Investors Sold Self Storage REITs in July

  1. This year, the self-storage REIT sector’s performance has been slightly negative.
  2. When REITs started to released their Q2 results, investors sold their positions in late July.
  3. In general, results have been in line with expectations.
  4. One possible explanation for the mini selloff are concerns over the valuation values, which have reached high levels, especially Extra Storage and Public Storage.

chart01If there’s a REIT sector that hasn’t managed to follow its peers in terms of performance this year, it’s the self-storage sector, which includes five companies, ranging from the small cap National Storage Affiliate (NSA) to the large cap Public Storage (PSA).

On average, their return has been slightly negative at -3%, as opposed to the average REIT return of 19%. While July was a good month, in general, for REITs, self-storage was left with a slightly bitter taste in their mouth. Average REIT return was 5%, whereas self-storage was -4%.

A mini selloff occurred when self-storage REITs started releasing their Q2 results in late July. Despite the good results, Extra Space (EXR) has an 8% drop after the release. Public Storage had the same results, though with just a 6% drop.

Fear of new supply might be a reason why investors are being spooked away. The management teams have flagged new supply, although this is limited to certain markets, such as Denver and Houston. On the west coast, supply appears to be constraint and the sector is thriving.

With that in mind, investors might be concerned about the valuation levels some of the REITs have reached, especially Public Storage and Extra Storage. As far as multiples go, both are trading above the sector average.

In summary, multiples have not come down enough to consider investing in the self-storage sector. This is especially true for Public Storage and Extra Space.

Source: Extra Space Storage Inc.(NYSE:EXR), Public Storage(NYSE:PSA)

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 is long FCH, XHR, CLDT, and PEB.

This REIT Might Be Your Best Chance in Self-Storage

chart01It was a quiet week for US equity REITs, which were on average slightly up 1.1%. It appears as though investors are waiting for the Q2 season results release. Stock performance was down slightly in specialty REITs, but positive for the remaining sectors. One of the week’s best-performing sectors was self-storage, led by National Storage Affiliates, which was up by 5.2%.

Keeping up the good news, National Storage Affiliates reported raising $238 million in proceeds from the offering of common shares. They were able to issue an amount of stock equivalent to half of the total outstanding shares. The company plans to use the proceeds to expand debt capacity in anticipation of new acquisitions.

National Storage operates under an affiliate system which is referred to as PRO, or participating regional operators. Each PRO contributes properties in exchange for operating partnerships (OP) and subordinated performance units (SP). Each PRO manages the properties it contributed to the company. The affiliates are the major owners of the company via OPs and SPs. The most recent addition to the PRO network was Hide-Away. They became the seventh PRO to join the company last April.

In self-storage, National Storage has one of the lowest multiples at 22 times AFFO (despite high). This may be a result of becoming publicly traded last year. In comparison, Public Storage, which is the largest company in the sector, is trading at 29 times. Amidst speculations that the sector is losing strength, National Storage Affiliates has maintained strong stock returns this year whereas its peers showed overall weak performance.

The sector appears to be becoming more concentrated. For example, last May, Sovran Storage acquired LifeStorage for $1.4 billion. The affiliate strategy of National Storage also acts as a consolidation mechanism. National storage appears to be the best bet in self-storage as far as overall outlook.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on July 08, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of May 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report 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. 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.

Is Self-Storage REIT a Buy Again?

chart01Following 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.

Self Storage REIT Gets Carried Away

 

chart01.pngInvestors never realized or attached little importance to the negativity surrounding Sovran Self Storage’s $1.3 billion acquisition of LifeStorage last week. LifeStorage is a privately owned self-storage company that is ranked among the top 15 largest in the sector. Sovran also announced an equity raise of $600 million to fund the transaction.

The drop recorded last week, attributed to the release of Fed minutes, was sharp. More than 90 percent of the equity REIT stocks fell. Sovran stock dropped by 7 %. This is the major drop ever to happen among the self-storage peers.

