Life Storage (LSI)

November 21, 2019

COMPANY DESCRIPTION

Life Storage (LSI) is the fourth largest owner and operator of self-storage locations in the United
States and is a real estate investment trust (REIT). The company owns and operates more than
700 self-storage facilities in 29 states and has nearly 400,000 customers.

INVESTMENT THESIS

Life Storage Inc. continues to improve operations, shore up its balance sheet, enter into joint
ventures and third-party management agreements, and acquire complementary firms. The shares’
valuation is attractive based on the company’s favorable prospects. At its current price, the
shares offer a yield of 3.63%.

RECENT DEVELOPMENTS

On October 31, LSI announced third-quarter adjusted funds from operations (AFFO) of $1.46,
up from $1.45 in the prior year period and a penny above consensus. Expenses were up only 20
basis points and contributed to same-store operating income growth of 2.6%.

Turning to the top line, revenue increased to $146 million from $141 million in the prior year
period. Revenue was just below the consensus estimate of $144 million. The increased reflected
2.8% higher rental rates, offset in part by a decline in average occupancy to 90.7% from 91.8%.

EARNINGS & GROWTH ANALYSIS

In 2019, same-store operating expenses are expected to grow 0.5%-1.5%, up from 2%-3%. The
improvement reflects cost reductions implemented throughout the company. In particular, LSI’s
Rent Now program enables customers to rent storage space online and will require fewer
customer service representatives. Same-store operating income is projected to increase 2.4%-2.9,
up from prior guidance of 1.5-2.4%.AFFO are projected to be $5.59-$5.63, up from $5.56-$5.63
per share.

For 2020, management provided preliminary guidance. Revenue is expected to grow 1.25%-
2.25%, while AFFO guidance is expected to come in between $5.93 per share and $6.07 per
share.

In 2019, we forecast FFO of $5.80, rising to $6.20 in 2020.

RISKS

Risks include having to issue more shares and diluting earnings, oversupply in some markets and
economic weakness in some metropolitan areas. Some of the company’s borrowings are variable
rate and higher rates would increase the company’s interest expense. REIT shares, as income
investments, are affected by higher interest rates. Often, investors shy away from REITs in a
rising interest-rate environment.

VALUATION

Our price target of $132 implies a multiple of 21.3 times our 2020 FFO estimate. Applying a
capitalization rate of 7% to our 2019 estimate of NOI generates a valuation near that of our target
price. The shares are not cheap, but we believe Life Storage’s steady growth, ability to acquire
accretive companies and improving finances warrant a premium valuation. At its current price,
our target, if achieved, offers investors the prospect of a 23% return, including its dividend.

Life Storage (LSI)

Current Price: $110.59

Target Price: $132

Current Valuation: 17.8 times FY20 FFO

Target Valuation: 21.3 times FY20 FFO