External Growth | 2019 Annual Report

When people think of Extra Space Storage’s innovative culture, often they think of leading technology teams. However, our innovation isn’t just tied to technology, it also applies to our growth and deployment of capital. In 2019, we continued to find creative, market appropriate ways to deploy capital in different tiers of the capital stack, at attractive risk adjusted returns. We introduced three new external growth channels in 2019, in addition to our traditional growth approaches: acquisition, joint venture and third-party management.

BRIDGE LOAN PROGRAM

2019 marked the launch of the Extra Space Bridge Loan Program. This program was designed to provide loans to current and prospective third-party management customers on existing properties regardless of their property’s occupancy. This deepens our relationship with these partners, adds management contracts to our platform, and allows us to place capital at an attractive risk-adjusted return. It also provides another future acquisition pipeline, as we further solidify relationships with our partners. We created a program with a co-lender, which allows us to manage the total loan balances carried on our balance sheet, control our loan concentration and enhance returns.

"No one is approaching growth with the same unique, creative energy we are. We are motivated to continue growing through our traditional three avenues: acquisitions, third-party management and joint venture deals. Plus, we’re opening new avenues with fresh ideas like our bridge lending program, our net lease deal and our preferred equity investments."

ZACH DICKENS
Executive Vice President Real Estate

$104 million

IN BRIDGE LOAN PROGRAM ORIGINATIONS

STORES IN 2019 NET-LEASE TRANSACTION

$150 MILLION

PREFERRED INVESTMENT IN SMARTSTOP

170

STORE COUNT INCREASE

NET LEASE TRANSACTION

We entered our first net lease transaction in 2019, converting 31 managed properties to net leases, and adding five new net lease properties to the platform. All NOI generated at the properties above the contracted lease payment accretes to our shareholders, as well as the tenant insurance income and an implied management fee. We effectively have no capital investment in the properties, creating another capital light addition to the platform.

PREFERRED EQUITY INVESTMENT

We made a $150 million preferred equity investment in SmartStop Self Storage REIT (SmartStop) with an additional $50 million available to be drawn by October 2020. SmartStop pays a preferred dividend of 6.25%, before its common dividend can be paid, and the investment includes an option to convert to common stock. After five years, the dividend payment escalates 75 basis points annually, providing either an even higher return or a redemption of capital at that point. Significant common equity is subordinate to our position, providing us an attractive return at a lower risk position in SmartStop’s capital stack. This transaction marks another successful transaction completed between Extra Space and SmartStop, and further strengthens our long-term relationship.

2019 Store Count Growth

wholly-owned 5.4%
Joint Venture 5.6%
Managed 20.5%

NEW STORES

We added 170 stores (net) to our platform in 2019, in 32 different states, including expanding into our 40th state - Idaho. That is more than one store every two business days. This balanced approach to growth continues to keep our portfolio highly diversified. Many of those properties were recently built, also keeping our portfolio relevant, fresh and competitive in the market.

OUR TRADITIONAL GROWTH CHANNELS

Acquisitions

We acquired or developed 47 stores in 2019, for total investment from Extra Space of $424 million. The acquisition environment continues to be very competitive and we are committed to only enter transactions that are accretive for our shareholders. In 2019, all acquisitions came from off-market transactions or existing joint venture or third-party management partners, rather than bidding wars in the open market.

Joint Venture

Our acquisitions included wholly-owned (22) and joint venture structures (25). Our history with joint ventures has produced outsized return on dollars invested. We not only receive our pro-rata share of NOI, but joint ventures provide management and other fees, tenant reinsurance income and promoted return opportunities, giving us additional income without full investment.

Third-party Management