The subsequent Fitch announcement that they will place Sovran on a negative watch confirms our suspicion. Besides increasing leverage, Sovran will make an expensive acquisition. They will pay an initial cap rate of 4.8 percent, in line with the established self-storage rates, for a company founded five years ago.

However, the management argues that the portfolio of LifeStorage is better and will improve their quality. As a matter of fact, LifeStorage has the benefit of owning higher rent per occupied square foot and a greater surrounding population with a higher average household income.

Given that the company has been recently upgraded by S&P, they were quick to worsen its leverage metrics and increase debt. The transaction will be financed by a bridge loan of $1.35 billion initially, and later replaced by 50%/50% debt and equity. The debt financing percentage will be higher than the usual debt funding. However, the total debt to total enterprise will increase from 17% to 24%, still very manageable.

Sovran got carried away looking for a sizable operator to buy. LifeStorage investors must have celebrated the transaction given the fact that the company is only five years old. Size is an important aspect for a self storage company to compete in an industry where it has become essential to dilute the administrative and marketing costs. Of the 550 properties it has, Sovran will further add 84 more.

A drop in the stock does not mean stocks will be cheaper and, based on the valuation multiples, definitely not a buy.

Source: Sovran Self Storage Inc.(NYSE:SSS), LifeStorage, Fitch Ratings, S&P Global Ratings

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.

Is the self-storage sector moving toward consolidation? (Part 2/2)

Click here if you have not read part 1.

So, which companies have the potential to alter the self-storage landscape? Let’s look at the options.

National Storage Affiliates

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National Storage Affiliates is a REIT that was achieved by combining a variety of smaller companies to achieve better access to funding and lower corporate costs. As a result, the small companies received the benefits of larger companies, while retaining management of their original properties. It started with six affiliates (known as PROs) has become the sixth largest self-storage operator in the country. Their 2014 national ranking (with the exception of SecurCare) include: Northwest (16th), Optivest Properties (21st), Storage Solutions (29th), Move It (34th), Guardian Storage Centers (36th), and SecurCare (6th in 2013).

Today, National Storage anticipates adding more affiliates, which should act as an industry catalyzer.

Privately Owned Companies

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Two private companies, Simply Self Storage (founded in 2003 with headquarters in Orlando, FL) and StorageMart (founded by Gordon Durnam after selling his previous company, Storage Trust, to Public Storage in 1999) have the potential to alter industry dynamics. Currently, Simply Self Storage operate more than 160 facilities with over 12 million square feet of rentable space, while StorageMart operates 165 stores in Canada and the United States and has 11 million rentable square feet.

 

W.P. Carey

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Self-storage only accounts for 5% of W.P. Carey’s annualized base rent (ABR), yet they are still one of the top 10 self-storage operators in the US. With 3.5 million square feet of rentable space, they generate an ABR of $32 million. They have only one tenant, U-Haul Moving Partners and Mercury Partners, which makes them the second largest W.P. Carey tenant.

chart07

Currently, W.P. Carey has an 88% interest in this venture and also operates industrial, office, retail, and warehouse space, which contribute greatly to their total revenue. Self-storage is a component of the company’s strategy to be diversified across different types of property.

U-Haul International

The shareholders of Amerco (U-Haul International’s parent company) decided not to pursue the conversion of its real estate assets into a REIT platform at their annual meeting in August 2015. As a result, it doesn’t appear that they will be repositioning the company in the short term.

 

Source: Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart Common Shares (NYSE:CUBE), Sovran Self Storage Inc. (NYSE:SSS), National Storage Affiliates Trust (NYSE:NSA), Amerco (NASDAQ:UHAL), W.P. Carey, Inc. (NYSE:WPC).

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.

Is the self-storage sector moving toward consolidation? (Part 1/2)

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In the United States, there are more than 50,000 self-storage facilities and 30,000 operators that account for $24 billion in annual revenue. While around 11% of the industry’s total rentable square footage are self-storage REITs, the other 89% are privately owned and run by operators. Although these statistics indicate that there is significant potential for consolidation in this profitable industry, it remains to be seen whether or not this will actually take place.

