For nearly 20 years, Public Storage has held the title of being the largest publicly traded self-storage real estate investment trust (REIT). But that's about to change.

On April 3, Extra Space Storage (EXR 1.02%) said its agreed to acquire Life Storage (LSI) in an all-stock transaction valued at $12.7 billion. This deal will make Extra Space Storage the largest self-storage operator by facility count and will increase its portfolio of self-storage properties by more than 50%.

Let's take a closer look at the deal to see how it will affect investors. 

A closer look at the deal

Earlier this year, Public Storage made an unsolicited offer to acquire Life Storage. Life Storage rejected the offer, claiming the 17% premium at the time seriously undervalued the company. Extra Space Storage used this rejection as an opportunity to come in and make a higher offer.

Extra Space Storage agreed to pay $145.82 per share, a 10% premium to Life Storage's closing share price on March 31, the last trading day before the offer was announced. In this all-stock transaction Life Storage shareholders will receive 0.895 share of Extra Space Storage. After closing the transaction in the second half of 2023, Life Storage shareholders will own roughly 35% of the combined company while Extra Space Storage shareholders will own around 65%.

How the deal impacts investors

The deal will have a positive impact on both Life Storage and Extra Space Storage shareholders. To start, it will make Extra Space Storage the dominant provider of self storage in the U.S. It will account for 13% of all square footage within the self-storage industry, more than any other individual operator. It will also give it more exposure to the southern parts of the country, an area with rapid growth right now.

The merger will be accretive to Extra Space Storage's funds from operations (FFO) within the first year without notably increasing its debt ratios. Its post-acquisition ratio of debt to earnings before taxes, interest, depreciation, and amortization (EBITDA) will go from 4.9 times to 5 times. That's still within the healthy range for a REIT.

Extra Space believes economies of scale and its existing operational synergies will reduce certain expenses, ultimately earning the REIT a higher net rent per square foot and a better net operating income over the long run.

Is Extra Space Storage or Life Storage a buy?

At the close of trading on April 6, Life Storage's share price was $141.59, only about $4 less than the initial value of Extra Space's offer. That leaves a small spread between the share value investors will receive in Extra Space Storage after closing and Life Storage's current pricing. But this window for buying at a slight discount likely won't last long.

Extra Space Storage is currently trading for about 19 times its full-year 2022 FFO, pre-merger. This isn't a steal of a deal, but also not a bad valuation given the company's recent and past performance. The REIT has yet to provide an updated FFO outlook for the full year 2023 post-merger, but given the transaction should be accretive to Extra Space Storage, it indicates the REIT is likely trading at a discount compared to its post-merger operations.

I've been invested in Extra Space Storage for several years and am excited to reap the benefits of this acquisition over the long haul.