Q2 in Self-storage: Lessons learned from the coronavirus

Let’s rewind to 5 months past: 2020 has just begun and things are looking up. For the first few months, operators have been increasing rents in anticipation of what could have been another good summer rental season. But everything changed when COVID-19 came into play. Game plans have to be tweaked, else the hurt in Q1 will spillover to Q2 & Q3 at a much painful rate.

But while Q2 numbers were less than stellar, there are bright spots (aka June & July). Industry demand is resilient as it has been in the past. And it turns out, a key shift was needed: automation.

Note that throughout this series we will be following 5 listed self-storage REITs: CubeSmart (CUBE); Extra Storage Space (EXR); Lift Storage (LSI); National Storage Affiliates (NSA); and Public Storage (PSA).

This report at a glance:

  • As expected, numbers for Q2 were hit by the ‘coronavirus effect’. Suppressed growth drivers led to weak same-store revenues (-2% YoY) which cascaded to NOIs (-4% YoY).

  • Headwinds have softened in June and July, and indicators are showing quick turnaround relative to April and May levels. 

  • Operators that have shifted to automation and contactless rentals have reaped the rewards in Q2, translating to operational KPI improvements.

  • Outlook for the rest of the year is mixed among our covered REITs. These range from cautious optimism to downright weaker expected NOIs. This is against a backdrop of quieter transaction activity and slower rent appreciation in the coming months.

Q2 in a nutshell: some not unexpected bleeding

The coronavirus effect—characterized by stay-at-home restrictions, strict social distancing rules, downbeat consumer confidence, and just weak demand overall—was reflected. Average same-store revenues fell by 2% during the quarter, a function of both weak rental volumes and lower street rates. While occupancy seemed steady, the average at 92% (nearly unchanged from last quarter) was less than what is expected during the summer based on the period’s supposed seasonality. Deferral of auctions for the past months have also bloated occupancy figures across our coverage so the numerical stability in this area should be taken with a grain of salt.

Hopefully steady-state from June and July levels

The thing with quarter numbers, which is essentially a collective summary of 3 months of operations, is that it discounts the recovery story of a data point; in this case, June. Public REITs have reported a broad recovery in rental activity beginning somewhere between June to July, mostly as local government restrictions around this period have become more relaxed. Extra Space rentals rebounded from -35% in April to +4% in June (year-on-year figures). Similarly, LSI’s negative rentals in April and May turned stronger later on, with July move-ins rising nearly 17%. The rest of the REITs are also enjoying higher collections, with at least 150bps improvement versus April and May levels. While the business environment remains cloudy, at least on the demand side and whether or not consumer propensity to spend on storage is back to pre-pandemic levels, the numbers are supporting the industry’s reputation for being resilient.

The name of the game is automation

A fully-automated self-storage facility is not unheard of before the pandemic. “It is where the self-storage industry is headed” is, in fact, a common opinion back then. But social distancing and stay-at-home protocols have highlighted the need for a distinct value-add: upgrading to newer tech means the revenue cycle does not live and die with foot traffic. Thus, the industry-wide beeline for contactless solutions and automation. CubeSmart launched its SmartRental platform during mid-April. The site allows fully renting a space online, from inspection to payment. As of end June, or a little more than 2 months since launch, SmartRental accounted for nearly 25% of rentals for Q2.

The improvement in numbers is more apparent for operators that already have a contactless platform in place prior to 2020. Take for instance Life Storage’s Rent Now program which was launched mid-2018. The program was planned to take a modest 11-12% share in total rentals by the end of 2020. However due to the pandemic, its share in rentals surged to as much as 50% during April when restrictions were most stringent, before settling to 30-35% by the end of June. Management now sees this as the new base level for the program and in fact plans to launch an upgraded version, Rent Now 2.0, with price tiering capabilities to further stimulate demand. Talk about finding a silver lining.

Outlook and expansion plans mixed: from treading water to smooth sailing

Improving operational indicators and the gradual recovery in mobility all point to the industry generally getting out of the heavy doldrum-state it was in Q2. However, demand pressure still persists courtesy of still-elevated coronavirus cases, on top of worries that consumer spending will not be making as big of a comeback as other sectors of the economy. This leads public REITs—which benefit from inorganic growth more than smaller private-owned operators—to reassess expansion plans in lieu of murky visibility, at least for the remainder of 2020.

For NSA, recalibrations of earlier targets were in order. From 20%, NSA scaled down its portfolio growth projection to 10% for 2020, albeit qualifying that the initial number is still up in the air (still, the lowered bar is telling). The company also flagged that it may not reach its $400-600 million acquisitions target before year-end. Public Storage executives warn that P&L may further slide in the second half as cost pools are more likely to outpace topline recovery, and likewise see 15-20% reduction in deliveries for 2020.

On the other end of the spectrum, CUBE is more optimistic of growth for 2020, although they are closely monitoring consumer behavior and other macro changes such as school openings on a region-to-region basis to get more accurate, store-targeted responses. Similarly, EXR remains of the view that there will be consistent deliveries even if the macro backdrop is hazy, only that the market will be paying bigger premiums on stabilized assets than otherwise (although note that EXR expects same-store revenue growth to remain in the red for H2).


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