In all honesty, it will take considerable effort to make any changes in the industry. Outside of the ten leading operators, there is no single operator with the power to make big changes in the industry’s landscape. Any that do attempt growth will have to do so a little bit at a time through development or the acquisition of smaller players.

chart02Currently, Public Storage, a $43 billion market cap company, is in the industry’s top spot as the largest company. In the United States and Europe, they operate 142 million net rentable square feet of real estate. No other company is anywhere near this. Public Storage has aggressively gobbled up private operators, but, in recent years, due to increasing acquisition competition, they have ramped up a development process. Even if the remaining REITs combine together, they would have no chance of overcoming Public Storage.

In second, Extra Space Storage has an $11 billion market cap with 87 million square feet of rentable space. In September 2015, Extra Space Storage closed on the acquisition of SmartStop Self Storage, which had been the 7th largest operator in the industry, for $1.4 billion USD.

Additional players in the self-storage sector include REITs CubeSmart, Sovran, and W.P. Carey (minority self-storage), as well as recently publicly traded REIT National Storage Affiliates, Amerco (the publicly traded company that operates U-Haul International), and two additional private operators, Simply Self Storage and StorageMart.

So, which companies have the potential to alter the self-storage landscape? Let’s look at the options tomorrow.

Source: Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart Common Shares (NYSE:CUBE), Sovran Self Storage Inc. (NYSE:SSS), National Storage Affiliates Trust (NYSE:NSA), Amerco (NASDAQ:UHAL), W.P. Carey, Inc. (NYSE:WPC).

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.

What’s Special about National Storage? (Part 2/2)

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Click here if you have not read part 1.

The lack of a national identity may be an advantage.

One remarkable difference from its REIT peers is a lack of national identity. Each of the PRO’s preserves its own name brand, and continues to be associated with the region it operates within. For instance, the websites of SecurCare and Northwest are different from each other, thereby maintaining their own identity. In addition, each PRO manages their own contributed units promoting their own level of service, pricing, and customer policies, to name a few.

chart07There is a central website https://gostorageunits.com that encompasses National Storage operators and serves as a locating service for their nearest units. The National Storage website http://www.nationalstorageaffiliates.com/ has been built around attracting both investors and potential affiliates.

I am certainly not saying that a lack of a sole identity is a negative factor. When compared to their competitors, National Storage has more conditions to be in sync with their target region. This enables the company to be more flexible and quicker when it comes to making decisions that cater to their local customer base. This may be a competitive advantage.

Capital Structure

chart05In addition to the common shares and OP units, National Storage issues subordinated performance units, which change the way common share and OP unit holders are remunerated.

Once a property’s operating cash flow covers allocated corporate G&A costs, debt service and maintenance capital expenditures, the common share and OP unit holders will receive six percent on their unreturned capital. Once this condition is met, SP unit shareholders will also receive six percent. The excess operating cash flow will be split between the SP and OP unit holders.

When all is said and done, REIT shareholders (common) have a downside protection; however, they do not enjoy as much upside as PRO shareholders (OP and SP units).

The company’s debt to total capitalization of 36% is higher than its peers’, but in line with the REIT industry’s.

Operational Performance

Although National Storage must improve their occupancy metrics, the company has enjoyed a better same store revenue, and net operating income growth rate when compared to their industry peers. They also show a two-digit growth rate in FFO per share. This demonstrates the company’s capacity to make large distributions in the future. The company’s dividend yield of 5% is the highest in the self-storage sector.chart04

Conclusion

National Storage Affiliates most definitely stands out in the five factors that we have analyzed: industry fundamentals, valuation, profile, capital structure, and operational performance. The capital structure is by far the trickiest characteristic related to common shareholders due to the fact that it provides downside protection with a limited upside potential. That being said, this REIT is a potential buy.

Source: National Storage Affiliates Trust (NYSE:NSA), 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.