Following the announcement of Sovran Self Storage’s US$1.3 billion acquisition, self-storage REITs hit the news again later last week. Extra Space Storage announced an increase of 32% in its dividends. With another big news, my question is, is self-storage a buy opportunity again?
As a matter of fact, due to its double digit growth rates, self-storage has always attracted investors. AFFO multiples have climbed up high and, consequently, the dividend yields have gone down. This made a number of potential investors to lose interest. The average dividend yield of self-storage REITs is 2.9%, making it the lowest as compared to other REIT sectors.
In general, real estate markets have kept supply under control even though it is predicted that there are higher chances of overbuilding. Spencer Kirk, the CEO of Extra Space Storage, said that new supply seemed to be appearing in pockets as no one is aware of them countrywide. Public Storage CEO noted the increase in supply in certain markets like the boroughs in New York and Denver.
Fast growing funds from operations have sustained the 32% increase Extra Space recorded, which pushed the yields from 2.6% to 3.4%. Even though this is still considered to be below average for equity REITs, the share price increased by 32% in the last 12 months.
Another self-storage REIT that recorded an increase in its dividends last week was National Storage Affiliates. Its dividend shot up by 10%, taking its yields to 4.1%. Even though the REIT began trading last year, its AFFO multiple has been at the top. This current year, its share price has already increased by 24%. Definitely, a perfect timing for the company to become public.
Generally, when the rate of optimism is higher, expectations fail to be real thus resulting to be painful. Even though Kirk commented that self-storage has been the best performing asset class year in and year out, investors never like oversupply, or an indication that there will be one. For instance, last year’s prolonged selloff of lodging REITs is a perfect example.
In conclusion, the increase in dividends is appetizing, but it does not lure me into making any purchase.
Source: Sovran Self Storage Inc.(NYSE:SSS), National Storage Affiliates(NYSE:NSA), Extra Space Storage Inc.(NYSE:EXR), Fast Graphs
Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.
Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.