By Lorna Pappas
While in graduate school in the late 1960s, Ken Woolley, chairman and chief executive officer of Extra Space Storage Inc. (NYSE: EXR), worked part-time at a self-storage property development company. Although he enjoyed the job, he never imagined the work would become a major career pursuit and passion. Neither could he have possibly envisioned that decades later a self-storage business he would establish in 1977 would nearly quadruple overnight, effect the largest transaction to date in the self-storage industry, change the competitive dynamic of the segment, and catapult his firm from the seventh to the second-largest self-storage operator in the U.S.
Woolley’s major push in the self-storage industry started in 1977 when he opened his first Extra Space Storage facility in Billings, Mont. From there, he expanded to Los Angeles, Washington D.C., Florida and Chicago. By 1993, Extra Space Storage owned 21 properties located in California, Illinois, Massachusetts, Nevada and Utah. At that time, Woolley sold 13 properties to Storage USA, which was a rapidly growing, newly public company.
In 1998, with 12 properties remaining in the portfolio, Woolley strategically restructured the company’s finance and operations to grow the business, with Prudential Real Estate Investors and several high net-worth individuals providing the equity. A new management team was brought in composed of individuals from multiple industries to build the operational infrastructure. By the time Extra Space went public in 2004, it had 136 properties in 20 states, and was the seventh-largest operator in the U.S.
Today, Extra Space is a fully integrated, self-administered and self-managed REIT operating 620 self-storage properties in 34 states encompassing more than 415,000 units and 43 million square feet rented by 340,000 commercial and residential tenants.
Extra Space is one of five publicly traded self-storage REITs, who together own about 9 percent of all U.S. self-storage facilities—the industry is still dominated by smaller, local owners. The biggest REIT operator is Public Storage, Inc. (NYSE: PSA), followed by Extra Space, Shurgard Storage Centers, Inc. (NYSE: SHU), Sovran Self Storage Inc. (NYSE: SSS) and U-Store-It Trust (NYSE: YSI).
The Big Deal
The deal that thrust Extra Space toward the head of the class was its July 2005 acquisition—along with joint venture partner Prudential Real Estate Investors—of Storage USA from GE Commercial Finance Real Estate for about $2.3 billion in cash. The purchase nearly quadrupled Extra Space’s operations portfolio from 170 to 620 properties and, according to Woolley, gave the company “the national presence it sought; the ability to spread overhead across a larger portfolio; and added about 20 cents FFO per share on a pro forma basis in 2005.”
Metuchen, N.J.
The impact of the purchase has yet to be fully realized. However, if Extra Space had owned the new portfolio for all of 2005, Woolley says, “it would have increased our FFO per share by 16 to 20 cents.”
“The acquisition increased total operating revenues at stabilized properties in the third quarter by over 400 percent and gave Extra Space a national platform from which to grow in the future,” he says. “As we move forward and continue to show our ability to integrate and efficiently manage this larger portfolio, increased shareholder value will be created.”
“Also, because we as a smaller operator acquired the larger Storage USA, the industry was kept more fractured, spread out to a variety of owners, which altered the competitive dynamic of the largest operators,” Woolley says. “On top of that, the $1.5 billion in equity we received from Prudential for the purchase of Storage USA helped increase the exposure of self-storage to institutional investors and intensify their interest in this segment.”
Although Extra Space also acquired the Storage USA brand, Woolley says the company plans to rebrand all of the acquired locations to carry the Extra Space name.
A Stable Industry
Investors certainly have every reason to take notice of self storage. According to Woolley, the sector is one of the only ones in which revenues have risen nearly every year since the 1980s without decline. The self-storage sector posted a 26.6 percent total return in 2005, the highest of any individual REIT sector, according to NAREIT.
San Ramon, Calif.
With rents running month to month, self-storage could be considered unsteady, but with so many diverse tenants in such a huge portfolio (about 38,000 U.S. facilities, both public and private), a single tenant can rarely hurt any one owner, producing a solid, even flow of cash. Shorter leases mean rents can be raised faster, and insulation from economic swings (people store belongings in both good and bad times) makes the segment unusually stable. In fact, Moody’s Investors Services recently noted the self-storage industry as the least volatile of all the REIT sectors.
Woolley says demand for self-storage units is growing faster than the economy. “We live in a consumer-oriented society in which people are addicted to their stuff,” Woolley says, adding that the need for storage rises as people both acquire more goods (especially as the employment level continues to rise) and hold onto what they already have. Also, the growing number of baby boomers and empty nesters who opt to downsize their homes will increase the need for self storage units.
