In one of the largest acquisitions ever in the U.S. self-storage industry, Extra Space Storage will scoop up Smart Stop Self Storage in a deal valued at $1.4 billion.

The deal, announced June 15, would give Salt Lake City, UT-based Extra Space ownership of 121 SmartStop facilities, as well as management of 43 facilities owned by SmartStop’s related investment funds.

“SmartStop has built a high-quality national portfolio, and these 164 stores will enhance and complement our physical footprint and digital presence,” said Spencer Kirk, CEO of Extra Space, a publicly traded REIT.

In terms of number of facilities, Extra Space is the country’s third largest self-storage operator, with more than 1,100 owned and managed locations. Extra Space competitor Public Storage is the largest operator in the U.S.

Ladera Ranch, CA-based SmartStop is the country’s seventh largest operator of self-storage facilities, with locations in 21 states. The non-traded REIT operated at a loss for several years while building its portfolio. Last year was SmartStop’s first profitable year.

‘Logical’ sale

Self-storage analyst and broker Marc Boorstein, principal of Chicago, IL-based MJ Partners, said the deal makes sense for both parties. “It was a very logical and predictable sale,” Boorstein told The SpareFoot Storage Beat.

In May 2013, SmartStop hired Citigroup Global Markets to help the company analyze options for boosting shareholder value. One alternative was an IPO, while another was a deal with a publicly traded self-storage operator.

Michael Schwartz
Michael Schwarz is chairman and CEO of SmartStop Self Storage.

Boorstein said SmartStop had been quietly shopping itself to the big four self-storage REITs since then, but hadn’t able to strike a deal until now.

“SmartStop’s performance has gotten a lot better over the last 12 months,” Boorstein said. “Extra Space knows they can continue the performance and likely improve upon it.”

Moving parts

The deal is pending approval from SmartStop’s common shareholders. Extra Space expects it to close during the second half of 2015.

SmartStop stockholders will receive $13.75 in cash for each share. Shareholders could decide to convert their shares to Extra Space stock, according to documents filed with the U.S. Securities and Exchange Commission (SEC).

Eight properties owned by SmartStop are excluded from the deal: one facility in California, two facilities in Alabama and five facilities in Toronto, Canada. Strategic 1031 LLC, an entity owned and controlled by SmartStop President and CEO Michael Schwartz, will pay $120 million to buy those facilities. Extra Space will lend the entity up to $118 million for the purchase, according to the SEC. Following the transaction, Extra Space will manage the Alabama and California facilities.

The $1.4 billion deal consists of $1.29 billion to be paid by Extra Space and about $120 million tied to the sale of the eight facilities to Schwartz.

Schwartz told Commercial Property Executive: “Our mission was a five- to eight-year investment hold. Since we started eight years ago, the timing for this merger worked well with our strategy. Today’s investment market is a positive environment for a large-scale transaction at an attractive price.”

As part of the transaction, Extra Space will manage the facilities still owned by two SmartStop entities, Strategic Storage Trust II and Strategic Storage Growth Trust. Both of those entities were launched last year. In a joint deal, the two trusts recently bought 32 facilities from DSI Properties.

Photo of Michael Schwartz courtesy of the Orange County Register

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Alexander Harris