How To Survive A Bear Attack: Extra Space And Life Storage Build A Bigger Bear

Posted by msmessenger on Apr 5, 2023 12:00:00 AM

There’s an old wilderness survival rhyme that goes like this, “If the bear is brown, lie down; if it’s black, fight back, and if it’s white, say goodnight.” In the self-storage environment, momentarily lying still enabled Life Storage, Inc., to not only escape the bear hug Public Storage was using to take over its entire portfolio but also form a more forceful alliance with Salt Lake City, Utah-based Extra Space Storage, the industry’s second largest real estate investment trust (REIT).

Announced the morning of April 3rd, the $12.7 billion deal between the two REITs is the most momentous merger in the self-storage industry’s history. Moreover, the merger will dethrone Public Storage from its long-held reign as the No. 1 operator by creating “the largest storage operator and one of the largest REITs in the RMZ.” The acquisition of Life Storage would actually propel Extra Space Storage up the MSCI US REIT Index (RMZ) rankings by six slots, from the 12th to the sixth largest REIT in the RMZ by equity market cap. Life Storage was previously ranked 25th in the RMZ.

“The Extra Space Storage and Life Storage portfolios are highly complementary,” says Extra Space CEO Joe Margolis, “and while each were already top performers in the sector individually, we believe the combined portfolio will be greater than the sum of the parts.”

Huge News
Similar to seeing a bear up close in the wild, most readers were likely astonished by the headline of the recent press release distributed by the REITs: “Extra Space Storage and Life Storage combine to form the preeminent storage operator.” The news was even more surprising considering the fact that Life Storage rejected a “hostile” acquisition proposal from Public Storage on Feb. 16—less than two months ago—and both REITs had declined to comment when Bloomberg reported the possibility of an acquisition on March 22nd. Following the unconfirmed announcement that Extra Space was weighing an offer for Life Storage, shares of Life Storage spiked 2 percent, whereas Extra Space’s shares dropped nearly 1.5 percent.

Less than two weeks later, on March 31st, Life Storage had two bidders for its company. After a weekend of thorough deliberation, the Life Storage board made the decision that merging with Extra Space would maximize its value and provide better immediate and long-term returns for its shareholders. The REITs then announced that they had entered into a “definitive merger agreement” on April 3rd. According to the press release, the tax-free, all-stock transaction “brings together two industry-leading platforms, and the combined company is expected to have a pro forma equity market capitalization of approximately $36 billion and total enterprise value of approximately $47 billion.”

Of the company’s projected pro forma, an investor presentation for the “preeminent storage operator” states that the acquisition of Life Storage would increase the size of Extra Space’s portfolio by more than 50 percent by facility count. With the addition of Life Storage’s 1,198 properties (758 wholly owned, 141 joint venture, and 299 third-party managed stores), the transaction adds over 88 million square feet to the Extra Space portfolio. The companies’ combined portfolio represents the largest storage operation in the country with a total of 3,536 locations (1,891 wholly owned stores, 459 joint venture stores, and 1,186 third-party managed stores), more than 264 million square feet, and over two million customers.

Those impressive totals mean that the merged company would hold 13 percent of the U.S. self-storage market share by square footage—three percent more than rival REIT Public Storage’s 10 percent and 9 percent more than CubeSmart, National Storage Affiliates, and U-Haul, each of which reportedly hold a four percent share of the market. Their U.S. market share pie chart also listed percentages for non-institutional quality properties (approximately 20 percent) and non-REIT institutional quality properties (approximately 45 percent). To put these percentages into perspective, according to the 1996 to 1997 Self-Storage Almanac (the first annual almanac published by Mini-Storage Messenger), Public Storage held 7.32 percent of the industry market share when that publication went to press; until this merger, Public Storage was the largest self-storage operator in the United States.

As for the terms of the merger agreement, Life Storage shareholders will receive 0.8950 of an Extra Space share for each Life Storage share they own. Based on Extra Space’s share price close on March 31, 2023, that represents a total consideration of approximately $145.82 per share. At the deal’s closing, Life Storage and Extra Space shareholders are expected to own around 35 percent and 65 percent of the combined company, respectively. The transaction was unanimously approved by the boards of directors for both companies.

