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.

Extra Space Rose 34 Percent This Year

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 it…

Sourced through Scoop.it from: gilverbook.com

When we last looked into Extra Space Storage (NYSE:EXR), we ranked that company as a top pick among self-storage REITs. Since we featured its stock on May 26, EXR has had a great 11 percent run and distributed dividends 26 percent higher in June. Together with CubeSmart (which we have also featured), the company performed well the first seven months of 2015, ending up among the top 3 stock performers among 172 equity REITs we follow. Thus far, EXR stock has risen a whopping 34 percent.

Q2’s results have been as exciting as Q1’s. Year-over-year, total revenues and funds from operations (FFO) grew 16 and 17 percent respectively. Also, metrics that measure internal growth have been scorching hot. Same-store revenue and same-store net operating income (NOI) increased by 9.4 and 12.1 percent respectively; and same-store occupancy advanced 240 basis points to 94.5. Even with the dividend bump, the payout level is around 80 percent — a comfortable level.

Management is so confident that they purchased SmartShop, the country’s seventh-largest storage company, for $1.3 billion — a transaction that increases EXR’s footprint by 15 percent. The company will also end up with about 1,300 stores. In such a very fragmented industry as self-storage, besides growing presence, scale matters in cost reduction. That is particularly notable when marketing costs associated with the Internet have been a deciding factor in drawing in customers. Try google ‘storage’ and you’ll realize how competitive this market is.

Unfortunately, EXR has reached a supreme level from a valuation perspective. Expecting possible strong growth, price-to-FFO has reached 27×, while dividend yield is 3 percent. Certainly, there are advantages in acquiring self-storage stock, which, being of shorter duration like apartments, can raise rates with rising interest rate costs. However, the entry point is too steep.

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.

Public Storage – King of Self-Storage (Series 5 of 5)

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As the world’s largest owner and operator of self-storage facilities, Public Storage (NYSE: PSA) is the de-facto leader of the industry. Structured as a REIT, PSA boasts an extensive network of 2,300 facilities across 38 states in the US. This presence has created a very strong and recognized brand. PSA wisely leverages their size to maximize economies of scale and gain access to capital. In a fragmented market where creating a new location is fairly straightforward, these benefits facilitate the company’s continued expansion.

Overall, PSA’s stock has been a solid investment. As a large, well established company, PSA’s growth rate has predictably lagged its smaller cap peers. However, the dividend payout has never been decreased since its IPO in 1996. As a sign of PSA’s strength, the dividend has increased an average of 21 percent per year over the past five years. Investors have also benefited from a lower beta coefficient enabling the stock to weather down markets.

Leaders of their sector and industry earn privileges few companies in the US can boast. In examining PSA’s financials, the company has an impressive debt-to-enterprise ratio of less than one percent. Unlike most REITs, the company chooses to issue preferred shares as a method of financing. Although this comes at a higher cost, PSA justifies the strategy with the following points:

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  1. REITs, by law, must distribute a significant portion of operating income. Subsequently, conventional debt can become difficult to repay with operating income
  2. Refinancing risks do not exist since sinking fund requirements, maturity date and redemption issues are eliminated
  3. PSA retains the option of redeeming preferred shares at a specified future date.
  4. Preferred shares are not subject to covenants
  5. Dividends on the preferred shares can be applied to satisfy our REIT distribution requirements.

The credit ratings on their preferred shares are “A3” by Moody’s, “BBB+” by Standard & Poor’s and “A” by Fitch Ratings.

Regarding valuation, PSA’s has been on par with previous years. Over the past three years, the Price-to-FFO multiple has fluctuated between 20.0 and 23.7. Although historically high, PSA’s current Price-to-FFO multiple is within its historical range. In addition, historical yield has been hovering around 3.0.

Takeaway

PSA can be a solid addition to balance a portfolio.

