Shortly after revealing its deal to buy SmartStop Self Storage for $1.4 billion, publicly traded Extra Space Storage said it will issue and sell 5.5 million shares of common stock to help pay for the acquisition.
The Salt Lake City, UT-based REIT also will grant underwriters Wells Fargo Securities, Bank of America Merrill Lynch and Citigroup an option to buy a total of up to 825,000 shares.
At a target price of $68.15 per share, Extra Space Storage would reap proceeds of nearly $375 million through the stock offering, with the money going toward the SmartStop deal. On June 16, the REIT’s shares were trading around $68.
It’s unclear how Extra Space will cover the remaining acquisition costs.
On its own
This isn’t the first massive transaction Extra Space has undertaken.
In a joint venture with Prudential Real Estate Investors, Extra Space bought the Storage USA portfolio from GE Commercial Finance in a deal valued at $2.3 billion — at the time, the largest self-storage transaction ever. That deal closed in July 2005. Public Storage would go on to purchase Shurgard Storage Centers for $3.2 billion in 2006.
As part of the transaction in 2005, Extra Space acquired 61 facilities from Storage USA and a minority stake in several joint ventures with Prudential that bought the remaining 259 facilities. In 2012, Extra Space bought out Prudential’s stake in 36 of those properties for $298 million.
One big difference this time around: Extra Space is doing the SmartStop deal without a joint venture partner.
“Portfolio integration posed a risk to self-storage operators in the not-too-distant past,” said Ryan Burke, an analyst at Newport Beach, CA-based Green Street Advisors.
Advances in technology and other areas of self-storage operations helped make such a large acquisition less risky than it would have been 10 years ago, according to Burke.
“Extra Space’s smooth integration of Storage USA and subsequent portfolios offers confidence in the company’s ability to digest its current pipeline,” Burke said.
Going for growth
The addition of 164 SmartStop locations will grow Extra Space’s portfolio by 15 percent, reaching 1,270 owned and managed facilities.
Burke said Extra Space is poised to realize a significant upside from the SmartStop facilities.
“The high-80 percent occupancy [in the SmartStop portfolio] and rents that sit 25 percent below Extra Space’s same-storage average leave room for top-line growth,” Burke said.
The occupancy rate of SmartStop’s same-store portfolio was 86.8 percent during the first quarter of this year, compared with a same-store occupancy rate of 92.5 percent for Extra Space. Average rent per square foot at Extra Space was $13.66 during the first quarter, compared with $11.10 at SmartStop.