Long-term growth in the short-term storage industry has made this sector attractive to investors for years, and Life Storage (LSI) is hardly an exception.
The chart below shows how Life Storage -- one of the largest real estate investment trusts (REITs) in the self-storage market -- would have turned a $1,000 investment into $33,470 since its 1995 initial public offering, compared with $12,370 in total return for the S&P 500.
LSI Total Return Level data by YCharts.
You couldn't exactly have bought Life Storage shares back then. The company was named Sovran Self Storage until a post-merger rebrand and the adoption of its current name in 2016.
But since then, the performance has still been solid, especially after the pandemic helped fuel a surge in self-storage rentals and in the companies that own them. You can see that in the chart below, which shows Life Storage stock's total return since 2016.
LSI Total Return Level data by YCharts.
Based in Buffalo, New York, Life Storage has grown to 1,167 stores in 37 states, with an emphasis on markets where the population is growing. That's not all that's growing. This REIT has raised its dividend by about 61% in the past five years and is now yielding a nice 4.2% or so at a share price of about $104 that analysts expect to rise to $141.
That's a lot of upside, of course, but Life Storage has been turning in some impressive numbers that speak to its current strength while positioning it for continued growth.
For one, there's same-store occupancy of nearly 92% as of Oct. 31. And adjusted funds from operations, a good measure of REIT cash flow used to support dividends, was up 26% year over year in the third quarter. Same-store revenue also was up a healthy 15% in that same period, helped along by the ability to raise rents when units turn over, which, of course, they do a lot.
Four strategies for driving continued growth
Along with the growing demand for storage space in general, I like four specific strategies that Life Storage is deploying to maximize its gain in this industry. One is its use of joint ventures that allow it to gain fee income and equity ownership without as much financial commitment to an individual project. Another is its extensive use of touchless, digital self-service rentals, which alone accounted for nearly 40% of its rental income in October.
A third element is its Warehouse Anywhere program, which provides space for e-commerce vendors. Then there's its third-party management program that spreads its brand awareness -- Life Storage properties seem to be everywhere in a lot of markets -- while generating income without ownership. This can lead to more acquisitions of those properties down the road.
Of course, investors want to see portfolio growth. REITs don't hold a lot of cash, so to grow, they need to borrow directly or issue shares. Life Storage has managed its balance sheet well, earning an investment-grade rating from Moody's and posting a very healthy debt-to-EBITDA (earnings before interest, taxes, debt, and amortization) ratio of 4.6 as of Sept. 30.
Getting it together in a fragmented industry
The relatively low cost of entry and steady demand for self-storage space has led to a lot of growth for players, large and small, and the self-storage industry is still quite fragmented. According to an industry outlook report from Realty Mogul, only about 16% of the national market is controlled by the 10 largest operators, and about 77% of all facilities are independently owned.
That leaves a lot of room for Life Storage to expand, given its diverse strategies. As of Oct. 31, the company's portfolio includes 758 wholly owned facilities, 141 joint ventures, and 268 it's managing for third parties. A recession-resistant business with high cash flow, relatively low capital expenses, and repricing ability, combined with 35 years of industry experience, makes Life Storage a good candidate to keep turning a $1,000 investment into something much more.
