There is plenty of room left in the Public Storage shed to put a rival. On Sunday, Public Storage unveiled an unsolicited all-stock bid for rival, Life Storage, worth $11bn in equity value.
These plainly-named but highly-profitable competitors in the American self-storage business have prospered. Increased migration has led to demand for places to store belongings. In the past five years, the shares of the two have far outpaced the 66 per cent return of the S&P 500, including dividends.
Each company is organised as a real estate investment trust, a structure that avoids corporate level tax but that requires hefty dividends be paid out to shareholders. As interest rates have spiked, the valuation multiples for big dividend payers including REITs have deflated. That leaves smaller participants such as Life Storage vulnerable to consolidators. At $55bn Public Storage’s market capitalisation is nearly six times larger.
It insists that it can better manage Life Storage’s portfolio. Even Life Storage admits in its own recent analysis that its valuation does not quite stack up with its operating performance. In an investor presentation, for example, it told shareholders that its implied capitalisation rate — essentially the reciprocal of a price-to-earnings ratio — of 6.4 per cent sat near the bottom of the sector.
In a moment of foreshadowing, that benchmarking analysis revealed Public Storage to have the highest earnings multiple. Public Storage, by offering stock to shareholders of Life Storage, argues that it can bring its own halo to the target.
In 2022, warehouse operator Prologis made a multi-billionaire dollar bid for its reluctant rival Duke Realty, which culminated in a friendly transaction. Life Storage is firmly in play now. Between the Public Storage bid and any other potential strategic or private equity buyers, Life Storage will have to seriously consider a buyout. Assuming so, Life Storage should tell bidders there is still space to squeeze in a higher bid.
Get Best News and Web Services here
