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The self-storage industry has been a popular asset class for real estate investors over the past decade. Low overhead and high demand for storage space has created the perfect storm for a growing commercial real estate (CRE) industry. Additionally, its proven track record for resiliency during times of economic hardship makes this investment avenue even more appealing to investors in the current climate.
While Life Storage, Inc. (NYSE: LSI) isn't the largest self-storage real estate investment trust (REIT), it is one of the leaders in the industry and is growing rapidly. Currently it has more than 900 storage facilities under management across 30 states and Ontario, Canada, with another 338 third-party facilities using their management platform. Let's take a look at where the company stands to determine whether Life Storage is a good buy right now.
Strong performance during uncertain times
While many commercial real estate sectors have been hit hard by the global pandemic, the self-storage industry has fared rather well. Life Storage in particular had a great third quarter with rental collections on par with pre-pandemic levels and increases in same-store revenues, net operating income, and funds from operations (FFO). Occupancy at the end of September 2020 was 93.2%, which is 2.9% higher than occupancy the same quarter of the previous year.
Move-in's are up 11% with move-outs down 7.7%. Much of business operations are back to normal including auctions for delinquent tenants, which is allowing the company to recoup uncollectable units and make them available again for rent. The company is aggressively expanding, adding 30 new facilities to their management software and acquiring 25 stores from their joint ventures. The company also recently partnered with Deliverr in creating a third-party logistics (3PL) and warehouse storage service solution catered business to business (B2B).
When it comes to the company's financial position, Life Storage appears well funded with ample liquidity including $110.2 million in cash or cash on hand, having reported an annualized debt to annualized EBITDA of 5.8x and debt service coverage of 4.3x, which falls in line with the standard for the REIT industry. Dividends are currently $1.07 per share quarterly, making the company's payout ratio 70%, which is well within normal ratios for REITs.
Where the company is most vulnerable
Unlike most other self-storage REITs, Life Storage doesn't develop properties from the ground up. Instead, they acquire existing properties which can include newly developed properties that are still in lease-up. Currently the company has 22 properties in lease-up mode, achieving a total occupancy of 75.1%. Having properties, especially such a large number of properties, performing below average does affect their revenues. Some of the properties are also in markets that are experiencing a decline in demand, which is in part from oversupply of storage facilities and migration of tenants leaving high-density areas for more rural or suburban markets.
Rental rates are down 2.4% and will likely remain flat over the next few quarters as certain markets adjust and adapt to the change in demand. Life Storage also suffered damage to certain stores from recent hurricanes. Environmental challenges including fires and hurricanes can affect the company's bottom line -- in Q3 2020 alone, it suffered $1.5 million in uninsured damages.
Life Storage's balance sheet remains strong despite environmental and economic challenges. Investors looking for somewhat of a safe haven may want to consider buying Life Storage, but keep in mind that demand is up for this sector and it's likely that cap rates and rental rates will continue to decline as markets adjust to the current changes in supply and demand.
Like many other REITs, share prices took a dive in March but have rebounded and are now just shy of their February highs, providing a roughly 3.6% return, which is fair for the safety it provides. Personally, I think the future looks good for the self-storage industry. While they definitely have a few shortcomings that will push cap rates and rental rates down for the next few quarters, I see a strong rebound and continued need for storage space in the coming years.
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