Sign in

    Extra Space Storage Inc (EXR)

    Business Description

    Extra Space Storage Inc. operates as a fully integrated, self-administered, and self-managed real estate investment trust (REIT) focused on the self-storage industry. The company is involved in owning, operating, managing, acquiring, developing, and redeveloping self-storage properties across the United States. Extra Space Storage generates revenue primarily through its self-storage operations and also offers tenant reinsurance services, providing additional income through reinsurance premiums collected from tenants . As of December 31, 2023, the company owned and/or operated 3,714 stores across 42 states and Washington, D.C., managing approximately 283 million square feet of net rentable space .

    1. Self-Storage Operations - Manages rental operations of wholly-owned stores, which are the primary source of revenue, contributing significantly to the company's overall income.
    2. Tenant Reinsurance - Provides reinsurance of risks related to the loss of goods stored by tenants, generating additional revenue through reinsurance premiums collected from tenants.

    Q3 2024 Summary

    Initial Price$154.25July 1, 2024
    Final Price$178.28October 1, 2024
    Price Change$24.03
    % Change+15.58%

    What went well

    • The integration and rebranding of Life Storage stores under the Extra Space brand are beginning to show positive results, including better SEO performance, improved conversion rates, and modest savings in paid marketing spend. This is expected to close the performance gap between the two brands over time.
    • The company anticipates annual cost savings of $10 million in paid search expenses as Life Storage stores reach parity with Extra Space stores. Additionally, a stronger unified brand is expected to lead to further marketing savings.
    • Extra Space is experiencing strong growth in its third-party asset management business, benefiting from the absorption of Life Storage's management clients and increased demand from non-institutional owners seeking professional management in a challenging operating environment. This business is growing faster than anyone else, despite being the most expensive in the business with very healthy margins.

    What went wrong

    • Life Storage (LSI) stores have underperformed expectations, leading to two revenue guidance cuts for those stores. The markets where LSI has higher concentration, such as Florida, have performed disproportionately weaker, and the company did not get the expected benefits from the dual-brand strategy, prompting a shift to a single-brand approach.
    • Significant bridge loan maturities are approaching next year, with uncertainty about how many will extend or pay off. This could put downward pressure on the bridge loan business, potentially impacting interest income if loans are not extended or default.
    • The company expresses uncertainty about future pricing power and storage demand, highlighting dependence on macroeconomic factors like interest rates, housing market, and consumer health, which they lack visibility on and could negatively affect their ability to push pricing.

    Q&A Summary

    1. Brand Consolidation Impact
      Q: What benefits are you seeing from the brand consolidation?
      A: We are in early stages since rebranding to Extra Space in late Q3, but we've seen slight improvements in SEO performance for former Life Storage stores, better conversion rates on the Extra Space website, and modest savings in paid marketing spend. We expect converted stores to perform like original Extra Space stores over time.

    2. Guidance Deceleration
      Q: What's causing the deceleration in fourth-quarter guidance?
      A: The deceleration is primarily due to property performance in the fourth quarter. It depends on where you are in our guidance range, but there's not an extreme revenue drop-off or growth expected.

    3. LSI Performance and Synergies
      Q: Can you update us on Life Storage performance and merger synergies?
      A: Life Storage has underperformed expectations, leading us to cut revenue guidance twice. Contributing factors include weaker markets in 2024, LSI's higher concentration in underperforming markets like Florida, and not realizing expected benefits from dual branding. We are targeting $100 million in synergies and have achieved $80–$90 million so far, exceeding initial estimates in G&A and tenant insurance savings.

    4. Acquisition Activity and Yields
      Q: Can you provide details on recent acquisitions and their yields?
      A: We've approved 10 wholly owned operating deals with first-year yields in the low 5% range and stabilized yields of 6.5%. Our joint venture deals have first-year yields at 10% and stabilized yields at 12% due to the economic benefits of the JV structure. We also approved three developments with an 8.6% development yield.

    5. Move-in Rate Trends
      Q: How are move-in rates trending compared to last year?
      A: Our average rate to new customers for the quarter was down 9% year-over-year, and in October, down 8%. October feels similar to September and August, with no significant changes month-to-month.

    6. Hurricane Impact on Occupancy
      Q: What impact have hurricanes had on rental activity and occupancy?
      A: We've seen an uptick in rentals, particularly in the Life Storage pool, with occupancies increasing from 92–93% to 96% at some stores. A typical hurricane customer stays around 10 months, which should benefit us, although these gains often offset hurricane-related expenses.

