Kelsey Smith is a single mother who works as a waitress in Midvale, Utah, and lives with a roommate in a small apartment in the Sugar House neighborhood of Salt Lake City. Smith, 26, pays $500 a month for day care for her 3-year-old, a stretch on a waitress’s pay. She says she’s had to move to cheaper lodgings six or seven times.
Rather than drag all her belongings with her, Smith rents a 10-by-15-foot self-storage unit, for which she pays $80 a month — as much as two shifts’ worth of wages and tips. The unit contains furniture and other items she’s accumulated over the years. “Just the things you’d need if you had a home,” she says. “People don’t want to let go.”
Millions of Americans are like Kelsey Smith. They have furniture and old photos, children’s toys and bric-a-brac that they’re loath to give up, yet they can’t find a place for it in their homes, garages or apartments.
That’s been a huge boon for Kenneth Woolley and Spencer Kirk. They’re the chairman and chief executive, respectively, of Extra Space Storage, the best-
performing of four publicly listed self-storage companies, all organized as real estate investment trusts.
REITs — agglomerations of property that sell like stocks — are booming. Investors are pouring into the asset class as they search for alternatives to a frothy equities market and low-yielding bonds. Bloomberg indexes for hotel, shopping center and apartment REITs have returned more than 12 percent this year as of Aug. 4, compared with 4 percent for the Standard & Poor’s 500-stock index.
REITs are attractive because they pay no taxes if they distribute all of their income to shareholders, which gives investors relatively high-dividend yields.
The hottest REITs are the self-storage trusts, according to Bloomberg Markets’ second annual ranking of alternative investments. Three of the top five REITs in the 141-company Bloomberg REIT Index for the three-year period ended March 31 are self-storage companies, excluding firms with less than $100 million in market value.
Extra Space is the top performer, with an annualized return of 36.7 percent for the three years and 27.9 percent for one year. Extra Space’s income from operations grew more than 20 percent year over year for the 14 quarters ended June 30.
The high returns are driven by robust demand for storage units, which are also used by small businesses to hold inventory.
The number of U.S. storage locations has swollen from 27,500 in 1998 to 52,000, housing an estimated 25 million units, according to the Self-Storage Almanac, published by MiniCo Insurance Agency, which provides insurance to the industry. They brought in an estimated $24 billion in revenue last year, according to the Self Storage Association.
“People accumulate too much stuff,” says John Murphy, an analyst at Cohen & Steers, a New York-based real estate investment firm that holds more than $52 billion of REITs and other securities, including about a 10 percent stake in Extra Space.
Other storage investors include university endowments, pension plans and a host of investment firms, including Morgan Stanley, Prudential Real Estate Investors and Chicago-based Harrison Street Real Estate Capital. Blackstone Group bid on a 43-property storage portfolio offered by Harrison last year, according to people familiar with the transaction. It lost to Public Storage, the biggest self-storage firm, which won the assets for $315 million.
The D.C.-based Carlyle Group formed a partnership with William Warren Group of Santa Monica, Calif., in July to develop self-storage properties, according to a person familiar with the investment.
“Self-storage has come out of obscurity,” says Extra Space’s Kirk, 53. “It’s no longer the goofy real estate class. It’s the real estate class that during the recession did better than any other.”
Storage returned 101 percent from the beginning of 2008 through 2011, outperforming all other REIT categories.
After a decade of expansion, Extra Space operates 1,071 self-storage sites in 35 states, the District and Puerto Rico. It owns about half of the properties outright and manages the rest as joint ventures or for other owners.
At least 11 million Americans pack their spare possessions into storage units every year. It’s all about life-changing events, Kirk says: “birth, death, marriage, divorce, upsizing, downsizing.”
It’s also about how firmly Americans are attached to their belongings, according to a 2009 study of storage by Carnegie Mellon University, Harvard University and the University of Virginia.
“We do not know if people store their lava lamps because parting with them is such sweet sorrow,” the researchers wrote in an article in the Journal of Experimental Social Psychology. “But we do know that they store them because they like them and that they like them because they’re theirs.”
The good news for the big public companies — Extra Space, Public Storage, CubeSmart and Sovran Self Storage — is that there’s a steady and growing stream of customers for their steel cubicles, even as storage developers run out of cheap land in urban and suburban areas.
“There has been very little building since 2007, and as demand increases, rents go up,” says Extra Space’s Woolley, 68.
At the same time, 83 percent of the existing self-storage properties are owned by local entrepreneurs, according to the Self-Storage Association, many of whom will sell if the price is right. That means the big public companies may have years of expansion ahead.
Low overhead costs lure the entrepreneurs who invest in storage.
“You don’t have to paint walls and replace carpets when tenants move out,” says Jason Smith, a broker in Utah for real estate firm Marcus & Millichap. “You just take a broom and sweep. The eviction laws are only 30 to 45 days, as opposed to six or nine months in an apartment, so you turn around and make money faster.”
After years of double-digit gains, Extra Space’s highflying stock is no bargain. Three analysts have downgraded their recommendations on Extra Space since April.
“While fundamentals are solid in the self-storage sector, there are signs that we are reaching an inflection point and growth is set to slow,” wrote Omotayo Okusanya, an analyst at Jefferies & Co., in a May 8 report in which he downgraded Extra Space and Public Storage to hold. Move-in rents at Public Storage locations open at least one year averaged $114 per month in the first quarter, down from move-out rents of $123, according to Okusanya.
Investors who want to buy existing storage properties are stymied by high prices.
