Leading self-storage real estate investment trust (REIT) Public Storage (NYSE: PSA) has agreed to buy ezStorage for $1.8 billion. The transaction will enhance the REIT's portfolio scale, quality, and growth potential. It's Public Storage's second notable deal in the last few months and another in a string of consolidation transactions in the self-storage space over the past year.
An easy strategic fit
ezStorage currently owns 48 high-quality self-storage properties with 4.2 million net rentable square feet in Washington, D.C., Virginia, and Maryland. That portfolio will enhance Public Storage's presence in the mid-Atlantic region, giving it an unmatched market presence at 163 properties and 11.3 million rentable square feet. Overall, it will grow its property count in that region by 42% and its net rentable square feet by 59%. Public Storage expects that the acquisition will be immediately accretive to its NOI and FFO with further upside potential in the future as it benefits from its increased scale in the region and embedded expansion opportunities.
Public Storage sees several growth drivers enhancing the returns it can earn from the ezStorage portfolio in the future. It will assume responsibility for one property currently under construction and expand eight existing properties, which will increase ezStorage's square footage by 10% through 2023. The company expects to earn a high return of a 10%+ estimated stabilized NOI yield on these expansion projects. On top of that, Public Storage believes it can grow the NOI of ezStorage's existing portfolio through revenue optimization, operating expense efficiencies, higher occupancy, and ancillary income like tenant insurance and cell towers. That embedded growth should boost Public Storage's FFO and NOI over the next few years.
The consolidation wave continues
Public Storage's acquisition of ezStorage is its second notable deal in recent months. In December, the REIT closed the first phase of its acquisition of the newly built Beyond Self Storage portfolio. The company will acquire 36 properties with 3.6 million net rentable square feet for $528 million. The first phase included 24 properties with 2.3 million square feet. It expects to acquire the remaining properties that are in various stages of development upon completion this year.
Since 2019, Public Storage has acquired $3.6 billion of self-storage assets, including ezStorage. Overall, it has added more than 20 million square feet to its portfolio during that time, making it the leading acquirer among its publicly traded REIT peers.
Overall, deal-making in the self-storage sector has been on the rise over the past year as developers cash in on recent investments. Last year, self-storage deals hit a record at $7.7 billion, according to an analysis by Real Capital Analytics, one-third higher than 2019's level. The leading buyer was Blackstone Group's (NYSE: BX) non-traded REIT BREIT, which purchased Simply Self Storage from a real estate fund managed by Brookfield Asset Management (NYSE: BAM) for $1.2 billion. Another notable deal was NexPoint Advisors’ $900 million acquisition of Jernigan Capital, financed in part by a $300 million preferred equity investment by Extra Space Storage (NYSE: EXR). As part of that financing deal, the self-storage REIT will assume management of the properties and certain rights to purchase them in the future.
More consolidation seems likely in the future given the fragmented ownership in the self-storage sector. Currently, small non-REIT operators control 45% of the institutional-quality properties in the U.S. (and another 25% of the country’s non-institutional quality space), leaving lots of room for REITs and institutional investors to continue acquiring smaller players to enhance their scale. While there will be plenty of competition for future deals among REITs and private equity funds, Public Storage believes it's the acquirer of choice to drive consolidation in the sector. It has a history of executing win-win transactions and a balance sheet built for growth.
Fueling up its growth engine
Public Storage is the world leader in owning, operating, developing, and managing self-storage properties. However, the REIT has lots of room to keep growing, given the fragmented ownership in the self-storage sector. With a top-notch balance sheet even after this deal, Public Storage has plenty of financial flexibility to keep shopping for needle-moving acquisitions as consolidation in the self-storage sector continues.