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In December, I named LSI one of the best wager in Storage REITs. In January, I recognized Storage REITs as one of many 7 REIT sectors probably to outperform in 2022. And in February, I named LSI as one of many prime 12 REITs for the subsequent 12 months. In April, Steven Cress named Life Storage, Inc. (NYSE:LSI) one of many three greatest REITs to purchase to struggle inflation.
Exhibits what we all know. There are nonetheless a number of months to go on my predictions, however no less than to this point, it is not trying good for me, or for Mr. Cress.
YTD (year-to-date) LSI is underperforming the Vanguard Actual Property ETF (VNQ) by 827 foundation factors (bps). Oof!
What is going on on? Is the corporate in some sort of bother?
Meet the corporate
Life Storage Inc.
LSI opened its first self-storage facility in 1985, and is headquartered in Williamsville, NY. The corporate now operates 1,105 shops in 36 states, and sports activities a 93.7% same-store occupancy charge, up from 92.4% in Q3 2020. The corporate owns 727 of these amenities outright, with a stake in one other 121 by joint ventures. LSI additionally manages an extra 261 for third events.
Geographic Distribution of LSI Property (LSI investor presentation Might 2022)
LSI is nicely diversified geographically, with solely 8.7% of its revenues coming from the New York space, and its prime 10 markets accounting for lower than half its income.
Geographic breakdown of LSI revenues (Firm investor presentation for Might 2022 Is it in bother?)
This additionally displays the corporate’s emphasis on each main and secondary markets of their acquisition technique. The work-from-home development has created a internet migration out of huge cities and into smaller cities and the Solar Belt. LSI’s sturdy presence in secondary markets will play of their favor. LSI has a bigger proportion of its belongings within the Solar Belt and in non-major markets than any storage REIT besides Nationwide Storage Associates (NSA).
Hoya Capital
The corporate is seeing sturdy inhabitants development of 10% or extra throughout 53 of its markets, together with 8 of its prime 10. Folks have a tendency to decide on the storage facility closest to their house.
Inhabitants development in LSI markets (Firm investor presentation for Might 2022)
However what actually units this firm aside is 2 issues they’ve pioneered:
- On-line, touchless self-service leases (about 35% of all leases at present)
- Storage for e-commerce (their “Warehouse Anyplace” program)
LSI doesn’t construct new amenities. They develop by acquisitions, and by enlargement and enhancement of their present buildings. Their tempo of acquisitions has been quickly accelerating for 3 years, and is off to a very good begin this yr, with $445 million invested by April. Which brings us to quarterly outcomes.
Life Storage Inc. tempo of acquisitions (Firm investor presentation for Might 2022)
Quarterly outcomes are in
Life Storage reported quarterly outcomes Might 5. Listed below are the highlights:
- Whole revenues of $233.5 million, up 35.8% YoY (yr over yr)
- Earnings from operations of $97.5 million, up 47.9% YoY
- Earnings per share of $0.88, up 39.7% YoY
- FFO (funds from operations) per share of $1.44, a 33.3% enhance YoY
- Similar retailer income up by 15.6% YoY
- Similar retailer NOI (internet working revenue) up by 21.9% YoY
- Web money from operations of $105.3 million, up 57.0% YoY
- Ancillary revenue (reinsurance, charges, and so on.) $28 million, up 29.5% YoY
- Acquired 18 shops for $351.5 million (a $1.4 billion annual tempo)
- Added 25 shops to the Firm’s third-party administration platform.
These are sensational numbers. I do not assume CEO Joe Saffire was exaggerating when he stated this on the Q1 earnings name:
We’re off to a really sturdy begin for the yr as we proceed to reveal sturdy pricing energy in our footprint and sturdy acquisition exercise. . . With a powerful pipeline forward, wholesome shopper demand developments, and our means to proceed to operationally execute on our strategic initiatives, we’re nicely positioned to proceed to develop shareholder worth by 2022 and past.
Development metrics
Listed below are the 3-year development figures for FFO (funds from operations), TCFO (whole money from operations), and market cap.
| Metric | 2017 | 2018 | 2019 | 2020 | 2021 | CAGR |
| FFO (thousands and thousands) | $229 | $256 | $266 | $277 | $400 | — |
| FFO Development | — | 11.8% | 3.9% | 4.1% | 44.4% | 14.96% |
| TCO (thousands and thousands) | $249 | $262 | $279 | $299 | $434 | — |
| TCO Development | — | 5.2% | 6.5% | 7.2% | 45.2% | 14.90% |
| Market Cap (billions) | $4.14 | $4.33 | $5.05 | $5.90 | $12.56 | — |
| Market Cap Development % | — | 4.6% | 16.6% | 16.8% | 112.9% | 31.98% |
Supply: TD Ameritrade, CompaniesMarketCap.com, and creator calculations
These are glowing, FROG-worthy development numbers, and this resourceful and modern firm saved rising proper by the pandemic.