    7. Rebranding Costs for LSI Assets
      Q: What are the costs associated with rebranding Life Storage assets?
      A: We expect total rebranding costs of about $117 million, including $20 million of non-branding capital costs that were delayed. Our initial underwriting assumed $75,000 per property, or $90 million in total, which was included in our returns when we announced the deal.

    8. Bridge Loan Activity
      Q: How is the bridge loan program performing and what's the outlook?
      A: We've had a strong year in bridge loan originations, partly due to new LSI partners and owners opting for bridge loans in a difficult acquisition market. Next year, we'll see meaningful maturities; some will extend, pay off, or be acquisitions. We'll remain active but won't make bad loans just to maintain volume, and we'll manage exposure by selling A notes.

    9. Occupancy Trends and Pricing Strategy
      Q: How are you balancing occupancy and pricing, and what's the outlook?
      A: We prioritize long-term revenue by balancing occupancy and rates. Currently, data suggests leaning more into occupancy, offering lower rates to attract new customers. We expect to continue operating at higher than historical occupancy levels and are positioned to benefit quickly when the market turns.

    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Self-Storage Operations433.962440.747650.887696.982,222.578688.044697.1710.874
    Rental Operations--------
    Tenant Reinsurance47.70448.43369.12870.42235.68081.34783.784.048
    Management Fees and Other-22.206--101.986-29.9-
    Property Management, Acquisition, and Development--------
    Total Revenue503.050511.386748.034797.772,560.244799.539810.7824.804
    KPIs - MetricFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    **Same-store square foot occupancy (%)**93.594.594.193.0-93.294.394.3
    **Net Rentable Square Feet (million sq ft)**179.99184.3278.79283-290292.07296.65
    **Number of operating stores**1,4571,4602,3692,377-2,3842,3892,401
    **Number of stores managed for third parties**9319781,2821,337-1,4091,4231,461
    **Number of tenants**1,380,0001,440,0002,100,0002,100,000-2,155,0002,235,0002,245,000
    **Average length of stay (months)**16.6~1817.217.4-17.417.517.2
    **Average annual rent per sq ft (existing) ($)**21.0521.0821.4321.25-20.3620.3820.55
    **Average annual rent per sq ft (new) ($)**17.0017.7116.0116.19-13.6015.6013.49
    **Average discounts (%)**2.42.62.72.5-2.22.32.2

    Executive Team

    NamePositionStart DateShort Bio
    Joseph D. MargolisChief Executive OfficerJanuary 1, 2017Joseph D. Margolis has served as the Chief Executive Officer of Extra Space Storage Inc. since January 1, 2017. Prior to this role, he was the company's Executive Vice President and Chief Investment Officer from July 2015 until December 31, 2016. He has held senior positions at Penzance Properties and was a co-founding partner of Arsenal Real Estate Funds .
    Zach DickensExecutive Vice President and Chief Investment OfficerDecember 2020Zach Dickens has served as the Executive Vice President and Chief Investment Officer at Extra Space Storage since December 2020. He has been with the company since 2002, holding various roles in the real estate department, including Executive Vice President of Investments. Before joining Extra Space Storage, he oversaw a technical support team at eBay .
    Matthew HerringtonExecutive Vice President and Chief Operations OfficerJune 2020Matthew Herrington has served as the Executive Vice President and Chief Operations Officer at Extra Space Storage since June 2020. He has been a member of the company's senior management team for over a decade, previously serving as the Senior Vice President of Operations from 2015 to 2020 .
    Gwyn G. McNealExecutive Vice President and Chief Legal OfficerJuly 2013Gwyn G. McNeal has served as the Executive Vice President and Chief Legal Officer at Extra Space Storage since July 2013. She has been with the company since 2005, initially serving as Vice President and Associate General Counsel. Before joining Extra Space Storage, she practiced law at Latham & Watkins LLP in San Diego .
    Samrat SondhiExecutive Vice President and Chief Marketing OfficerJune 2020Samrat Sondhi has served as the Executive Vice President and Chief Marketing Officer at Extra Space Storage since June 2020. Prior to this role, he was the Chief Operations Officer from January 2013 to June 2020. He has been a member of the company's senior management team since 2008 and has been with the company since 2003 .
    Noah SpringerExecutive Vice President and Chief Strategy and Partnership OfficerDecember 2020Noah Springer has served as the Executive Vice President and Chief Strategy and Partnership Officer at Extra Space Storage since December 2020. He has been with the company since 2006, holding various roles in acquisitions, third-party management, and asset management .
    Scott StubbsExecutive Vice President and Chief Financial OfficerDecember 2011Scott Stubbs has served as the Executive Vice President and Chief Financial Officer of Extra Space Storage Inc. since December 2011. Before this role, he was the Senior Vice President of Finance and Accounting since the company's inception as a public company and served as the Corporate Controller of its predecessor starting in December 2000 .

