Extra Space Storage(NYSE: EXR) unveiled a bold move this week. It agreed to acquire rival self-storage REITLife Storage(NYSE: LSI) in an all-stock deal. The transaction will create the largest player in the self-storage industry, vaulting past Public Storage(NYSE: PSA), which had been trying to buy Life Storage.
The transaction will transform Extra Space into one of the biggest REITs. It should also enable the company to continue growing its exceptional dividend.
A bold strike to get bigger and better
Extra Space Storage has agreed to acquire Life Storage in an all-stock transaction valuing the company at about $145.82 per share. That's above the roughly $129 per share proposal from rival Public Storage, which Life Storage rejected because it said the offer substantially undervalued the company. The companies hope to close the deal in the second half, assuming shareholder approval and that Public Storage doesn't bump up its bid.
Extra Space Storage will leapfrog its rival and become the largest self-storage REIT after outbidding Public Storage for Life Storage. The deal will expand Extra Space Storage's portfolio by 50%, giving it over 3,500 locations with more than 264 million square feet of rentable space, or about 14% of the U.S. self-storage market. Public Storage has 2,869 self-storage facilities with about 204 million net rentable square feet in the U.S., or about 10% of the market.
One noteworthy aspect of the deal is it will make Extra Space Storage bigger in better locations. It will increase the company's presence in the Sun Belt region, which continues to benefit from above-average population growth. That's driving demand for self-storage space across the region.
Adding more space to grow the dividend
Extra Space expects the transaction will have a positive financial impact. It will be accretive to its core funds from operations (FFO) per share within the first year. It will also have a neutral impact on the company's leverage ratio, preserving its financial flexibility.
The acquisition will also enhance the company's long-term growth prospects. Extra Space expects that it will be able to capture about $100 million of annual operating synergies. The company expects to reduce general and administrative costs and property operating expenses at the acquired properties. It also anticipates improving operating revenue and tenant insurance income across the Life Storage portfolio. In addition, there are many embedded growth drivers, including leveraging Extra Space Storage's third-party management, joint venture, and bridge loan platforms to accelerate external growth. The company also has the investment capacity to make additional acquisitions and invest in site expansions and redevelopments.
These catalysts should drive growth in the REIT's core FFO per share. That should enable Extra Space Storage to continue increasing its dividend. The company has delivered sector-leading dividend growth over the past decade:
Image source: Extra Space Storage Investor Relations Presentation.
That has helped drive leading total returns. Extra Space has produced a 475% total return over the last 10 years, the highest in the entire REIT sector. It has significantly outperformed Life Storage (about 250%) and Public Storage (roughly 180%).
While that past success is no guarantee of future results, the Life Storage deal puts the company in a solid position to continue driving outperformance. It enhances the company's scale, increases its internal growth profile, and improves its prospects for external expansion.
The top dividend stock is getting even better
Extra Space is swooping in to acquire Life Storage by outbidding Public Storage. The accretive deal should bolster its growth prospects. That should enhance Extra Space's ability to continue growing its dividend, which yields more than 4%. It looks like an appealing investment for those seeking an attractive and growing dividend with upside potential.
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Matthew DiLallo has positions in Public Storage. The Motley Fool recommends Extra Space Storage and Life Storage. The Motley Fool has a disclosure policy.
