Should You Invest in Life Storage Right Now?

Self-storage company Life Storage (LSI -0.04%) recently issued its second-quarter financial, putting up results that display the rock-solid fundamentals that self-storage stocks have to offer. Life Storage expanded by acquiring 13 new stores during the quarter, and it looks to continue its acquisition strategy over the long run. Here’s why you should own shares of this real estate investment trust (REIT).

Strong fundamentals

During the latest quarter, same-store revenue growth — sales at stores owned for more than a year — rose  19%. As a REIT, the company reports funds from operations, or FFO. FFO is like net income for a REIT, but adjusted for non-cash items like depreciation and amortization of intangible assets. During the quarter, adjusted FFO jumped by  37.5% to $1.65 per share.

Image source: Getty Images.

As any storage unit renter will tell you, the extra space is invaluable for folks needing a long-term place to keep their valuables. Self-storage units are ideal, especially in densely populated urban areas with cramped living spaces. Sometimes renters keep things just for sentimental reasons.

In either case, self-storage companies like Life Storage take low-cost storage facilities and charge a market rent that handsomely covers expenses. The economics of self-storage are simple and highly profitable. Self-storage companies also know that the longer a renter keeps their unit, the less likely they are to move out. With that in mind, Life Storage can implement modest price increases and improve same-store revenue growth on those lifers. Given the month-to-month nature of self-storage leases, implementing price increases can quickly flow to the financial statements. Of course, the increased revenue comes with no additional cost to Life Storage.

Life Storage has another trick up its sleeve. The company operates a third-party management business, which leverages Life Storage’s marketing and resources as a large-scale company to run self-storage facilities for properties it does not own. For a fee, Life Storage can ramp up sales of empty units and lower costs in a hands-off experience for its self-storage property owner customers. Its third-party management segment also provides Life Storage an insider view of each customer’s business and helps to identify prime acquisition targets.

Understanding the economics of the self-storage business early on, Life Storage has a history of increasing its store count. Between 2010 and 2015, the company boosted its wholly owned store, joint venture, and third-party management store count from  377 to 542. Then it stepped on the gas, bringing its total store count to 1,114 in May of this year.

Image source: Life Storage.

Life Storage is incorporated as a self-storage REIT, meaning it must pay out most of its taxable net income as a dividend to shareholders. As the company has executed its growth and acquisition strategy for over a decade, it has increased its dividend at  a 9.7% compound annual growth rate.

Image Source: Life Storage.

The interesting thing about the self-storage market is that it is very fragmented , meaning that aside from a few large public self-storage REITs, the rest of the market is made up of a large number of much-smaller players. A large number of these operations are potential takeover targets, providing Life Storage with fertile ground to continue with acquisitions.

Should you invest in Life Storage right now?

Life Storage’s self-storage business is also very resilient. Self-storage renters usually keep their units even in the event of a macroeconomic setback. That could make the stock ideal for value-minded investors or anyone who thinks a recession in the U.S. is on the way.

Dividend investors seeking a growing stream of passive income should also take a look at the stock. It has a forward dividend yield of about 3.2%, with great potential to increase its annual payout. The stock offers a unique combination of growth, passive income, and stability. It is also one of the easier companies to understand, so investors can feel comfortable knowing exactly what they own. With the stock down 11% this year, investors might have a great opportunity to add Life Storage to their portfolios.

BJ Cook has no position in any of the stocks mentioned. The Motley Fool recommends Life Storage Inc. The Motley Fool has a disclosure policy.

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