Self storage real estate investment trusts (REITs) are pretty boring businesses, since they effectively own boxes where people put their "junk." The thing is, that stuff usually sits there for years, creating a very sticky customer base and robust profits in good times and bad. Public Storage (NYSE: PSA) is the industry bellwether, but there are up and comers worth examining, like Life Storage (NYSE: LSI) and Extra Space Storage (NYSE: EXR). Here's a primer to see which one might be a better option for you.
1. The basic business
It's not rocket science to run a self-storage operation. Basically, these REITs build or buy facilities with lots of small rooms. It then leases out what are essentially lockable closets to individuals and businesses that need some "extra space" to store their stuff. For many years this was a fast growing property niche, but competition has heated up because of its profitability and sticky nature (few people want to move all of their stuff just to save a few bucks). The additional construction in the space has put pressure on profits as facilities increasingly compete with each other for customers. All in, it's still a very good business, but the growth prospects aren't quite as good as they once were. That's the quick and dirty backdrop for comparisons here.
2. Size and scale
At the end of the third quarter, Life Storage operated around 900 facilities across 30 states. Extra Space Storage operated roughly 1,900 across 40 states. To round out this comparison, industry giant Public Storage owned 2,600 self storage facilities across 38 states and had investments in a self-storage business in Europe, with another 239 properties, and a business-focused storage operation with 28 million square feet of commercial storage space.
Clearly, Life Storage is the small fry here. There are some benefits to economies of scale in this business, but Life Storage is big enough to see those benefits. The real issue is growth, since it is easier to expand a small business than a large one. So, in some ways, Life Storage might actually be more interesting than either Public Storage or Extra Space Storage, both of which have materially bigger footprints.
3. Recent performance
That said, in the third quarter of 2020, Life Storage's adjusted funds from operations (FFO), which is like earnings for an industrial company, rose 4.1% year over year. Extra Space Storage's core FFO rose 5.6%. Clearly, Extra Space is performing a bit better right now. That said, each of these REITs is doing better than Public Storage, which saw core FFO drop 3.4% year over year in the quarter. This point tilts in Extra Space's favor, but not massively.
Life Storage increased its dividend 7% (to $1.07 per share per quarter) at the start of 2020 after holding it steady at $1.00 per share for many years. Extra Space Storage's last dividend increase was a roughly 4.5% hike in 2019. Both REITs saw dividend cuts during the deep 2007 to 2009 recession. By comparison, Public Storage's dividend hasn't been increased since 2016, but didn't get trimmed during the so-called "great recession."
All three have payout ratios in the 70% range (Public Storage is the highest at roughly 75%), so they are fairly similar in that regard. But if you believe that the safest dividend is the one that was just increased, then Life Storage is the standout here.
Yield wise, Life Storage is also the top dog, offering investors a 3.7% dividend yield. Public Storage comes in a close second at 3.6%, with Life Storage falling in third place with a more modest 3.2%. All in, on the dividend front, Life Storage looks like the winner right now.
5. The balance sheet
But there's one more thing that needs to be examined: leverage. Public Storage has a fairly modest debt-to-equity ratio of around 0.3 times. Life Storage's debt-to-equity ratio is just a touch over 1 times. Extra Space comes in at roughly 2.2 times, a figure that's roughly doubled since 2014. Clearly, Public Storage is working off of the strongest financial foundation, but Life Storage again seems to come out ahead in comparison to Extra Space.
That said, Extra Space storage covered its trailing 12-month interest expenses by 3.9 times in the third quarter compared to 2.9 times for Life Storage. Neither is a troubling number, but Extra Space is in a bit better shape when you look at its ability to carry the debt it has taken on. That said, Public Storage covered its interest costs 50 times over.
At the end of the day, there's really no hands down winner in the comparison between Life Storage and Extra Space Storage. Even Public Storage doesn't exactly stand out. On the whole, the best all-around pick is likely Life Storage. Its small size should make growth easier to achieve, it has lower leverage than Extra Space, it just raised its dividend, and it has the higher yield. But all three of these self-storage REITs have had higher yields over the past decade, and the rally since the early 2020 bear market appears to have priced in a material amount of good news in an industry that's facing increasing competition. Unless you absolutely have to buy a self-storage stock now, this is probably a case where investors are better off keeping all three of these names on a wishlist for the next material market sell off.