Image Source: Public Storage
By Brian Nelson, CFA
On February 5, self-storage giant Public Storage (PSA) announced that it had launched a hostile takeover attempt of rival Life Storage (LSI) for all of its outstanding shares in an all-stock transaction. According to the terms of the overture, Life Storage shareholders would receive 0.4192 shares of PSA for every share of LSI that they own, implying a 19% premium to the 20-day volume weighted average price of PSA and LSI, as of February 3.
We like the proposal and believe that a combined PSA-LSI will be able to drive material synergies. For example, PSA’s same-store direct operating margin is ~80%, while LSI’s is roughly 7 percentage points lower. The combined entity will likely be able to drive LSI-specific assets to higher levels of profitability under PSA expense efficiency practices, and perhaps even higher given scale and other platform savings. Since the combination will not take on additional debt, a PSA-LSI tie-up would benefit from PSA’s stronger credit rating (A/A2), too, which is a few notches higher than LSI’s (Baa2/BBB).
We recently highlighted how LSI operates in one of the most attractive subsegments of the REIT sector, “Life Storage Operates Within An Attractive Slice of the REIT Sector.” LSI has over 1,100 locations across 35+ states and is the fourth-largest operator in the self-storage space. PSA is the largest. Self-storage REITs are generally recession-resistant, offer high operating margins, and generally lower maintenance capital requirements. The industry is also highly fragmented giving larger operators an ability to roll up smaller players and drive efficiencies within their portfolios.
Both Public Storage and Life Storage recently raised their dividends meaningfully. Public Storage raised its dividend 50% in conjunction with the takeover offer, to $3.00/share per quarter (~3.9% on a forward estimated basis), while Life Storage on January 3 raised its quarterly dividend 11%, to $1.20 per share (~3.9% on a forward estimated basis). Though the self-storage arena remains highly competitive, a combined PSA-LSI entity will operate from a stronger position, in our view, and this ultimately will benefit the dividend.
As of the latest update, the executive team at LSI has yet to engage with PSA, refusing to negotiate, explicitly writing on December 29 of last year that Life Storage is “not for sale.” If what PSA management has said is true and that the executive team at LSI has not fully engaged with PSA regarding its overture, it’s fair to say that the team at LSI may not be operating in the best interest of its shareholders. On the other hand, it’s also possible that LSI is playing hardball, potentially hoping PSA will up the offer.
In any case, we hope these two top income ideas will put their differences aside and work to come together for the benefit of both PSA and LSI shareholders. We think a combined entity will have higher levels of profitability, a better credit rating, and greater financial capacity to drive even further growth in adjusted funds from operations and dividends per share. The saga is not over yet, and we’re anxiously awaiting either PSA’s or LSI’s next move.
Tickerized for PSA, LSI, EXR, CUBE, NSA
NOW READ: Why Are the Dividends of REITs So Risky?
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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