Self storage is rocking the REIT world, and according to Spencer Kirk, chairman and CEO of Extra Space Storage (NYSE: EXR) there are many reasons to celebrate. Revenues in the sector are up, expenses are down, net operating income (NOI) is up and occupancy rates continue to climb.
Last month at REITWeek 2011 sponsored by NAREIT (National Association of Real Estate Investment Trusts), nearly all major property types posted double-digit gains with self storage leading the pack at 18.4 percent. Property stocks are currently the darlings of the investment business. As of May 31, the total return of the FTSE NAREIT All Equity REITs index, which tracks 120 REITs with a combined market capitalization of $415.5 billion, was up 14.1%. In comparison, the Standard & Poor's 500-stock index rose 7.8% and the Dow Jones Industrial Average rose 9.8% during the first five months.
Kirk said Salt Lake City – based Extra Space Storage issued additional equity in May 2011 to help fund the recently announced acquisitions. He added that the company’s philosophy has been to do acquisitions using a 50-50 split of debt and equity. The policy enables Extra Space to “fund those opportunities as they arise,” rather than keeping “a bunch of dry powder just sitting on the deck,” according to Kirk.
With self storage out in front, the REIT industry has sustained an improving trend this year, driven by a largely increased inflow of funds as institutional investors allocated more capital to the industry. This has helped the group generate market-beating returns. Investors looking for high dividend yields also favored the REIT sector. Since many self storage assets are still independently owned, Kirk said that he does see some room for consolidation in the industry. He also noted that aging assets could soon necessitate new development in the sector.
“I think there will be an acceleration of consolidation not only financially but operationally, and we are seeing some of that. But as we look at some of these older assets, there will also be a need for new assets to come in,” Kirk said.
Extra Space Storage is not currently in the development game, Kirk said.
“The market for construction loans is very difficult, and I think it’s going to be a considerable period of time before we see that market rebound,” said Kirk.
Kirk also said Extra Space hopes to participate in joint venture relationships. For instance, Kirk said the company may be interested in partnering with specialized local operators to build, brand and operate assets.
“Perhaps where someone with specialized local knowledge comes to us and says ‘will you help us get this asset built and then ultimately we want you to brand it as Extra Space and then manager it for us,’ ” he said.
Sources Used:
Bechard, Matt. “Self Storage Industry Quick to Recover.” REIT.com. July 11, 2011.
Kilpatrick, Kim. “Self Storage Ranks as Ruler of the REITs.” Self Storage Industry News. June 9, 2011.