LADERA RANCH, CA—Adding to our coverage of Extra Space's agreement to acquire SmartStop Self Storage, the seventh largest storage owner/operator in the US, for $1.4 billion or $1.29 billion net of planned dispositions, analyst RBC Capital Markets LLC, says that Extra Space's management business should benefit from the deal.
As part of the acquisition, Extra Space will manage the assets of Strategic Storage II Inc. and Strategic Storage Growth Trust Inc. which are two funds affiliated with the sponsor of SmartStop. “We would expect growth in EXR's managed business as the two entities acquire additional storage assets,” says RBC.
In addition, RBC says that the acquisition provides Extra Space with an opportunity to increase leverage. Prior to the acquisition, EXR's leverage had fallen below the company's optimal levels due to prior acquisitions that were overly financed with OP units, says RBC. “We expect the company to issue $600 million of CMBS and secured bank debt to clear the line.”
RBC has revised its estimates due to larger than expected acquisition volume. “Our 2015 estimate assumes the SmartStop acquisition closes in the fourth quarter. We have raised our target to $76 from $74.”
To see RBC's valuation, see below.
Self Storage Adjusted AFFO Analysis.
“Based upon our proprietary Adjusted AFFO analysis for '15, EXR trades at a multiple of 22.6x compared to the weighted-average self storage sector median of 22.1x. We believe this premium reflects EXR's attractive portfolio quality and strong relative organic/external growth prospects in '15-17 partially offset by EXR's higher relative dependence on secured financing and more complex operating structure.”
Equity Net Asset Value Analysis.
“We estimate EXR's current equity NAV to be $67.40/share using a weighted-average 4.50% economic (5.13% nominal equivalent) capitalization rate on forward 12-month proportionate self storage and tenant reinsurance NOI along with adjustments to adjust for G&A cost efficiency (-$0.45/share), stabilize recent CO buyouts (+$0.77/share) and value EXR's CO pipeline (+$0.44/share) using a 5-year DCF analysis. Using this analysis, EXR shares currently trade an implied economic cap rate of 4.43% (5.00% nominal equivalent).”
Liquidation Net Asset Value Analysis.
“Further marking to market proportionate debt (+$0.61/share), adjusting for proposition 13 RE tax exposure in CA (-$0.95/share) and removing the G&A efficiency adjustment to reflect a sale/privatization scenario, we calculate a current liquidation NAV estimate for the portfolio of $67.51/share. Using this analysis, EXR shares currently trade at an implied economic cap rate of 4.44% (5.06% nominal equivalent).”
Price Target Justification.
“Our revised 12-month price target of $76/share represents a 25.0x multiple on our '15 Adjusted AFFO estimate vs. our target for the self storage sector of 24.5x and is supported partially by our forward 12-month equity NAV estimate of $73.88/share.”
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
