With the approval of both companies’ shareholders, Extra Space Storage and Life Storage completed their previously announced merger on July 20, 2023. Together the REITs have become the largest self-storage operator in the United States (based on total number of facilities) with more than 3,500 locations across 43 states, approximately 270 million rentable square feet of storage space, over two million customers, and an enterprise value of approximately $46 billion.
Though the two REITs had a market overlap of 80 percent, the addition of Life Storage’s portfolio has increased Extra Space Storage’s presence in Texas, Florida, and the Southeast. What’s more, Extra Space had no locations in Arkansas, Iowa, or Buffalo, N.Y., prior to the merger.
Since many self-storage professionals were mulling over the specifics of this record-breaking deal,Messengersat down with Extra Space Storage’s CEO Joe Margolis to shed some light on the matter.
Value and Synergies
When asked how the merger would impact shareholders, Margolis, who has had a presence at Extra Space since 2005, serving a member of its board of directors for more than a decade before stepping into the roles of CIO and executive vice president in 2015 and being promoted to CEO in 2017, replied that it will create long-term value and synergies. “Scale is really important,” he says, pointing out that Extra Space Storage is now 50 percent larger and has 50 percent more data that the REIT can utilize for decision-making.
Margolis mentions that the merger will enable Extra Space to improve its balance sheet, lower its cost of capital, increase its buying power, expand its third-party management and bridge landing platforms, and form better industry relationships. On the corporate level, the REIT has already achieved some G&A expense savings by eliminating duplicate, higher level functions. For instance, there will be one board instead of two (although the Extra Space board has expanded from 10 to 13 directors with the addition of Mark G. Barberio, Joseph V. Saffire, and Susan Harnett), one executive team of C-level positions, and fewer administrative roles.
Alternatively, he says that there are “almost no redundancies” at the store level. “We need those employees to run the stores.”
“While there will certainly be some change for the former Life Storage employees who are joining our team, we have been and will continue to work hard to train and incorporate them into our operations and processes,” says Margolis. “We also think the larger organization will provide greater opportunities for advancement for our new and existing teammates.”
As for facility operations, Margolis states that all of Life Storage’s stores are being moved up to Extra Space’s platform of proprietary and integrated systems. At the same time, the company will be analyzing Life Storage’s systems in search of possible improvements that could be incorporated into Extra Space’s platform to optimize operations.
Instead of rebranding the entire Life Storage portfolio, which included 1,198 properties (758 wholly owned, 141 joint venture, and 299 third-party managed stores), Extra Space “will be testing a dual-brand strategy” for approximately one year, says Margolis. While the REIT originally underwrote $90 million for rebranding, he discloses that only “143 stores will be rebranded” from Life Storage to Extra Space Storage. Life Storage stores that are being rebranded will receive new Extra Space signage and office updates to match Extra Space’s color palette. Margolis estimates that the decision to utilize a dual-brand strategy instead of rebranding every Life Storage facility will save the company between $70 million and $75 million.
Despite the substantial savings, it was digital marketing that motivated their decision to operate under two brands. Margolis explains that having both Extra Space and Life Storage pop up in “storage near me” search results doubles the REIT’s digital real estate, which can meaningfully impact its overall performance.
Outside of the digital presence, all stores within the newly combined portfolio will run the same way. This will enable store-level employees to work at both store brands and refer customers to facilities of either brand to meet their needs. To the REIT and its employees, the differences will be “invisible,” he says.
“… regardless of brand, the stores will be operated in similar manner, focused on providing a clean and safe storage facility and excellent customer service driven by our strong technology platforms,” adds Margolis.
While operating under multiple brands may be an uncommon strategy within the self-storage industry, Margolis says that “it’s nothing new,” pointing to the hotel industry as an example. “Marriot has many brands.” To be exact, Marriot has 31 brands, all of which offer different features at varying price points to accommodate any prospective customer.
When it comes to further expansion of the portfolio, though, Margolis clarifies that new stores will most likely be brought on as Extra Space Storage. However, that decision will be made on a case-by-case basis as some markets may be better suited for the Life Storage brand, such as those where it already has an established presence.
Currently, Margolis is most excited about the internal growth of Extra Space Storage. He’s eager to expand the company’s third-party management business, identify value-add opportunities, multiply its number of solar roofs (55 percent of Extra Space branded, wholly-owned stores have solar panels), and develop storage on underutilized parking lots. These endeavors will coincide with the assimilation of Life Storage’s assets.
“We are laser-focused on integrating the Life Storage portfolio and people onto the Extra Space platform, extracting the synergies we have identified, and preserving our culture and values that have led to our consistent performance,” he says. “After smoothly integrating the Life Storage portfolio, people, and systems, we will turn to the external growth opportunities we believe will be available through this merger.”
Eventually, the merged REIT will resume external growth through acquisitions and ground-up development.
Finally, when asked whether the self-storage industry would experience more consolidation, Margolis gave a nod without hesitation. He firmly believes that “the business absolutely is going to continue to consolidate.”
Why will consolidation continue? The answer comes down to scale, the importance of which cannot be overstated. With technology at the forefront of self-storage operations, and customers seeking elevated storage experiences, it’s becoming increasingly more difficult—and costly—for independent owner-operators to compete with larger regional operators and REITs. Many mom-and-pops have begun acknowledging this growing reality. In the first half of 2023, more than 100 self-storage owner-operators hired Extra Space for its third-party management services; its third-party management platform is the largest in the industry.
“Big operators have advantages,” he says, pointing to data, pricing, and technologies as a handful of operational components that economies of scale can make more affordable and effective. “It’s difficult for smaller operators to compete.”
He goes on to say that “NOI and occupancies won’t likely be as good” for independently operated facilities that share a market area with REITs and other larger operators.
For independent owner-operators to better compete and enjoy similar economies of scale, it may be necessary to employ a third-party management company or join a storage cooperative. Margolis says that most facilities “do better” with third-party management, but he adds that owner-operators should “only do it if you truly want them to manage it. Don’t hand over the keys and then ask to drive.”
Erica Shatzer is the editor of Modern Storage Media.