The self-storage industry has been a popular asset class for real estate investors over the past decade. Low overhead and high demand for storage space has created the perfect storm for a growing commercial real estate (CRE) industry. Its proven track record for resiliency during times of economic hardship makes this investment avenue even more appealing to investors in the current climate.
Life Storage (NYSE: LSI) is not the largest self-storage real estate investment trust (REIT), but it is one of the leaders, owning over 850 storage facilities across 29 states in addition to managing 317 third-party facilities using their management platform. Investors contemplating how to participate in this seemingly safe sector of CRE are wondering whether Life Storage is a good investment right now. Let's take a look at where the company stands to determine whether it's a good buy.
Relative stability through uncertain times
COVID-19 has made an impact on the storage industry, but in different ways than many other industries are seeing. Occupancy at the end of June 2020 was at 91.9%, an increase when compared to the same month of the previous year, with a 99% collection rate for all leases. The pandemic did result in a large uptick in tenant retention but also a decrease in new leasing from March to June 2020, but the company remains relatively strong and in line with current occupancy rates for the industry.
When it comes to the company's financial position, Life Storage appears well funded with ample liquidity, having reported an annualized EBITDA of 6x and debt service coverage of 4.4x for the second quarter of 2020, which falls in line with the standard for the REIT industry. Life Storage reported a year-over-year same-store revenue decrease to 2.0% and year-over-year same-store net operating income (NOI) of 2.5%, which is being attributed to the COVID-19 pandemic.
As of Q2 2020, funds from operations (FFO) were $1.42, which is on par with FFO achieved last quarter. Dividends are currently $1.07 per share quarterly, meaning the company's payout ratio is 75%, which is fairly conservative by REIT standards and gives plenty of wiggle room for the company if revenues continue to drop over the next several quarters.
Where the company is most vulnerable
Overdevelopment of storage facilities has been a growing concern over the past few years as multiple indications have shown that certain markets are oversaturated for storage space, driving rental prices down and cap rates up. The current state of the economy isn't helping much. The continued success of future development and projects underway, which includes three joint ventures for the development of storage facilities in the New York Metro area, will be dependent on competition and market saturation as well as future policies regarding evictions and auctions, which will impact the company's lease rate and revenue.
All in all, Life Storage appears to have a strong balance sheet even during these uncertain and challenging times, taking far less of a hit than other REITs in this sector. Investors looking for somewhat of a safe haven may want to consider buying Life Storage, but keep in mind that demand is up for this sector and it's likely that cap rates and rental rates will continue to decline until more certainty of where the market is headed is established. Like many other REITs, share prices took a dive in March but have rebounded significantly, which means you may be paying a premium to participate in the safety the industry is offering right now.