How can Extra Space (NYSE: EXR) Raise its Same-Store Revenue Projections when Web Self Storage Rental Rates Decline?

Extra Space just raised its same-store year-over-year revenue growth projection to +2.75%-3.5%, up from +2.5%-3.5%. Compare this to the year-over-year published web rates, down -13%. Therein lies the magic of self storage. Leases are all month-to-month, and 85% of customers pay electronically. Because no one really wants to go to their storage unit, customers ignore the increases and maintain the status quo.

Finding solid new storage development deals is challenging right now because demand has softened due to fewer purchases and sales of single-family homes and, subsequently, fewer moves-in and moves-out. The decline in web rates substantiates this softening, but there is more to the story. We need to look one level deeper.

Behind the scenes, Extra Space has changed its rental rate game plan and has shifted to be more aggressive on rental rate increases for existing, in-place customers. I have a storage unit for a vehicle that had to be moved out of my garage to make room for daily drivers. Only three months after my move-in, I received a 22% increase! 

Before last year, EXR brought in customers at a higher initial rental rate and then would wait nine months before hitting them with their first rent increase. Subsequent rent increases then happen every six to nine months after the initial. With their old rate strategy, the in-place rents match the advertised web rates more closely. Now, in-place rents can be 20-50% above the web rate, creating less transparency into property performance. The industry must adjust to focusing on in-place rates, not teaser web rates. Appraisers are going to have to retool their valuation methodology. Developers and investors will have to reduce reliance on web rates in favor of in-place rates.

We invest in a dynamic industry, and the pricing strategy could change again tomorrow. When Extra Space increases its same-store revenue guidance, you know the industry is healthy.