“We are impressed with the management team’s strategic repositioning of the Life Storage portfolio over the last seven years, creating a highly diversified portfolio of quality storage assets in strong growth markets,” Margolis said in the press release. “The business combination is highly synergistic, creating an even stronger combined company that will drive long-term, outsized operational and external growth opportunities through scale efficiencies, higher retained cash flow, data analytics, third-party management relationships, and more. We look forward to welcoming the Life Storage family to Team Extra Space and bringing our organizations together to drive enhanced growth.”
Life Storage CEO Joseph Saffire said, “Following a deliberate and comprehensive review, the Life Storage board unanimously concluded that the pending transaction with Extra Space maximizes value today and is the transaction most likely to deliver superior long-term returns for our shareholders. Together with Extra Space, we expect to accelerate growth while maintaining our customer-centric focus and commitment to continued innovation. We are also pleased that Life Storage shareholders will participate in the tremendous upside of the combined Extra Space and Life Storage platform through a significant ownership stake in the combined company. I want to thank the Life Storage team for their continued unrelenting dedication and commitment to our business and customers.”

Though both REITs have exceptional brand recognition across the country, the now unified companies will retain the name Extra Space Storage and continue to trade on the NYSE under the ticker “EXR.”
“We will continue operating under the Extra Space Storage brand,” says McKall Morris of Extra Space. “We plan to evaluate if we maintain multiple brands and determine if that makes sense for us long-term after thorough testing.”

During the REITs’ combined conference call on April 3rd, Extra Space’s Margolis elaborated on that notion, stating that Life Storage facilities would be rebranded as Extra Space over time. However, they would be collecting data about whether operating under two brands would be more favorable for the company throughout that rebranding process. “This is unwritten as if we have one brand,” Margolis adds about the merger.

As for their executives and boards, Kenneth W. Woolley will remain chairman of the board and Joseph D. Margolis will stay on as CEO and director. Extra Space’s board of directors will also gain two additional directors, expanding from 10 to 12; it will consist of nine directors from Extra Space’s board and three directors from Life Storage’s board.
Subject to shareholder approval and other customary closing conditions, the transaction is expected to close in the second half of 2023.

Shared Benefits
“Extra Space and Life Storage both share customer-centric mindsets,” Morris says. “By combining our footprints, leading technology, and operating platforms, we will be able to provide the most seamless storage experience in the industry.”
Per the companies’ joint press release, “The combination of Extra Space and Life Storage is expected to result in significant strategic, operational, and financial benefits to shareholders,” such as transformative scale, enhanced diversification, significant synergy opportunity, embedded growth drivers, and positive financial impact.

Some of the benefits mentioned in the investor presentation were improved cost of capital, potential credit ratings upgrade, improved purchasing and cost efficiencies, better data and analytics, widening of the customer acquisition funnel, expansion of their solar footprint, a higher penetration rate for Extra Space’s tenant insurance program, marketing spending savings, a larger bridge loan business, and accelerated growth of managed stores. Of course, by essentially doubling its portfolio size, Extra Space will also enjoy store densification and a greater presence in growth markets such as Texas (2.8 percent increase), Florida (2.1 percent increase), and the Southeast (0.8 percent increase).

Essentially, the REITs will take the best of Life Storage’s offerings and merge them with the best of Extra Space Storage’s. Margolis also specifically mentioned that the combined company would be utilizing one revenue management system.

Will Consolidation Continue?
Certainly, consolidation can create enticing efficiencies for everyone involved, especially during times of economic uncertainty. But high-profile deals like this one are uncommon, so further consolidation is likely to occur at smaller clips.

“There is already a greater consolidation within the industry,” says Steve Mirabito, president of StoragePRO Management, Inc. “Although the ‘Life Storage’ mega-merger opportunities happen infrequently (Shurgard being the most recent), our industry is rapidly consolidating through owner/operators backed by venture funds. There will be plenty of operators of a few hundred properties looking to get larger and the smaller players looking to exit—especially if equity and venture capital have a limited interest, i.e. 10-year position in their investment prior to wanting to exit. Once again, the savings from SG&A by putting a few 100-unit operators together is too compelling not to consolidate. Similarly, property management companies are facing the same dilemma. That is why we at StoragePRO Management made the strategic decision to grow. Smaller management companies cannot afford the technology, systems, and services to remain relevant. The Life Storage merger is living proof!”

Pogoda, however, doesn’t believe there will be more significant consolidation this year, “… unless PS decides it has something to prove and goes after CubeSmart or one of the larger regional players or management companies. With pricing having come down from the 2022 peak, it makes sense to go after a publicly traded company and try to buy it at a discount vs. last year,” he says. “But many of the large regional players will likely hold their cards, enjoy the continued cash flow, and wait for the market to rebound before considering a big buyout.”

