Extra Space Storage is revving up its third-party management engine, undeterred by rival Public Storage’s plan to make a hard run at the business.

In 2017, Salt Lake City, UT-based Extra Space brought 156 facilities into its program for managing properties on behalf of third-party owners; about half of those locations were newly built facilities. At the end of last year, Extra Space had 422 locations in its third-party management portfolio.

So far this year, Extra Space has added another 19 facilities to the third-party management mix. By the end of 2018, the REIT expects to have added well over 100 locations to the third-party management program, CEO Joseph Margolis told Wall Street analysts Feb. 21.

Small but strategic

For 2018, Extra Space is forecasting up to $47 million in revenue from third-party management fees and “other income,” up from nearly $39.4 million last year. That’s a tiny, but valued, sliver of the $1.1 billion in total revenue posted in 2017.

Margolis said third-party facilities enable Extra Space to boost revenue, scalability and market density. In addition, he said, the management program bulks up the REIT’s acquisition pipeline. Margolis noted that more than 80 percent of the company’s acquisitions in 2017 came from off-market deals, including third-party facilities.

Acquisitions and third-party management will fuel “solid external growth” in 2018, Margolis said.

Bring it on

In terms of third-party management, Margolis doesn’t appear to be worried about recently beefed-up competition from Glendale, CA-based Public Storage.

As part of a series of management changes unveiled Feb. 20, Public Storage said it promoted Pete Panos, executive vice president of operations, to a newly created role — president of third-party management. Panos has been tasked with growing the REIT’s third-party management platform, which today comprises only about 30 facilities.

Ron Havner, who’s stepping down as CEO of Public Storage effective Jan. 1, 2019, suggested during a call with analysts that the company may pass more profits on to third-party operators than other operators.

“I don’t think it’s going to be a big profit generator for us, because we plan to pass through most of the benefits to the operators for which we’ll be providing the service,” Havner said. “So it’s kind of an Amazon strategy, where we’re going to pass most of the benefits from the tenant insurance and the benefits of operating our platform on to the owners for which we provide the service.”

He added that he’d be fine with Public Storage eking out only a “modest profit” from third-party management in the first couple of years of the new initiative.

Focus on performance

Margolis acknowledged Public Storage’s grab for market share in third-party management “is not a good thing, and we’re going to have to compete with them.”

But he added that as long as Extra Space’s results for third-party management exceed those of its rivals, “we can have a very good argument about why people should choose us for management.”

At the same time, Margolis said the “overall pie” for third-party management is expanding as more independent operators realize they need professional management to compete against better-equipped REITs.

Here are some of the 2017 financial highlights for Extra Space:

  • Same-store revenue at 701 locations increased 5.1 percent and same-store NOI grew 6.9 percent compared with 2016. For 2018, Extra Space is predicting same-store revenue growth of 3.25 percent to 4.25 percent, and same-store NOI growth of 3 percent to 4.5 percent.
  • The REIT spent about $576.1 million to buy 30 existing facilities and nine certificate-of-occupancy facilities, as well as joint venture partners’ interests in six facilities.
  • The company ended 2017 with an occupancy rate of 91.9 percent, up slightly from 91.5 percent at the close of 2016.
  • Major markets with revenue growth above the company’s portfolio average for 2017 include Hawaii; Las Vegas, NV; Los Angeles, CA; Phoenix, AZ;and Sacramento, CA.
  • Major markets with revenue growth below the company’s portfolio average for 2017 include Boston, MA; Dallas, TX; Denver, CO; and Houston, TX.
John Egan