Publicly held self-storage REIT Extra Space Storage just made a $150 million bet on one of its non-traded industry peers.
On Oct. 29, Salt Lake City, UT-based Extra Space purchased $150 million worth of shares of newly issued convertible preferred stock in Ladera Ranch, CA-based SmartStop Self Storage REIT Inc. Extra Space committed to buying another $50 million in preferred shares of SmartStop within the next 12 months. In most cases, the preferred shares can’t be redeemed for five years; the investment carries a dividend of 6.25 percent.
SmartStop is the 10th largest self-storage owner and operator in the U.S., with more than 130 owned or managed facilities in 18 states and Canada. Extra Space is the country’s second largest self-storage owner and operator; its portfolio comprises nearly 1,800 facilities in 40 states, the District of Columbia and Puerto Rico.
“Very comfortable” deal
Extra Space and SmartStop are far from being strangers.
In 2015, Extra Space purchased SmartStop’s non-traded predecessor, SmartStop Self Storage Inc., for about $1.4 billion. Extra Space gained 165 owned or managed facilities in the deal. Extra Space subsequently operated nearly 100 facilities owned by SmartStop affiliates Strategic Storage Trust II Inc. and Strategic Storage Growth Trust Inc. until SmartStop switched to in-house management.
CEO Joe Margolis said on Extra Space’s Oct. 30 earnings call that the SmartStop stock purchase is a solid investment.
“We’re in a very comfortable position from a risk standpoint,” Margolis told Wall Street analysts. “And we also feel it strengthens our relationship with the company, and hopefully we’ll do more with them in the future.”
Steep climb in advertising costs
Margolis also told Wall Street analysts that Extra Space’s digital advertising “is as expensive as we have ever seen it,” although he didn’t provide a dollar figure. The rise in advertising costs contributed to a 4.3 percent hike in same-store operating expenses for the first nine months of this year compared with the same period in 2018.
“Our job is to make sure we are as smart as we can possibly be with our marketing dollars in terms of bidding on the right [online search] terms, in the right places, at the right time, and also finding alternatives to Google to drive business to our stores,” Margolis said.
Margolis identified social media and billboards as two of those alternatives.
“We are trying other avenues [for marketing],” he said. “I think it’s way too early to say how effective they will be, and what will be the winners and what may not be the winners.”
Other highlights of Extra Space’s third quarter:
- Same-store revenue jumped 3.3 percent compared with the year-ago period.
- Same-store NOI grew 2.1 percent versus the same period in 2018.
- Same-store occupancy remained at 93.8 percent compared with the same time last year.
- Major markets that posted above-average increases in revenue included Cincinnati, OH; Hawaii; Las Vegas, NV; Norfolk-Virginia Beach, VA; Oklahoma City, OK; and Phoenix, AZ.
- Major markets that performed below the company’s portfolio average included Charleston, SC; Denver, CO; Houston, TX; and Miami, Tampa and West Palm Beach-Boca Raton, FL.
- The third-party management platform added 42 facilities.
- Through Sept. 30, the company had spent $362 million on acquisitions this year, with another $50 million to $52 million worth of deals expected to close before the end of 2019.
- The bridge loan program is expected to grow by at least 100 percent in 2020.