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Benchmarking commercial real estate, self-storage developers

According to the survey by the Self-Storage Association of the United States, one out of every 10 households rents a self-storage unit. A high mobility rate, the retirement of baby boomers, increasing demand for rented apartments over full-fledged houses (including attic and garage) are the prominent factors which are driving the demand for self-storage facilities. Additionally, the factors that matter the most for evaluation of a self-storage developer’s performance are occupancy rate, growth in rentals and net operating income. Moreover, other aspects that should be considered include contract rent per sq. ft., revenue, expenses and EBITDA per available sq. ft., organic vs. inorganic growth, return on average rental assets and cost of debt. The qualitative factors such as the location, sustainability of design for self-storage facilities and use of technology also determine their operational excellence.

The self-storage industry is highly fragmented in the United States with many mom-and-pop operators, however, there is an ongoing consolidation and large players held more than 75% of the market share in 2016. Televisory analysed four companies operating in the United States, these are collectively known as the ‘BIG 4’ in the self-storage industry, namely Public Storage (2,494 facilities with operations in both the US and Europe), Extra Space Storage (1,347 facilities), CubeSmart (672 facilities) and Life Storage (542 facilities).

A higher occupancy rate coupled with an increase in rental income leads to lower cost of operations per sq. ft., this results in healthy bottom line.

The industry achieved an average physical occupancy rate of 90.2% (2015) as compared to 80.3% (2008) according to the 2015 Self-Storage Almanac. The trend more or less remained the same for all the firms except for Public storage, which faced a minor dip in facilities (2015) owing to high incidents of vacancies in Europe. Furthermore, companies experience a low occupancy rate in winters and a higher rate in late spring or summers. This is due to a greater incidence of residential moves and student activities.

A high occupancy rate coupled with a heightened rental rate helps in generation of higher revenue per available sq. ft.

In the period from 2012-15, there was an upward trend in the rental rates per sq. ft. for the four self-storage developers, the highest rental among these were earned by Extra Space Storage as shown in the graph. An increase in rental rate leads to rise in revenue per sq. ft. for a company, this depends on the occupancy rate of facilities. The demand-supply ratio plays a major role in determining an increase in rental rates. This, in turn, depends on the type, location and availability of area in a storage facility or facilities of developers.

Hence, developers are adding more facilities to their portfolio through acquisition or third party management contracts as the portfolio size of a self-storage developer is of utmost importance. Extra Space Storage acquired 171, CubeSmart procured 32 and Life 27 properties in the FY 2015. In addition, Public Storage added 26 properties in Europe and relied more on organic growth for operations in the US. Similarly, the number and size, location and design of facilities are also significant metrics. Self-storage facilities situated closer to prospective clients are usually higher in demand. The four firms examined in this blog have set up their facilities in highly populated areas such as Boston, Chicago, Houston, etc.

Inorganic growth is necessary in order to compete in the industry and a third-party facility management is essential to attain this feature. Therefore, companies can comfortably expand their portfolio under management and find potential target companies through third party management contracts from small and private players. Extra Space Storage and CubeSmart have more third-party areas under management as shown in the graph. Public Storage has a very large portfolio and thus, is not dependent on third-party facilities as compared with other companies.

Furthermore, a true meaning of operational metrics can only be understood by evaluating the impact on profits. A comparison of EBITDA margin for all the 4 companies shows that Extra Space Storage and Public Storage almost had the same EBITDA margins.

EBITDA is a product of revenue and cash expenses, revenue is mainly composed of rental income. However, rental income could be affected by acquisition, occupancy and rental revision rate. For instance, in FY 2015, despite the highest rental rate growth and occupancy, the Avg. revenue per sq. ft. was the lowest for Extra Space Storage. This was due to the acquisition of the highest number of facilities because of which its revenue per sq. ft. decreased. Subsequently, as the acquired properties get integrated into its existing portfolio and the firm develop the growth strategy, these will again start contributing more to the overall revenue. Likewise, the type of storage units made an impact on the revenue derived by Extra Space Storage. 

Notably, despite the low revenue per sq. ft., Extra Space also had the lowest cash opex per sq. ft. and this led to the highest EBITDA margin among the 4 companies. The cost of acquisition inflated operating costs across all the companies as property operating expenses, SG&A (Selling, General and Administrative) expenses rose with an increase in the size of operations of these companies. The number of acquisitions executed in 2015 was lower from 2014 for CubeSmart and Public Storage, this meant that there was a slight decline in the operating cost for these companies. Extra Space Storage was undoubtedly excelling on each of the parameters, but the remaining firms were not far off. 

In conclusion, it can be stated that the self-storage industry is a customer-centric industry. According to Mr Chris Marr, CEO, CubeSmart, 6% of the self-storage customers vacate the facility each month. Hence, apart from the above-stated factors, other elements such as average length of tenant stay, the level of customer engagement through a website or a mobile app or receiving continuous or real-time feedback from customers and use of technology through the implementation of cloud-based software are equally important for a company to survive. Thus, a detailed analysis of quantitative and qualitative factors are necessary to benchmark the self-storage developers.

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