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.

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.

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.

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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.

Extra Space, CubeSmart Outperform Sovran, Public Storage in Q1 2015

Here is a list of the self storage REITs ranked by various Q1-2015 key metrics (operations, funds from operations, distributions, debt, valuation, and projections).  The stocks are rated item by item (from best #1 to worst #5), and at the end, there is a consolidated result.

These are the companies:

  • Extra Space Storage (NYSE: EXR)
  • Public Storage (NYSE: PSA)
  • CubeSmart (NYSE: CUBE)
  • Sovran Self Storage (NYSE: SSS)

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Ranking Item by Item & Consolidated

Metrics Ticker EXR CUBE SSS PSA
Operations
Q1 Revenue growth (YoY) 2 1 3 4
Q1 Same-store NOI growth (YoY) 1 2 4 3
Q1 Same-Store Occupancy 2 3 4 1
Funds From Operations
Q1 FFO per share growth (YoY) 1 3 2 4
Q1 Company FFO per share growth (YoY) 1 3 4 2
Distributions
Q1 Dividend payout ratio 2 1 3 4
Q1 Dividend per share growth (YoY) 2 1 3 4
Debt
Q1 Total debt to total capitalization value 4 3 2 1
Valuation
Q1 Implied Cap Rate 3 2 1 4
Q1 Dividend yield 2 4 1 2
Projections
Dividend per share growth (2015 vs 2014) 4 1 3 2
Company FFO/AFFO per share growth (2015 vs 2014) 1 3 2 4
Total Sum 25 27 32 35
Final Ranking   1 2 3 4
    Results:
  1. Extra Space Storage (NYSE: EXR)
  2. CubeSmart (NYSE: CUBE)
  3. Sovran Self Storage (NYSE: SSS)
  4. Public Storage (NYSE: PSA)

Written by Heli Brecailo

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.​

Does CubeSmart suffer from middle child syndrome with reason? (Series 4 of 5)

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As a middle child, it can often be difficult to get attention, especially as the third in a family of four children. The first typically gets more attention as there were not any siblings around vying for attention and the last gets coddling.

Does it get better if it changes its name to a tricky one?

That’s how I feel about CubeSmart (NYSE:CUBE). As of March 31, 2015, the Company’s market capitalization is US$3.9 billion. This is slightly higher than Sovran Self Storage, but not as high as Extra Space’s and Public Storage’s. However, that doesn’t mean CubeSmart’s not a quality company. It is a solid company that has strategically grown, which is ideal for a dividend growth investor.

Previously known as U-Store-It Trust, it changed its name to CubeSmart in 2011 to enjoy the branding benefits of joining the “big names” club, especially in a highly fragmented industry where customer service is a big differentiator. Furthermore, it takes pride for having re-positioned the portfolio, moving away from slow growth and less population, into high growth and more populated core markets such as New York, Washington DC, and Philadelphia. The result is a high quality, urban-oriented portfolio, which tends towards millennials who live in tight blocks and boomers who downsize to smaller homes.

As the portfolio changed, average occupancy increased from mid-seventy to ninety percent. Currently it is at an all-time high. Additionally, it has positioned itself in the highest income household neighborhoods versus its peers.

Since 2011, CubeSmart has checked all the following boxes:

  • 2-digit total revenue growth
  • 2-digit FFO growth rate
  • 2-digit dividend growth
  • Conservative dividend payout ratio
  • 6 percent average same store revenue growth
  • 8 percent average net operating income growth

2015 Projected Growth Rates 

  • 7 percent net operating income growth
  • 6 percent same store revenue growth
  • 4 percent FFO growth
  • 6 percent dividend

CubeSmart’s debt profile has improved over time and is currently on par with its peers. Nonetheless, the average interest rate of 4.0 percent is relatively high; Sovran’s is 3.7 and Extra Storage’s is 3.4 percent. Public Storage’s debt is less than one percent of its total market capitalization. The average maturity is six years. Most debt is fixed-rate and unsecured. The Company has mid-tier, investment-grade credit ratings from both Standard & Poor’s and Moody’s.

Although CubeSmart has seen capitalization rates of quality acquisitions decrease to approximately five percent, it has kept a good pace of acquisitions. Over the last three years, it has added 3.9, 1.5, and 2.6 million square feet to existing properties (2014, 2013 and 2012 respectively). As of December 31, 2014, the 421 owned self-storage facilities encompassed an aggregate of approximately 28.6 million rentable square feet.

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Valuation wise, price-to-FFO is on par with the last four year’s year-end price-to-FFO mean, as well as the sector’s mean. The dividend yield is acceptable at 2.8 percent.

The Company will release Q1 2015 financials after the market close on Thursday, April 30, 2015.

Takeaway

Although I like the growth story, there doesn’t seem to be much appreciation upside and the dividend yield is just okay. The middle child will have to do more to excel.

