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21 Sep 2020

Where Will Life Storage Be in 3 Years?


Matthew DiLallo


Life Storage (NYSE: LSI) is one of the largest self storage property owners in North America. The self storage REIT has been expanding rapidly in recent years, driven in large part by the growth of its third-party management business. That has helped boost its FFO and dividend, which has enabled the company to generate impressive total returns for its shareholders.

More growth seems likely for the self storage REIT over the next three years. Here's where the company appears to be heading.

Where Life Storage is Today

Life Storage currently owns 880 self-storage locations, with 64.1 million square feet of rentable space spread across 29 states and Ontario, Canada. That gives it a 3.3% share of the self-storage market, making it the 5th largest player in the industry.

It wholly owns 563 of these properties, holds interests in and manages another 122 via joint ventures, and manages 195 facilities for third-party owners. The company's focus in recent years has been on expanding third-party revenue streams through two main channels: acquiring properties with joint venture partners that it manages and signing management contracts with existing property owners. This strategic focus has enabled the company to grow its management fee income by 30% since 2016.

Where Life Storage Seems Headed

Life Storage has a dual-focused growth strategy: Expand both geographically and in regard to third-party management platforms. The REIT has steadily grown its footprint over the years by adding new markets. For example, it expanded to the West Coast in 2016 and entered the Seattle, Baltimore, and greater Toronto markets last year. With those new additions, the self-storage REIT now has a presence in 18 of the top 25 fastest-growing markets in the U.S. and one of the best in Canada.

The REIT will likely continue expanding geographically over the next three years. It could enter more of the top 25 U.S. growth markets, those right outside that group, and additional international markets, either in Canada or elsewhere. The company will also likely grow its presence in currently underserved markets. For example, earlier this year it expanded its presence in California by acquiring full control of six facilities from a joint venture partner for $115.9 million.

Life Storage also seems poised to continue the rapid expansion of its third-party management platform. It has already added 26 third-party properties to its portfolio this year as it leverages its brand strength to increase market share, scale, and revenue for a much lower investment rate than a wholly-owned acquisition. Meanwhile, these deals enhance its acquisition pipeline as it can eventually buy out its joint venture partners (as it did earlier this year in California) or acquire managed properties in whole or in part (by forming a joint venture).

One growth strategy Life Storage doesn't currently utilize is the development of new properties. That's partly because competitors have added so much new supply in recent years that there's too much capacity. However, while new supply growth is slowing, it still doesn't seem likely that Life Storage will start developing properties in the coming years. Instead of taking on the development risk, the company will likely continue to occasionally acquire newly built locations and leverage its brand power to lease them up. It applied this strategy earlier this year by forming a joint venture to buy a 20% interest in a facility that just opened in Seattle.

Focused Growth Ahead

Life Storage has steadily expanded its portfolio over the years by acquiring properties in fast-growing markets. That trend will likely continue over the next three years as it buys more wholly-owned properties and participates in more joint ventures. The company's other growth engine will be the continued expansion of its third-party management business. This focused strategy approach should enable the company to continue growing its FFO and dividend, which is the key to producing above-average total returns for its investors.

Article: Courtesey of Matthew DiLallo and MillionAcres.

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