EUR 850.00 For Business Accounts Only

Morningstar | Extra Space Storage Continues a Resilient Business Model

Extra Space generates revenue through rental income on its wholly owned and joint-venture self-storage facilities, tenant reinsurance, and management fees for third-party facilities. We believe the self-storage business will continue to lend itself to consistent revenue growth in the form of incremental rent increases and a growing portfolio of facilities located in key metropolitan areas. Management expands the top line by increasing one of three key drivers: price, occupancy rate, and rentable square footage. The industry has experienced tremendous growth in the last several years, and we see further societal shifts fueling that growth for years to come, albeit at a more modest pace.Self-storage demand is driven by life changes. With an aging baby boomer population approaching retirement and looking to downsize homes, we view self-storage as a necessary solution. Extra Space’s portfolio is concentrated in densely populated, high-income cities across the country and typically expands through acquisitions.Industry occupancy rates are at record highs, with Extra Space reporting overall rates in the mid-90s. Its California-based facilities continue to drive net operating income, or NOI, representing about 25% of the portfolio, with high occupancy and aggressive rent increases to both incoming and existing customers. Supply has been muted in high-barrier cities, such as Los Angeles and San Francisco, which has allowed management to drive double-digit rent increases in recent years.In search of new opportunities, management has established facilities all over the country, but largely in the northeast. While occupancy is typically below the company average, these areas carry high rental prices, typically double the rent per square foot as some locations at the low end of the portfolio. We see industrywide occupancy at peak levels now, so in a few years as supply begins to materially affect Extra Space’s portfolio, we project occupancy rates to decrease several hundred basis points. In response, we see management decelerating rent increases and increasing promotions to gain new customers.