Self Storage: Diversify Your Portfolio With a Self-Storage Leader

by Brad Thomas for Seeking Alpha

“The only investors who shouldn’t diversify are those who are right 100% of the time.”

Sir John Templeton

Most investors have come to understand the critical role of diversifying asset strategies. In doing so, many investors have expanded into the “fourth asset class” ­called real estate. Of course, real estate investing is a highly chaotic business today as most of the major product classes (retail, office, industrial, and apartments) are struggling to preserve principle and maintain modest yield. However, the one asset class that appears to be weathering the storms well is self-storage. The colossal devastation encountered with the other asset classes have not been as damaging for the self-storage industry.

According to CCIM news, over a 15-year history, self-storage assets averaged a 16.52% return, with office, industrial, retail, and multifamily assets averaging 15.53 percent, 11.64 percent, 13.35 percent, and 12.79 percent respectively. Self-storage sector fundamentals have remained relatively strong during the downtown, driving demand and causing cap rates to decline.

There appear to be several fundamental reasons that the self-storage industry is performing best, including:

  1. High demand for space driven by shrinking home sizes, growing displacement trends, and consumer demand for storage.
  2. Low lease up and low cap-ex costs
  3. Just in time revenue management (ability to control rents in “real time”)
  4. Responsible leverage compared with other REITs owning assets leased for retail, office, hotel, etc…
  5. Highly fragmented industry with opportunities to achieve efficiency with economies of scale

Upon review of various self-storage sponsors, I have found Extra Space Storage Inc. (EXR) to be an ideal investment choice. Founded in 1977, this publicly traded REIT (EXR) delivers an exceptional brand with a successful track record for sustainable yield and growth. This self-storage brand has evolved into the second largest US public self- storage REIT with over 809 locations (owned and managed) nationwide. Here is a summary of the top four (4) US publicly traded self-storage REITS:

Self-Storage Competition Extra Space Public Storage Sovran U-Store-It
Market Cap 1.61 B 17.74 B 1.01 B 893.65 M
Rev (ttm) 285.87 M 1.65 B 186.15 M 218.31 M

Diversification / Nationwide Footprint

With over 58 million square feet of space and more than 400,000 customers, EXR has a diverse portfolio with approximately 80% owned facilities and 20% third party managed facilities. The company continues to diversify and grow its company owned and managed facilities with brand presence in 34 states and Washington, D.C. Unlike other major asset classes, the self-storage industry is characterized by highly fragmented ownership. According to the self-storage Almanac, the top ten self-storage companies in the U.S. owned approximately 10.8% of total U.S. self-storage properties, and the top 50 self-storage companies owned approximately 14.9% of total U.S. properties (as of 12-31-09). With considerable fragmentation opportunities and access to capital, Extra Space is well positioned to expand its combined company owned and managed portfolios.


Safety, convenience and attractiveness are important attributes for the self-storage customer. The Extra Space brand provides high quality facilities as evidenced by one of its own.

Innovative Products

Innovation is most important for any national brand and Extra Space continues to deliver very innovative aspects of its own:

  • Call Center – Opened in 2008, Extra Space has its own state of the art National Sales Center (NSC). Comparatively speaking, this call center has provided a valuable strategic advantage over the highly fragmented competition.
  • Internet – According to the company’s 2009 Annual Report, Extra Space attributes the internet for more than 25% of customer sourcing. Compared to 5% for Yellow Pages (down from 50% in 2000). The company’s advanced technology and expertise provide Extra Space with a distinct advantage over smaller competition.

The expansion and acquisition strategies deployed will result in an expanded diverse footprint (over 809 facilities), with gained economies of scale attributed to its innovative sales center, internet technology, and operating efficiencies.

As stated by Spencer Kirk, Chairman and CEO, the company has “successfully navigated through the economic cycle over the last few years…and that speaks well to the stability of self-storage.”

Extra Space will report its 4th quarter in 2010 (and annual) results this month. The last quarterly report results (Nov 5 2010) indicate a good quarter and forecast for 2010 year end results:

  • +7.8% same store NOI growth
  • Added 21 properties
  • Paid down debt by 21% (1.1 billion from 1.4 billion)
  • Extended $50 million credit facility

Here is a recap of results for their previous three (3) years:

Extra Space Storage Inc.
Summary of Annual Financial Results 2009 2008 2007
Total Revenue 280,476 273,251 238,866
Net Income 68,406 46,888 36,094
Assets 2,407,556 2,291,008 2,054,075
Shareholder Equity 884,179 872,463 619,921
All in thousands

I expect that the 2010 data will be consistent with the previous results and I will post a follow up article after the earnings call is published.

Like Sir John Templeton, I am a huge proponent of diversification in both asset classes as well as product types. Extra Space Storage Inc. (EXR) is an excellent diversification strategy as the company provides a balanced geographic footprint (34 states) as well as a diverse and growing customer (tenant) base of over 450,000 doors. Many publicly traded and non-traded REITs have a highly concentrated customer (tenant) base; however, Extra Space Storage, Inc. has a very balanced and growing business model. Most importantly, the highly fragmented playing field (of self-storage owners), combined with the company’s well positioned balance sheet should provide an exceptional alpha opportunity in 2011 and the years ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.


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