PSA - Life Storage Merger With Extra Space Storage: Hold For Now

2023-05-16 00:17:48 ET

Summary

• Life Storage recently announced a merger with Extra Space Storage.
• This is going to make EXR the biggest player in the self storage market with 12% of the market share.
• As the EXR shares that LSI shareholders will receive offer little upside, I rate Life Storage as a hold.

Life Storage ( LSI ) is the fourth biggest self storage company and accounts for 4% of the market. It has nearly 1200 properties all around the US with exposure on both coasts and heaviest exposure in the sunbelt region, specifically in Texas (17%) and Florida (12%). This makes the REIT well positioned in the market since a lot of people have been moving South. LSI also provided projected population growth for the near future that works out in the favour of their portfolio distribution (see below).

The company recently received an offer to merge with Public Storage ( PSA ) which has the biggest part of the market share in the self storage sector (9%). If the offer was to be accepted by LSI's management, shareholders would receive 0.4192 PSA shares for one LSI share. This offer was declined by LSI as they believed it is not in the best interest of the company and of LSI's shareholders. A little while after that the company announced that they will merge with Extra Space Storage ( EXR ), in the second half of 2023, making them the biggest self storage company on the market with 12% of the market share, an enterprise value of $47 billion, and owning over 3500 stores. So let's go over the offer and how it will affect the company.

After the merger, LSI's shareholders will receive 0.895 of EXR's shares. As of right now, EXR trades at $153.54 which proposes a consideration of $137.42 per share for LSI. Since LSI stock currently trades at $135.31, there is a very small upside. The pro forma ownership will be 65% for EXP shareholders and 35% for LSI shareholders. EXR's chairman of the board and CEO are going to continue in their positions and the board is going to extend to 12 members and LSI's board directors are going to be able to nominate three directors.

Now I would like to look at how the company will change after the merger. The company's presence in the Sunbelt region is going to increase, especially in Texas and Florida, however, it's going to decrease in California by 4.3% which is also a part of the Sunbelt and has seen quite a bit of growth lately. The occupancy is going to be 94.2%. Of the 3500 stores 53% will be wholly-owned, 34% managed by a third party, and 13% will account for joined ventures.

Even though the management expects FFO growth as well as dividend growth it is hard to say how the company will actually perform and how the financials will turn out in the coming quarters.

As for the balance sheet, the joined debt of the companies will account for $12 billion with maturities pretty well spread over the next years. Their joined cash stand at around $72 million and they have lines of credit available.

Given that the consideration of the share after the merger ($137.42) and where the share stands at today ($135.31) is not that far off from each other so I don't see a reason to invest in LSI right now and would rather wait and see how the firms will perform as one. After a few quarters, I might reconsider my decision but I rate the company as a HOLD right now.

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