Self-storage real estate investment trust (REIT) Public Storage (PSA 0.04%) made an aggressive move earlier this month with an unsolicited offer to acquire its peer Life Storage (LSI) in an $11 billion all-stock transaction.
The offer was a public attempt to strong arm Life Storage into a deal after the REIT rejected Public Storage's private offer earlier this year. Could this move work, and if so, what would that mean for shareholders? Let's take a closer look to see.
Public Storage's offer
Public Storage first made a private bid to acquire Life Storage on Jan. 12, offering 0.4192 share of Public Storage common stock for each share of Life Storage. The offer was valued at about $11 billion, a 19% premium to the 20-day trailing volume weighted average price for both companies.
Public Storage said that its original offer was rejected, so it decided to make the bid public, hoping this would pressure Life Storage to seriously consider the terms. Life Storage rejected the offer on Feb. 24, saying the terms undervalued Life Storage and its long-term growth opportunities. Life Storage's share price rose after the offer was announced, but have since given back some of the gains. The shares still are down about 10% in the past year.
The acquisition would consolidate the highly fragmented self-storage industry and put Public Storage, which already holds the title of the world's largest self-storage operator, into a whole new category compared to its peers. At the start of 2023, Public Storage owned more than 2,800 properties, accounting for roughly 10% of the self-storage industry.
Public Storage is coming off a fantastic year of growth and looking for new ways to continue expanding. It's in a strong financial position, with an A credit rating, heaps of cash on hand, and little debt on its balance sheet. So it probably could afford to raise its offer in the near future to get this deal done, but there is no guarantee Life Storage will agree even then.
Is Public Storage or Life Storage a buy now?
Life Storage is now trading at about $120 a share, roughly the same as Public Storage's buyout offer. So investors who don't already own shares of Life Storage wouldn't gain from buying the shares at today's pricing if their purpose was to benefit from a buyout. However, I still think both companies are worth buying if the goal is long-term growth and reliable dividend income.
The self-storage industry has been one of the top-performing sectors for all REITs during the last 28 years. It's a resilient business with low overhead, which helps it hold up during higher inflation like we're seeing today. And both companies benefit from carrying low debt and have favorable debt-servicing interest costs because of their strong financial ratings, which is great now that rates are rising.
Occupancy and demand for self-storage space are returning to more normalized levels, but Life Storage and Public Storage are still poised for outpaced growth in the coming years. Public Storage spent more than $8 billion on acquisitions during the past three years and has $1 billion in planned acquisition and development completions forecasted for 2023.
Life Storage may be a smaller self-storage REIT, with just under 1,200 properties in 37 states, but it benefits from offering third-party self-storage management for 440 companies. That has been a major driver for earnings growth over the past few years. The REIT projects its funds from operations (FFO) per share, a metric that works similarly to earnings per share for REITs, will rise between 9% and 13% by 2024.
LSI Total Return Level. Data source: YCharts
Based on its full-year 2023 forecast, Life Storage is trading at around 18 times FFO, which is a fair price for a company that's managed to produce a 22% annualized return during the past three years -- outperforming the S&P 500 and Public Storage during that same period. Public Storage is also trading at about 18 times its anticipated FFO for 2023. Public Storage and Life Storage pay a 2% and 3.5% yield respectively, making both stocks a great buy for income investors looking for long-term investment opportunities.
