Late last year, shares of Life Storage, Inc. (NYSE: LSI) slipped below $100, culminating a rough year for self-storage real estate investment trusts (REITs).
A nightmare scenario of soaring apartment rents and rising mortgage rates kept more Americans in their homes — and demand for storage on hold. Along with peers Public Storage and Extra Space Storage, Life Storage endured a steady selloff from record highs, making the economically-sensitive industry one of 2022’s worst performers.
In 2023, hope is on the rise. Signs of a Fed rate hike slowdown and improving housing market data has Life Storage springing to life again. Last week, the Buffalo-based company’s stock jumped 11% in uncharacteristic ‘gap up’ fashion. It is already up 25% year-to-date.
Better yet, trading volume has been off the charts. More than 12 million shares were exchanged last week, by far the most the REIT has seen since its January 2021 split. Here’s why income investors are rushing to make space for Life Storage.
Why Is Life Storage Trading Volume Up?
Weekly volume was five times higher than normal because Life Storage received an $11 billion takeover bid from rival Public Storage. The California-based self-storage REIT presented an unsolicited offer to buy Life Storage in an all-stock transaction that would give Life Storage shareholders 0.4192 shares of Public Storage for each Life Storage share owned.
In a private letter sent to Life Storage’s Chairman and CEO on January 12th, Public Storage touted the pair’s opportunity to create value through 1) accelerated growth and profits, 2) cost savings, 3) ancillary operations such as reinsurance and lending, 4) portfolio development and 5) a strong balance sheet. As for the last point, Public Storage shareholders should feel comfortable that the acquirer is not funding the purchase with debt that would create risky leverage.
Public Storage’s now public plea comes after months of trying to engage Life Storage in takeover talks. In December 2022, Life Storage informed Public Storage that it is “not for sale” and has since refused to entertain further advances. Last week marked the first time that Life Storage publicly acknowledged the takeover rumors by saying it will review the current offer. This could mean that Public Storage has since sweetened the pot despite Life Storage management stating that the new proposal is “substantially similar” to the private proposal.
What Are the Implications of a Public Storage-Life Storage Merger?
For Public Storage, the proposal is strategically sound because Life Storage has one of the strongest self-storage footprints in the country. Its 1,100-plus facilities across 37 states cater to a wide range of residential and commercial customers. Adding Life Storage’s assets would give Public Storage more than 4,000 facilities and expand its customer base to over 2 million.
Based on market capitalization, Public Storage is five times the size of its desired target, but the addition would still be significant. Already the nation’s largest self-storage REIT, Public Storage would bolster its market leadership and establish a greater East Coast presence by acquiring Life Storage.
The move signals to rivals that Public Storage is going all in on the current market weakness by snagging a top-five player at a discounted valuation. It could also compel industry #2 (and fellow S&P 500 member) Extra Space Storage to seek a combination with a company like CubeSmart or National Storage. The advantages of scale, cost efficiency and pricing power have just been upped.
Is the Deal Likely to Get Approved?
Regulators raise a few eyebrows whenever a company with an industry-leading market share looks to get bigger. Public Storage’s hostile bid will likely be no exception. A lengthy review could keep this proposal on ice and Life Storage shareholders in limbo for months to come.
The saga could also get dragged out by a bidding war. First, Life Storage’s board could decide the company deserves more than the 19% VWAP premium it was offered, prompting Public Storage to raise its bid. Last week, sell-side research firm Jeffries suggested Life Storage’s repeated lack of interest could imply the requirement of a much higher bid.
The analyst at Citigroup, on the other hand, disagrees. He downgraded Life Storage stock to hold and gave it a $126 target. This suggests less than $3 per share upside from current levels.
There is also the possibility that Extra Space or another player gets involved in thwarting the leader’s takeover attempt and gain scale advantages of its own. With the spotlight on the self-storage space, this may not necessarily be a self-storage REIT. The buyout could also make sense for a residential or industrial REIT looking to diversify its business.
As things get sorted out, trading volume on Life Storage and the self-storage space could remain elevated. Let the Storage Wars begin!
