Extra Space, Public Storage Deals Are Positive Signs for Industry
posted on 7/31/2023 3:05:00 AM
Even as the storage sector slows from its pandemic boom, several blockbuster deals signal continued long-term optimism for the industry.
On July 20, Extra Space Storage completed its acquisition of Life Storage, leapfrogging Public Storage to become the largest self storage operator in the world. The company now has over 3,500 locations and 270 million square feet of rentable storage space and over two million customers. The combined entity has an enterprise value of $46 billion.
Speaking on CNBC’s Squawk Box on the day the deal closed, Extra Space Storage CEO Joe Margolis said storage has proven itself to be a need-based product that provides consistent cash flow in good times and bad.
“This deal is good because in the storage industry scale matters,” Margolis said. “It gives us more data to analyze for all of our decisions on pricing and customer acquisitions based on data analytics and gives us economies of scale. We think there are significant synergies we can unlock from this transaction.”
Four days later, Public Storage announced it will buy the Simply Self Storage portfolio for $2.2 billion from Blackstone. Orlando-based Simply gives Public Storage 127 new wholly-owned properties across 18 states in some of the country’s fastest growing markets, especially the Sun Belt. It also continues Public Storage’s growth mindset, which has expanded its portfolio by about 55 million net rentable square feet, or 34%, since 2019.
Upon announcing the acquisition of Simply Self Storage, Public Storage CEO Joe Russell said: “This acquisition reflects the continued execution of our multi-factor external growth platform, which includes acquisitions, development, redevelopment, expansion, and third-party management.”
As of March 31, Public Storage had 2,877 facilities in 40 states with 205 million rentable square feet. The Simply deal will add 9 million net rentable square feet.
“We don’t measure value by size, we value companies based on earnings,” said Smedes Rose, a director and real estate analyst with Citi covering the storage sector. “But in the game of who is the biggest, I guess we look at it from both number of distribution points managed, owned or JVs, and from a consumer perspective. How near is your nearest facility?”
With a new #1 and #2 set, the number three position is harder to determine.
CubeSmart has 1,341 locations with 88.6 million square feet of rentable storage space, according to its 2022 annual report. U-Haul has more locations at 2,200 but 81.2 million rentable square feet.
As of March 31, National Storage Affiliates Trust — through its Participating Regional Operators (PROs), third-party acquisitions and joint venture partnerships — operates 1,117 properties with 72.8 million rentable square feet.
In terms of size, Extra Space now has more distribution points or locations to reach customers, Rose said, but many of those stores come through the company’s robust third-party management program and some joint ventures. Public Storage has more direct, wholly-owned facilities.
“They are comparable, but both are big,” Rose said.
The Extra Space and Life Storage deal is now one of the top five largest deals of the year at $12 billion. And the new Extra Space is one of the top 10 REITs in the nation, a striking example of self storage’s ascent among commercial real estate classes over the last decade.
“The storage industry has shown itself to be resilient. It has done well even in times of economic weakness,” Rose said. “This will continue to be the case.”
Life Storage was the target of a hostile takeover by Public Storage earlier this year before the company warded off that plan in favor of combining with Extra Space Storage in a negotiated deal.
“It’s an industry that has always lent itself to consolidation. It’s very fragmented with lots of private owners. There’s been talk for many years that the larger players would acquire the smaller players. We have seen that happen.”
Rose said he suspects Extra Space and Public Storage already have their plates full digesting and integrating their recent mega-deals. At least in the near-term, Rose said he thinks more blockbuster deals are less likely.
The largest REITs, per their guidance to the markets, have said acquisition activity will move away from these larger transactions. Transaction volume is already lower in 2023 than the high watermark years in 2021 and 2022.
“Acquisitions are happening but at a slower pace, and that’s for all the reasons we’ve seen from normalizing rent growth to higher interest rates. And there’s not as much stuff on the market for sale,” Rose said.
NSA is likely to continue a strategy that focuses on tertiary and secondary markets, Rose said, while CubeSmart focuses on high-quality assets in New York and the Sun Belt.
The Life Storage brand will remain. Extra Space Storage intends to operate the newly enlarged portfolio as dual brands. Rose said he understands the decision is based in internet search strategy with an eye toward optimizing the company’s multiple brands in online searches.
But Extra Space Storage will assimilate Life Storage into its revenue management programs, and presumably expects improved revenue performance, based on the company’s own outlooks.
Certainly, Blackstone’s short-term hold of Simply Self Storage produced remarkable results. Blackstone bought Simply in December 2020 for $1.2 billion from a Brookfield Asset Management real estate fund. That was just in time for the pandemic boom to the industry. Less than three years later, Blackstone sold the portfolio for more than $1 billion over what it paid.
The outlook for the industry remains strong with growing Millennial household formation and downsizing Baby Boomers. Development has slowed from its 2019 peak, helping current operators.
“It’s still a pretty fragmented industry,” Rose said. “Market share has gone up for some in certain markets, but it’s not like anyone dominates any particular market.”
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