“It’s a tough asset class to make work for us right now, but we’re actively looking,” says Liz Raun Schlesinger, a managing director and co-head of the self-storage group at W.P. Carey, a New York-based REIT. “Properties have become pretty expensive.”
The Extra Space site that charges the highest rent is a long way from Utah. It’s on West 143rd Street in New York’s Harlem neighborhood, where customers pay an average of $45 a square foot for their units on an annual basis. That’s slightly less than they would pay to rent a Manhattan apartment, which averaged $52.50 a square foot in June, according to the real estate appraiser Miller Samuel.
“For a concrete pad with three steel walls, a roll-up door and an incandescent bulb,” Kirk says with eyebrows raised. “It blows people’s minds.”
Another highly profitable site is in the Bronx across the street from Co-op City, the largest U.S. housing cooperative, with about 50,000 residents. There are 500,000 people within a three-mile radius, Kirk says.
“The median household income is pretty low, lower than $50,000,” he says, “but because you have so many people in such a dense area with so many life-changing events, there’s unbelievable demand.”
Woolley founded Extra Space in 1977 and opened 28 properties during the next decade. In 1994, he sold all but three of them to Memphis-based Storage USA and concentrated on his larger real estate business, which included construction of 34 apartment projects with 13,000 units in the western United States and Canada.
Woolley is a native of Los Angeles with a bachelor’s degree in physics from Brigham Young University and a master’s in business administration and a PhD from Stanford University. He got serious about storage again in 1998. His first task, he says, was to recruit Kirk, whose management skills he admired, as a partner.
In his 20s, Kirk helped start a computer switch and modem maker called Megahertz and sold the company to USRobotics in 1995. A year and a half later, with his stake in the merged company worth $200 million, Kirk retired at 36.
Woolley knew Kirk because he had been on the board of Megahertz. Kirk, who grew up in Salt Lake City, initially resisted Woolley’s entreaties to join him at Extra Space on the grounds that the storage business, as he put it, was “seedy.”
Woolley says Kirk saw the potential only after Woolley took him on a tour of an attractive new Extra Space location in Sherman Oaks, Calif. He agreed to become a 50-50 partner.
Together the pair — both Mormons who suspended their careers to lead religious missions — have turned Extra Space into a storage juggernaut. They took the company public in 2004, raising $300 million. In 2005, Extra Space acquired Storage USA in a joint venture with Prudential Real Estate, adding 458 properties to its 140. That made Extra Space the No. 2 self-storage landlord in the country, after Public Storage.
The biggest challenge for storage operators is high turnover. Extra Space has about 600,000 tenants at any given time. Every day, the company is in search of 40,000 new renters to replace the ones who, on average, move out each month, Kirk says.
The CEO has applied his tech expertise to the task. When he joined Extra Space in 1998, self-storage “was incredibly sleepy,” Kirk says, with property owners keeping track of leasing and maintenance with pencil and paper and color-coded pushpins on wall maps. Kirk digitized Extra Space’s financial planning and logistics, and invested heavily in online advertising.
“We’re spending $1 million a month with Google,” Woolley says.
Although about a third of Extra Space’s customers come directly from the Internet, almost half pick their storage company by driving around the neighborhood. For that reason, customer service is a high priority.
Extra Space office staff are expected to make sales and convert as many customers as possible to credit-card automatic payment, thereby prolonging their tenure. Employees are paid $10 to $30 an hour, and in some markets, managers get on-site housing.
“You might offer an apartment in New York, New Jersey, Miami or Dallas to hire a more qualified candidate,” Kirk says. “That’s very appealing to a lot of folks.”
Extra Space taxes its long-term tenants for their loyalty. Rents are raised after five months and then every nine months after that. The company earns extra money by offering insurance on the items stored, starting at about $10 a month.
“We earn 80 percent margin on that,” Kirk says.
Tenants are required to have insurance, which can be via an existing policy. Extra Space also sells company-branded items such as locks, packing tape and boxes.
Kirk talks the language of Silicon Valley, describing his job as “evangelizing” the corporate culture of continuous improvement.
“The best at getting better” is the motto on a company PowerPoint.
Kirk holds a bachelor’s degree in finance and an MBA from the University of Utah. He was paid $2.3 million in 2013 in salary and bonus, according to the company’s annual financial statements. A licensed pilot, he sometimes flies himself to meetings around the country on executive jets leased from SpenAero, a company he owns.
Kirk and trusts controlled by his family own 3.2 percent of Extra Space, according to a company proxy statement, worth $192.6 million on Aug. 5. Woolley owns about 1 percent.
To keep its earnings rising, Extra Space needs to grow, and growth means acquisitions. Kirk has budgeted $500 million this year to buy storage properties; last year, the company spent $586 million.
Yet sellers aren’t easy to find. The secret is out: Storage is a cash cow.
Stan Owens, a co-owner of Alta Storage in Sandy, Utah, says he rejected a $3.9 million offer from a developer for his 389-unit property.
“Our cash flow is so good, plus my family works here, so they’d be out of a job,” says Owens, 71, who employs his son and two grandchildren.
Jason Smith, the Utah real estate broker, says he got 11 offers for a site in West Valley City that he sold for $4.2 million to a California investor and five offers for one in Herriman that sold for $3.1 million.
“More and more people are realizing that storage is not high risk,” he says. “It’s low risk, and it’s a great way to make money.”
The full version of this Bloomberg Markets article appears in the magazine’s September issue.