Public Storage (PSA 0.41%) is already the largest real estate investment trust (REIT) focused on self-storage properties. However, it wants to supersize that portfolio by acquiring rival self-storage REIT Life Storage (LSI). While Life Storage has repeatedly rebuffed its overtures, that's not stopping Public Storage from pressing for a deal. It recently made its offer public to pressure Life Storage to negotiate.
Here's a closer look at the proposed merger and what it means for investors.
The behemoth wants to get bigger
While the U.S. self-storage sector is very fragmented, Public Storage is by far the biggest player in the space.
Image source: Extra Space Storage Investor Relations Presentation. REIT = real estate investment trust.
As the chart shows, Public Storage is the leading self-storage REIT, with a 10% slice of the U.S. market. The company currently has interests in 2,836 self-storage facilities with 202 million net rentable square feet across 40 states. In addition, the company owns 35% of Shurgard Self-Storage, which has 14 million square feet across seven Western European nations.
Public Storage has offered to acquire Life Storage in an all-stock deal valuing the company at $11 billion, proposing a 19% premium to Life Storage's volume-weighted average price over the last 20 trading days.
Life Storage's portfolio currently comprises 1,172 properties with over 86 million square feet of net rentable space across 37 states. The REIT has 758 wholly-owned properties, 141 owned with joint ventures, and 273 it manages for third parties.
Acquiring Life Storage would further extend Public Storage's lead over other self-storage REITs and drive accelerated growth and profitability. Public Storage has much higher margins at its properties (80% vs. 73% at Life Storage units). Because of that, the REIT believes it can produce more income from Life Storage's locations by integrating them into its larger-scale platform. The combined company would also generate more free cash flow it could retain after paying dividends, giving it more flexibility to fund acquisitions or development projects.
Supersizing its expansion strategy and dividend payment
Public Storage has spent the past several years accelerating growth. It has invested heavily in developing new self-storage properties and acquiring smaller self-storage platforms.
Development is a notable growth driver for the company. During the first nine months of last year, Public Storage opened five newly developed projects and completed several other expansion projects, investing $126 million. It had another 2.1 million square feet of projects under development and 3 million square feet of expansions at existing locations, representing over $1 billion of investment. It expects to complete these projects over the next 18 to 24 months.
Meanwhile, the company has also been a consolidator in the sector. Through the third quarter of last year, it acquired 44 self-storage facilities across several transactions adding 3.2 million net rentable square feet for $501.9 million. In 2021, it accelerated its growth by making $5.1 billion of acquisitions, including buying the ezStorage and All Storage platforms for $1.8 billion and $1.5 billion, respectively.
These deals are now paying big dividends for investors. They've helped significantly expand the company's funds from operations (FFO) per share (up 20.8% in the third quarter). Because of that, Public Storage is now starting to return more cash to shareholders through its first dividend increase in years, boosting its payout by 50%.
Even with that big-time dividend boost, Public Storage retains significant cash flow. That's giving it the flexibility to continue funding accretive acquisitions and development projects. It would love to acquire Life Storage to further accelerate its FFO growth rate to generate even more free cash to invest in its expansion. Those deals could allow it to continue growing its dividend.
Aiming at a big target
Public Storage has an excellent track record of making value-enhancing investments. Those deals are paying big dividends for investors this year as the company is boosting its payout by 50%. It's hoping to complete an even larger acquisition by acquiring rival Life Storage, which would supersize its growth prospects over the next few years. Because of that, it's an interesting deal for dividend investors to watch.
