.
“There is going to be a limited time period where that comp is going to want to build occupancy and you’re going to need to compete,” Rogers said, “But it’s nothing that we really weren’t prepared for.”
