Despite the attention self-storage receives as a high-performing real estate asset and strong investment opportunity, the industry generally doesn’t get rocked by many singular news events. So, when the world learned on Monday that Public Storage Inc. had made an unsolicited $11 billion bid to acquire Life Storage Inc., major news outlets, financial analysts and antitrust attorneys immediately took notice.
The industry has experienced ebbs and flows of consolidation for years, but deals of this magnitude are rare. Most large self-storage transactions fall into the big fish, little fish category, in which a large operator—often one of the major real estate investment trusts (REITs)—gobbles up a mid-tier or regional portfolio. To have the industry’s largest operator go after the sector’s fourth largest player presents a potential seismic shift to the balance at the top of the self-storage food chain.
Here are some immediate thoughts in trying to put this potential takeover into context.
Public Storage first approached Life Storage in December, at which time Life Storage officials said the company wasn’t for sale. Life Storage officials reiterated their stance in a Jan. 31 letter, and the company’s unwillingness to engage in negotiations prompted Public Storage to go public with its offer.
As proposed, Public Storage would issue 0.4192 shares of its own common stock in exchange for each outstanding Life Storage share. At the time the news broke, this equated to $129.31 per share, which was 17% higher than the Feb. 3 Life Storage closing price of $110.58. With 85 million outstanding shares at play, that equates to an offer at just under $11 billion. Including debt, the proposed deal values Life Storage at around $15 billion, according to Reuters.
By the time the market closed today, Life Storage shares had risen to $123.11, while Public Storage closed at $299.91. Based on that figure, the offer would equate to about $10.7 billion or $125.72 per share, which is just 2% above the market value of Life Storage stock.
In addition to the share offer, Public Storage also announced on Monday that its board had increased its quarterly dividend from $2 to $3 per share, which could be enticing to Life Storage shareholders.
Considering the offer was unsolicited and Life Storage’s insistence that the company isn’t for sale, this would be a hostile takeover. Though Life Storage indicated on Monday that its board would review the proposal and advised shareholders not to take any action, the public disclosure of the proposed acquisition puts Life Storage officials on the clock and in an uncomfortable position.
As potential transactions go, this is a whopper. At $11 billion, it would dwarf Public Storage’s 2006 acquisition of Shurgard Storage Centers, which was valued at around $5.5 billion. To put it in perspective, Public Storage acquired the 48-property ezStorage portfolio and the 56-facility All Storage portfolio in 2021 for a combined $3.3 billion. Those deals represented about 11.7 million rentable square feet. Between owned and managed properties, Life Storage operates about 84.5 million rentable square feet.
Other recent self-storage transactions of notable size include CubeSmart’s $1.7 billion purchase of the Storage West portfolio and the Blackstone Real Estate Income Trust Inc. acquisition of Simply Self Storage for $1.2 billion. Again, those 2021 deals were among the largest in industry history, but pale in comparison to the scope of this Life Storage proposal.
Of all the potential deals, it’s certainly interesting that Public Storage targeted Life Storage, but in terms of instant and long-term growth, it also makes sense. Public Storage didn’t become the industry’s behemoth by accident. On the operational front, it does many things well and has a voracious appetite for growth. At its size, however, it’s difficult to continue to outpace the competition, particularly against its fellow REITs.
Though the company continues to invest in new development, it has largely grown its footprint recently by expanding existing facilities, acquiring properties and launching its third-party management platform (2018). In fact, based on numbers reported to ISS for our annual Top-Operators lists, Public Storage grew its total rentable square footage (owned and managed properties) 31.6% between 2018 and 2022. By comparison over the same five-year period, Life Storage increased its total portfolio 62.4%. In looking at only owned square footage, Life Storage grew 32.8%, while Public Storage came in at 24.6%.
As with all things that are massive, percentage indicators aren’t entirely equal. It’s much more difficult for Public Storage to grow exponentially than smaller operators. Swallowing a large portfolio, however, can certainly move the needle. The “Storage Beat” industry blog estimated the Life Storage acquisition would bump Public Storage’s square-footage market share from 10% to 14.2%. Using the square-footage figures from the 2022 ISS Top-Operators lists, the deal would push the Public Storage footprint from 18.8% to 25.6% of all property represented by the top 100 facility owners and top 50 management companies.
So, if you’re Public Storage and you’re looking to add a lot of bulk quickly, why not look at absorbing a chief competitor, including a fellow REIT? If you consider only the other companies that comprise the industry’s Big 6, whose portfolios dwarf everyone else’s and includes CubeSmart, Extra Space Storage Inc., National Storage Affiliates Trust (NSAT) and U-Haul International Inc., Life Storage looks very attractive.
For starters, as the industry’s second largest operator, Extra Space would likely be cost prohibitive and make passing antitrust scrutiny more difficult. It’s total portfolio, for example, is twice the size of Life Storage. U-Haul, which is owned by publicly traded AMERCO, is a more diverse operating model, which changes the synergy of blending platforms. Similarly, though NSAT has outpaced all other REITs by growing its total square footage 82.6% over the last five years, its affiliate structure likely makes an acquisition unduly complicated. That leaves CubeSmart, but its 27.3% portfolio growth between 2018 and 2022 pales next to the 62.4% posted by Life Storage, and its percentage of managed properties is also much higher (50.7% to 35.4%).
Thus, if you’re going to go after a fellow big fish, Life Storage makes a ton of good sense. The offer is a credit to Life Storage and its historical performance, even if the overture is unwanted by company brass.
The first thing that popped into my mind about the potential takeover was where it would fall on the antitrust meter. Though adding the industry’s fourth largest portfolio to the biggest would no doubt create a massive entity at the top, the self-storage landscape may still be just diverse and fragmented enough for a deal of this size to pass the scrutiny of regulators. In addition to other national brands, independent and regional operators still comprise a large portion of available self-storage space.
In an analysis of the proposal, legal news website Law360 indicated the Public Storage bid was “guaranteed” to draw the eyes of federal officials but that antitrust attorneys had called the play a “wise move” that would likely clear legal hurdles.
If true, that likely complicates matters for Life Storage officials, who now have to deal with an offer they didn’t want in the public sphere. The danger now is Public Storage might continue to sweeten the pot or raise the purchase price to the point where investors demand a deal go through or the Life Storage board can no longer avoid action.
According to Nasdaq, 89.74% of Life Storage is owned by institutional investors, with nine of its top 15 shareholders also being among the top 20 Public Storage investors. That is a lot of sway among a powerful group who are in the game to make the most money for themselves and their clients. Does the long-term forecast of Life Storage performance outweigh the short-term gain of cashing in on the largest deal in self-storage history? Only time will tell.