Summary

2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 0.29 0.35 0.46 0.55 0.64
Q4 Dividend, $ 0.08 0.11 0.13 0.16
Dividend payout ratio, in percent 45 47 51 51
Dividend yield, in percent 2.7 2.4 2.9 2.5
FFO per share, $ 0.56 0.71 0.87 1.03 1.17
FFO per share (Q4 only), $ 0.09 0.21 0.21 0.26
AFFO per share, $ 0.65 0.74 0.91 1.08
Debt to total capitalization, in percent 37.3 33.3 32.8 23.8
Revenues – Total, $ 000s 227,245 266,322 318,395 376,963
Revenues – Same Store, in percent 3.6 3.8 7.4 7.2 5.5
NOI – Same Store, in percent 5.7 6.0 9.3 9.6 6.5
Year End Occupancy – Same Store, in percent 79.1 85.1 88.8 90.0
Share Price on 31 December, $ 10.64 14.57 15.94 22.07 23.12
P/FFO on 31 December 19.0 20.5 18.3 21.4 19.8
 *2015P=2015 Projection

Written by Heli Brecailo

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.​

Extra Space Storage reaches high marks (Series 3 of 5)

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Second largest self-storage REIT, Extra Space Storage (NYSE: EXR) reaches high marks when it comes to cleanliness and employee satisfaction. However, do not take that as a sign that you can move in with your TV and sofa to live and work from your storage box. Some store managers live on-site, but the same ability is not extended to renters. Besides, you are not allowed to plug in appliances.

Extra Space Storage was founded in 1977 and enjoys ownership interest in 828 stores spread across 35 states as well as Puerto Rico and Washington, DC. Of those, 557 are wholly owned while 271 are joint venture partnerships. Add in 260 units owned by third parties, but operated by Extra Space Storage in return for a management fee and the entirety of this storage enterprise is just plain massive. It should be noted that 86 percent of the company’s revenues is derived from the rental side of business.

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Additional high marks:

  • Dividends have compounded at an annual growth rate of 18% since going public in 2004. The company has experienced only one reduction and that was in 2009 when just surviving the Great Recession intact could be taken as a good sign. An even better sign is that current dividend distribution levels have actually surpassed those from the pre-recession era.

EXR Q4 14 Revenues

  • Funds from operation (FFO) per share have increased at a compounded annual growth rate of 28 percent over the past three years, but management forecasts at least a 15 percent rate of growth in 2015. The company’s double digit rate of growth in revenue over the past three years has far surpassed expectations while at the same time enjoying same store revenue and net operating income growth in the high single digits. Occupancy rates have increased by over a hundred of basis points.

EXR Q4 14 AFFO

  • Extra Space Storage has consistently aimed at deleverage of its debt and current debt to enterprise figure stand at around 25 percent. That figure is more than reasonable in comparison to the figures reported by Sovran Storage and CubeSmart. In addition, 36% of the debt of Extra Space Storage is subject to variable interest rates. The combined weighted average interest rate is 3.4% with a weighted average maturity of approximately 4.6 years. As for the bad news: 84% of the loan is secured.
WANT TO SEE EXTRA SPACE’S METRICS AGAINST ITS PEERS? DOWNLOAD FREE FILE.

Extra Space Storage has been trading at a median year-end price-to-FFO figure of 22.2x. The projected FFO per share for the current year (2015) is $2.90 which translates into a fair price somewhere in the $64 range. That figure is just slightly below the $66.85 per share price the stock hit on April 21, 2015.

Out of the thirteen sell-side analysts covering the stock, six favor Extra Space Storage while seven have placed it on hold. The six “buy” ratings should at a minimum be taken as a sign that the stock should be moved to your watchlist.

Who knows, maybe they will allow self-storage living.

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Summary

 EXR
Metrics 2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 0.56 0.85 1.45 1.81 1.88
Q4 Dividend, $ 0.14 0.25 0.40 0.62
Dividend payout ratio, in percent 46 52 68 69
Dividend yield, in percent 2.3 2.3 3.4 3.1
FFO per share, $ 1.20 1.59 1.96 2.52 2.90
FFO per share (Q4 only), $ 0.35 0.43 0.52 0.62
AFFO per share, $ 1.23 1.64 2.12 2.61 2.94
Debt to total capitalization, in percent 36.2 27.4 27.5 24.7
Net Debt to EBITDA 6.94 6.03 5.50 5.61
Revenues – Total, in percent 17.1 24.1 27.2 24.3
Revenues – Same Store, in percent 5.8 6.6 7.4 7.5 6.3
NOI – Same Store, in percent 9.3 10.2 10.0 9.5 7.0
Occupancy – Same Store, in percent 86.9 87.9 89.2 91.4
Share Price on 31 December, $ 24.23 36.39 42.13 58.64 64.24
P/FFO on 31 December 20.2 22.9 21.5 23.3 22.2
 *2015P – 2015 Projections

Written by Heli Brecailo

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.​