Extra Space boosts marketing spend to stay above new supply

Al Harris
May 1, 2019

Extra Space Storage had a strong first quarter despite heightened competition in markets surging with new supply. But CEO Joe Margolis cautioned that the most severe impacts of excess supply may still be ahead.

“We still believe 2018 was likely the high water mark for total deliveries, and we expect 2019 deliveries to be only modestly lower. Further, we expect the total impact on performance from new supply to be greater in 2019 than it was 2018 due to the cumulative impact of several years of elevated development,” Margolis said during the company’s quarterly call with analysts.

Margolis said the company is seeing the impact of new development play out in the lease up of its newly developed locations, which it purchases from builders at certificate of occupancy. Until recently C of O stores have been leasing up well above pro forma, he said. Currently those lease up rates have returned to historic norms, suggesting that supply is quickly catching up with demand.

In response to increased competition for storage tenants, Extra Space Storage has increased its digital marketing budget to increase web traffic and attract tenants online.

“We have maintained occupancies above market averages in MSAs with new supply, but it comes at a cost. Cost per click is elevated due to a competitive  bidding environment and we are choosing to pull the advertising lever harder in order to ensure web visibility,” Margolis said.

The company increased its marketing budget for its same-store pool by 24 percent compared to the period last year, spending $5.2 million total in the first quarter of 2019.

Financial highlights:

  • Extra Space purchased two newly developed facilities at certificate of occupancy, and also bought out a joint venture partner’s interest in 12 stores for a combined total of approximately $222.3 million.
  • The company entered new deals with joint venture partners, acquiring an operating storage facility and six certificate of occupancy locations for a total cost of $210.6 million, with Extra Space’s contribution coming to $47.7 million.
  • The company added 46 new locations to its third-party management platform, bringing the most recent count to 805 managed stores.
  • Same-store rental revenue grew 4.2 percent during the first quarter compared to the same period a year ago.
  • Same-store net operating income grew 4.8 percent during the quarter compared to a year ago.
  • Same-store occupancy stood at 91.6 percent, just two basis points down from last year.
  • Markets performing better than the portfolio average were Atlanta, Chicago, Hawaii, Las Vegas, Phoenix and Sacramento. Major markets performing below average were Charleston, Dallas, Denver, Houston, Miami and Tampa.

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