In what its CEO called a “very safe transaction,” self-storage REIT Extra Space Storage Inc. bought out a joint venture partner’s interest in a 14-facility portfolio for $204 million.

Joe Margolis, chief executive of the Salt Lake City, UT-based REIT, revealed the deal during the company’s May 2 earnings call with Wall Street analysts. The transaction took place after the March 31 close of the REIT’s first quarter.

The 14 properties, located in 12 states, were part of an Extra Space joint venture.

Margolis said the facilities were acquired in the $2.3 billion deal in 2005 for the 458-facility Storage USA portfolio. Extra Space’s joint venture partner in that transaction was Prudential Real Estate Investors, now known as PGIM Real Estate.

During the call, Margolis did not name Prudential or PGIM as the joint venture partner in the recent $204 million deal. None of Extra Space’s recent filings with the U.S. Securities and Exchange Commission cite the partner’s name.

Asked about the identity of the joint venture partner, Jeff Norman, vice president of investor relations and corporate communications at Extra Space, said a nondisclosure agreement prevented him from offering “a lot of additional color” about the buyout beyond publicly available information.

Familiar facilities

Margolis said Extra Space knows the 14 facilities “very well.”

“We know the cash flows. We know if the roof leaks … . We have no transition costs, no branding costs, no broker costs,” he said.

Aside from familiarity, these older facilities offer a financial advantage.

“They’re stabilized,” Margolis told Wall Street analysts. “As you know, as properties get older, they get a larger proportion of long-term customers, so they just get more and more stable.”

A buyout incentive

Margolis said Extra Space bought the 14 facilities at a cap rate in the mid-5s. Therefore, he noted, the properties were not a “steal.”

However, Extra Space did benefit from an incentive known as a “promote” that was built into the joint venture. Through this arrangement, the REIT was able to collect profit above a certain return threshold. For Extra Space, that amounted to $14 million — money “that was nowhere on the books,” Margolis said.

After the $14 million incentive was credited to Extra Space, the effective first-year cap rate for the portfolio rose to about 6 percent, he said.

Other first-quarter highlights include:

  • Same-store rental revenue went up 5.2 percent.
  • Same-store NOI grew 4.5 percent.
  • The bottom of the 2018 guidance for same-store revenue growth was raised by 25 basis points, resulting in a range of 3.5 percent to 4.25 percent.
  • The bottom of the 2018 guidance for same-store NOI growth was raised by 25 basis points, resulting in a range of 3.25 percent to 4.5 percent.
  • Major markets achieving above-average performance were Atlanta, GA; Indianapolis, IN; Las Vegas, NV; and Los Angeles and Sacramento, CA.
  • Major markets registering below-average performance included Charleston, SC; Dallas and Houston, TX; Virginia Beach-Norfolk-News, VA; and West Palm Beach-Boca Raton-Boynton Beach, FL.
  • 41 properties were added to the third-party management program.
John Egan