Obviously, this merger will consolidate the REITs and top operators, but self-storage professionals are divided as to its potential impact on the asset class.

Pogoda, for one, doesn’t believe the merger will affect the industry. “Really, it’s like rearranging the deck chairs on the Titanic,” he says. “The REITs will still control the same market share as they did previously in an industry that is still highly fragmented. It may mean slightly higher rental rates in markets where Extra Space will now have a larger market share, but not much else.”

But Mirabito feels the merger should serve as a “wake-up call” for independent owners and operators. “Assuming this deal goes through, Extra Space will be the largest self-storage operator in the nation and quite frankly will have the momentum and management to leave its competition and every independent operator in the dust,” he says. “Our industry is a retail business—not a real estate play. I have always said ‘retail is detail.’ Face it, storage is a very high profit margin business and creates complacency amongst storage owners by not realizing how industry consolidation is and will adversely impact their business. Therefore, I think way too many owners and operators are not aware how the synergies of these dominate forces within our industry will result in each owner/operator facing an increasingly greater operational challenge. The internet and digital marketing playing ground within our industry is changing quicker than our eyes are blinking.”
Whether industry consolidation slows or intensifies, makes competition tougher or easier, there is one thing most self-storage professionals can agree upon, and P. Scott Stubbs, CFO of Extra Space Storage, said it best during the REITs’ combined conference call on April 3rd. “As both companies regularly say, ‘It is a great time to be in storage.’”

Let’s Talk Shop
To gauge the industry’s response to the Extra Space Storage and Life Storage merger, Mini-Storage Messenger reached out to several self-storage professionals for their thoughts. Here’s what they had to say.

“Basically, [it’s] great news for LSI shareholders. The Life management team did the right thing and held a process that was able to maximize the value for company. Extra Space paid a very full value for the company, and it is likely to be dilutive over the next several quarters. Extra is betting that size matters, and that the economy isn’t going to get much worse. They will also have to execute on $100 million in ‘synergies’ when combining the two companies—code for cleaning house in Buffalo because there won’t be room for any fat in this deal. The integration of this transaction will be a challenge for Extra, and they will have to execute at a very high level, or things could get ugly. However, Joe Margolis and the team at Extra are arguably the best in the business, so I would not bet against them.” –Cris Burnam, CEO of StorageMart

What was your initial reaction to the news of the Extra Space/Life Storage merger?
“Bloomberg News reported a possible EXR acquisition of Life Storage March 22nd. Since the Bloomberg report things remained silent. Although I expected PS to make a higher offer for Life Storage, I was not surprised to hear of the formal April 3rd announcement of the Extra Space/Life Storage merger. This announcement should serve as a wake-up call to our industry how consolidation is adversely affecting independent operators by their ability to out compete and get more customers, resulting in a higher cost for each independent operator to acquire new customers. Some might say, ‘Oh, it does not affect me,’ but it affects everyone as size and scale affect your ability to compete and get customers through digital marketing and your ability to maximize their potential revenue.” –Steve Mirabito, president of StoragePRO Management, Inc.

“I was surprised that I hadn’t thought of this possibility weeks ago when the PSA/LSI hostile takeover was announced. I also have been kicking myself for not buying LSI stock when the handwriting was on the wall that something was going to happen with them.” –Maurice Pogoda, chairman and founder of Pogoda Companies

In your opinion, why was Extra Space Storage able to do what Public Storage couldn’t do?
“Corporate culture! Extra Space has spent decades nurturing their corporate culture and relationship within the storage industry. Both Extra and Life, I believe, are more philosophically and strategically aligned in their corporate culture. Therefore, it only seemed logical Extra might be Life Storage’s white knight. The importance of corporate culture was evidenced when Extra Space announced they would expand the number of board members to include Life’s CEO Joseph Saffire. Joining forces and working together is really no different than the value of hiring third-party property management! I think Life put their ego aside and recognized the SG&A (Selling, General & Administrative Expenses) savings by joining with Extra Space was too compelling of a proposition to ignore and try to remain independent.” –SM

“No one likes a hostile takeover. A merger negotiated on their own (relative) terms is better than having it shoved down their throats. PS was a bit arrogant in how they went about it, and LS sought an alternative and found one.” –MP
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Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, Self-Storage Canada, and Mini-Storage Messenger’s annual Self-Storage Almanac.