    Questions to Ask Management

    1. With recent underperformance in key markets like Florida, what specific strategies are you implementing to mitigate further deterioration, and how confident are you in their effectiveness?
    2. Despite efforts to close the performance gap between Life Storage and Extra Space properties, there's still a 6% spread in like-for-like markets; what challenges are preventing parity, and how do you plan to address them?
    3. Given that you retain mezzanine positions when selling the A pieces of loans, how are you managing the increased credit risk associated with holding onto the riskier portions of these loans?
    4. You anticipate $10 million in marketing cost savings from integrating Life Storage stores under the Extra Space brand; what is the timeline for realizing these savings, and what risks could impact achieving this goal?
    5. As some customers are moving out due to rate increases from your ECRI program, how sustainable is this strategy without negatively affecting occupancy rates, and how do you balance rent growth with customer retention?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 13, 2023
    End Date/DurationNot explicitly stated
    Total additional amount$500,000
    Remaining authorization amount$500,000 as of September 30, 2024
    DetailsThe program allows for the repurchase of shares with an aggregate value up to $500 million

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Same-Store Revenue Guidance:
        • Extra Space: Midpoint at 0.125%.
        • Life Storage: Reduced by 50 basis points at the midpoint.
      2. Expense Guidance:
        • Extra Space: Raised by 25 basis points.
        • Life Storage: Revised downward by 100 basis points at the midpoint.
      3. Net Operating Income (NOI) Guidance:
        • Extra Space: Midpoint at negative 1.375%.
        • Life Storage: Range of negative 1.5% to positive 0.5%.
      4. Funds From Operations (FFO) Guidance:
        • Lower end raised to $8 per share.
      5. Bridge Loans and Interest Income:
        • Increased expected interest income.
      6. General and Administrative (G&A) Expenses:
        • Lowered for the year.
      7. Tenant Reinsurance Guidance:
        • Increased.
      8. Impact of Hurricane Milton:
        • Excludes impact, with estimated damage of $10 million or more .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue Guidance:
        • Extra Space: Midpoint at negative 0.25%.
        • Life Storage: Reduced by 200 basis points at the midpoint.
      2. Expense Guidance:
        • Extra Space: Midpoint at 4.5%.
        • Life Storage: Revised downward by 200 basis points at the midpoint.
      3. Net Operating Income (NOI) Guidance:
        • Extra Space: Midpoint at negative 1.75%.
        • Life Storage: Range of negative 1.5% to positive 1%.
      4. Funds From Operations (FFO) Guidance:
        • Lower end raised to $7.95 per share.
      5. Occupancy:
        • Extra Space: 94.5%.
        • Life Storage: 93.9%.
      6. Interest Income and Expense:
        • Increased expected interest income .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Interest Rate Assumptions:
        • SOFR assumption updated to 5.2%.
      2. Same-Store NOI Guidance:
        • Discussion on portfolio performance, no specific numeric guidance.
      3. Occupancy and Street Rates:
        • Emphasis on maximizing revenue, no specific targets.
      4. Same-Store Revenue Growth:
        • LSI portfolio: 3.25% growth expected.
      5. Occupancy Trends:
        • Expected to remain flat.
      6. Supply and Market Conditions:
        • 3% of same-store pool with new supply in Q1 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Same-Store Revenue Growth:
        • EXR: Negative 2% to positive 0.5%.
        • Legacy LSI: 2% to 4.5%.
      2. Expense Growth:
        • EXR: 4% to 5.5%.
        • Legacy LSI: 6.25% to 7.75%.
      3. Net Operating Income (NOI) Growth:
        • EXR: Negative 4.25% to negative 0.5%.
        • Legacy LSI: Negative 0.25% to positive 4%.
      4. Core Funds From Operations (FFO):
        • Range of $7.85 to $8.15 per share.
      5. Interest Rates:
        • Average SOFR rate of 4.75% assumed .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • CubeSmart: A primary competitor and a public self-storage REIT .
    • National Storage Affiliates: A primary competitor and a public self-storage REIT .
    • Public Storage: A primary competitor and a public self-storage REIT .