In the meantime, right here is how the inventory worth has executed over the previous 3 twelve-month intervals.
| Metric | 2018 | 2019 | 2020 | 2021 | 3-yr CAGR |
| LSI share worth Might 19 | $59.83 | $63.69 | $58.85 | $96.98 | — |
| LSI share worth Achieve % | — | 6.5% | (-7.6) | 64.8 | 12.83% |
| VNQ share worth Might 19 | $75.84 | $87.86 | $71.89 | $94.23 | — |
| VNQ share worth Achieve % | — | 15.8% | (-18.2) | 31.1 | 5.58% |
Supply: MarketWatch.com and creator calculations
LSI has outperformed VNQ in every of the previous two years, and over the trailing 3-year interval, has doubled VNQ in share worth Achieve. Buyers who bought shares on Might 19, 2019 have been rewarded with worth Achieve of 12.83% per yr on common, and a complete return north of 16%.
Stability sheet metrics
Life Storage Inc.’s bond-rated steadiness sheet has sturdy liquidity and no critical weaknesses. This firm is a bona fide FROG.
| Firm | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Score |
| LSI | 2.06 | 18% | 5.4 | BBB/Baa2 |
Supply: Hoya Capital Earnings Builder, TD Ameritrade, and creator calculations
As of Q1 2022, LSI was holding about triple the money ($55 million) they had been holding in Q1 2021 ($18 million), and have $365 million obtainable on their $500 million line of credit score. The weighted common rate of interest on LSI’s $2.785 billion debt is 3.2%, with a 6.3 yr weighted common maturity, and 95% of their fairness is unencumbered.
Dividend metrics
LSI is a powerful payer, with an above-average present Yield and excellent dividend development charge, leading to a juicy 5.49% Dividend Rating. Dividend Rating initiatives the Yield three years from now, on shares purchased right this moment, assuming the Dividend Development charge stays unchanged.
| Firm | Div. Yield | Div. Development | Div. Rating | Payout Ratio | Div. Security |
| LSI | 3.66% | 14.5% | 5.49 | 65% | B+ |
Supply: Hoya Capital Earnings Builder, TD Ameritrade, Looking for Alpha Premium
The payout ratio of 65% is slightly excessive, however nowhere close to sufficient to hazard the quarterly payout. In truth, the dividend is slightly too protected, at B+. The corporate retains extra money for acquisitions than most, however buyers have had little or nothing to complain about within the dividend division. LSI has raised its dividend 35% within the final 12 months alone.
Valuation metrics
Development like this firm has achieved often comes at a premium worth, however this firm is on sale at simply 18.0x FFO, and a reduction of (-15.9)% to NAV.
| Firm | Div. Rating | Value/FFO | Premium to NAV |
| LSI | 5.49% | 18.0 | (-15.9)% |
Supply: Hoya Capital Earnings Builder, TD Ameritrade, and creator calculations
The YTD sell-off in LSI shares seems to have little or nothing to do with the corporate itself, and rather more to do with the massive rotation from development to worth. This firm seems to be bristling with good well being.
What may go fallacious?
LSI runs the identical dangers as another firm that depends on acquisitions for exterior development, as these acquisitions do not all the time prosper as anticipated. Modifications in rates of interest might have an effect on their means to accumulate or finance new properties or redevelop present websites, or might suppress cap charges.
The REIT storage sector could be very aggressive, with a number of sturdy gamers, together with Nationwide Storage Associates, particularly within the prized Solar Belt markets. Elevated competitors for offers may additionally drive down cap charges on new acquisitions.
Self-storage models are comparatively simple to construct, and trade oversupply may depress rental development. Up to now, nonetheless, provide doesn’t seem like catching up.
Greater rates of interest may increase LSI’s value of debt funding (at present 3.2%).
Investor’s backside line
Glowing development, a powerful steadiness sheet, excellent dividends, and a cut price worth. What’s to not like? The REIT market total might proceed to dump within the quick time period, however as I see it, the upside potential is way higher than the draw back threat, at this level within the drawdown. The sell-off in LSI shares appears to have little to do with the corporate itself, and thus has created a pretty entry level. I charge this firm a Sturdy Purchase, and I’m rising my very own place.
Looking for Alpha Premium
For as soon as, I’m not alone. The Looking for Alpha Quant Rankings charge LSI a Purchase, as do the Wall Road Analysts, with a mean worth goal of $153.33, implying 39.6% upside. Quick-term dealer Zacks concurs, and so does The Road.
TipRanks and Ford Fairness Analysis are much less enthusiastic, score the corporate a Maintain.
