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Life Storage, Inc. is a US$4.6b mid-cap, real estate investment trust (REIT) based in Williamsville, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how LSI’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing LSI.
Funds from Operations (FFO) is a higher quality measure of LSI’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For LSI, its FFO of US$249m makes up 79% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for LSI to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take LSI 6.95 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times LSI’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 3.34x, it’s safe to say LSI is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at LSI’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In LSI’s case its P/FFO is 18.44x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
As a REIT, Life Storage offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in LSI, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for LSI’s future growth? Take a look at our free research report of analyst consensus for LSI’s outlook.
- Valuation: What is LSI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LSI is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.