Woolley adds that, compared to office and industrial properties, self storage presents minimal rollover costs. When a tenant moves out of a self-storage space, there are few capital expenses. “You sweep the unit and maybe replace a light bulb,” he says.
Unique Among its Peers
Within this stable real estate segment, Woolley says Extra Space has carved out a strong niche because a large portion of its properties are located in densely populated metropolitan areas in the Northeast. These areas, which include Baltimore, Connecticut, D.C., New Jersey and New York, tend to produce higher rents due to constraints on supply. In fact, 65 percent of its properties and 70 percent of its revenues stem from heavily populated markets (including those in Florida and the West Coast) where Extra Space ranks either first or second in terms of market penetration. Because of this, the company’s average rent per square foot hovers in the low $13 range, while most of its competitors are between $10 and $12 average rents.
Walnut, Calif.
Extra Space also prides itself on the design of its facilities and its use of “the most advanced computerized revenue management system in the industry, which allows us to maximize revenues on any property instantaneously, based on demand and supply,” Woolley says. The company developed the sophisticated system using both in-house and proprietary software.
“Much of the local competition hasn’t gotten the message that self storage can and should be more than an unattractive, cheap metal box with a gravel driveway,” Woolley says.
Since the acquisition of Storage USA, the company’s larger portfolio size has provided it with improved economies of scale, including advantages in advertising, such as building a local brand awareness that smaller (public and private) competitors can’t afford. These efficiencies also involve national online advertising, including Google searches that flag Extra Space Storage while smaller local competitors may not appear at all, and more extensive local and national yellow page advertising.
Woolley says research shows most consumers make decisions on self storage based on their perception of property security and cleanliness, and the friendliness of management. These are areas on which Woolley says Extra Space has focused. In addition, the company distinguishes itself by situating its properties on major thoroughfares and not behind industrial parks as some operators do, providing an additional element of consumer awareness.
A Closer Look
Now that the Storage USA acquisition has bolstered the company’s portfolio, industry standing and awareness among investors, the next challenge is how to continue growing the company. New development is a challenge because land prices have risen dramatically in the metropolitan areas in which Extra Space operates, and expansion by acquisition is somewhat restricted since self-storage companies are currently priced high.
Mt. Vernon, N.Y.
Extra Space is meeting those challenges and will continue to grow, reports Woolley, both through acquisition and development: “On the development front, we will continue to develop properties in our core markets of California, Florida, Illinois, New England, New York/New Jersey and the Mid-Atlantic States. We now have 29 properties planned for development over the next 24 months in these markets. We are currently the largest developer of self-storage among our publicly-held peers, and though land prices and construction costs have gone up, we’re still able to achieve attractive yield on costs.
“The acquisition market is very competitive right now, and we have lost out on several deals in which we were competitive in terms of price,” he says. “There’s a huge appetite for self-storage properties right now. We have to be smart and continue to stay the course in regards to how we value self-storage acquisitions and purchase only those properties or portfolios that can be accretive to our shareholders.”
To ensure revenues remain stable at its properties, Extra Space is targeting commercial clients through an aggressive marketing program. Commercial tenants, which account for 25 percent of the company’s business, tend to rent units for longer periods, averaging about 3.5 years. The company’s “bread and butter” is residential customers, who have average stays of 15 months.
Extra Space’s mission is sustainable growth based on six basic company goals, posted throughout the corporation. They are: maximize customer satisfaction; provide an excellent product and service; develop and maintain mutually beneficial business relationships; make a profit; grow the business; and make Extra Space Storage a great place to work. Woolley adds that, as part of developing good, long-term relationships, the company is committed to “taking the high road” in business dealings and is honest and fair to all parties, whether customer, investment banker or smaller vendor.
From what event, if any, has Woolley learned most during his career? Ironically, it was the 1993 sale of 13 properties to Storage USA, a move Woolley “learned to regret,” but which was rectified when he bought the same properties back, and hundreds of others, in the 2005 acquisition. “Back then I was motivated by the easy route of the short-term profit the sale provided, but should have stayed the course,” concedes Woolley. “Since then I have learned that for this business segment, to be truly successful, we must keep our sights on the long-term.”
Going forward, Woolley says he is committed to staying the course as he moves Extra Space forward in a tight self-storage market. In December, the company raised another $201.1 million through a public stock offering and continues to pursue market acquisitions while tackling the 27 ground-up developments it has scheduled for the next 24 months. All this, Woolley says, is being done with an eye toward maintaining the company’s long-term stable growth.
Lorna Pappas is a freelance writer based in New Jersey.