Summary

2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 3.65 4.40 5.15 5.60 5.60
Q4 Dividend, $ 0.95 1.10 1.40 1.40
Dividend payout ratio, in percent 65 69 72 72
Dividend yield, in percent 2.7 3.0 3.4 3.0
FFO per share, $ 5.67 6.31 7.53 7.98 8.68
FFO per share (Q4 only), $ 1.50 1.86 2.13 2.17
Alternate FFO per share (Core), $ 6.68 7.44 8.09
AFFO per share, $ 5.65 6.41 7.18 7.73
Revenues – Total, in percent 6.5 5.2 7.6 10.8
Revenues – Same Store, in percent 4.6 4.9 5.3 5.4
NOI – Same Store, in percent 6.6 7.9 8.2 6.7
Year-end Occupancy – Same Store, in percent 89.6 91.4 91.8 92.5
Share Price on 31 December, $ 134.46 144.96 150.52 184.85 200.24
P/FFO on 31 December 23.7 23.0 20.0 23.2 23.1
 *2015 Projection

Next week I’ll post the closing remarks for the self-storage REIT sector.


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.​

Self-storage industry: On a need or want basis?

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Being minimalist oriented, I must admit that I never understood the logic of the self-storage industry until I began to pay more attention to how my friends and family — myself partially included — treated their personal belongings.

A study done by the Self-Storage Association has revealed not only that 65 percent of all storage renters have a garage, but also that 47 and 33 percent of them have an attic and a basement respectively. In addition, almost half the renters in the United States have below-average household incomes.

The self-storage companies say that you must have storage if you:

  • are moving out and need an intermediary place for your possessions
  • are a member of the military who is being deployed overseas for at least six months
  • have things that require a climate-controlled environment
  • feel that your possessions will be safer in a nearby facility.

On the other hand, you can argue that you don’t want to throw your things away or sell them. You are not the kind to let things go so easily. Whoever has never personally struggled to get rid of that beloved sofa, kayak or model fighter aircraft collection (or in my case, the books, which are part of my self-esteem), let her/him cast the first stone. Raise your hand if you don’t know at least one person from your circle of friends who is a “hoarder at heart.” After all, for every year you pay in storage rentals, you could buy the stored stuff again and again and it would be new.

Whether you are motivated by need or want, the self-storage industry has been one of the most rapidly-growing sectors of the United States commercial real estate industry for about forty years.

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Below are some other insightful facts extracted from the Self-Storage Association’s website.

  • The top-5 self storage companies, including 4 real estate investment trusts (Public Storage, Extra Space, Sovran and CubeSmart) plus U-Haul (a public company / non-REIT), own, operate and/or manage some 5,600 self storage facilities, or about 11.5% of all US facilities.  Several public companies are now offering third-party management of facilities owned by other investors.  Hundreds of facilities are now being managed by the three public companies that have moved into this service area.
  • There is a total U.S. self storage space capacity of about 21 sq. ft. per American household.
  • About 13% of all self storage renters say they will rent for less than 3 months; 18% for 3-6 months; 18% for 7-12 months; 22% for 1-2 years; and 30% for more than 2 years.

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.​

How did these U. S. REIT stocks manage so well in Q1-15?

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Yes, you can cry over spilled milk. You should know that, on the whole, REITs did quite well during the first quarter of 2015; what you probably don’t know is that a smaller subset — the self-storage REITs — did even better still, generating a return of 8.8 percent, as opposed to the total returns of several indicators, including:

• S & P 500 — 0.95 percent

• MSCI US REIT — 4.8 percent

• FTSE NAREIT All REITs Index — 4.0 percent

Self-storage has developed into a niche market within the realm of commercial real estate. Its market concentration is low, with only thirteen percent of the facilities controlled by the top ten players and the remainder managed by numerous small businesses.

Self-Storage REITs

The FTSE NAREIT All REITs Index includes four self-storage REITs: Sovran Self Storage, Inc. (NYSE:SSS), Public Storage (NYSE:PSA), Extra Space Storage Inc. (NYSE:EXR), and CubeSmart (NYSE:CUBE).

The four companies share many consecutive years of strong operational performance. As a result of a combination of steady same-store growth and store expansion, their overall revenues have grown by two digits, and net operational income has grown slightly higher than revenues, a sign of how strong their operational efficiency is.

On the cash flow front, funds from operations (FFO) and cash dividends have increased over time and, according to the guidance of management, it is unlikely they will stop in 2015. Last but not least, expansion has been carried out wisely and a healthy debt profile maintained — the company has held its debt-to-enterprise level within reasonable bounds.

Demand drivers

On the macro level, as long as U.S. demographics and the current state of the economy help increase the number of personal possessions which thus need to be stored outside the owner’s residence, self-storage will be in demand. Some believe baby boomers will strengthen this trend by moving into smaller houses. As a result, future growth prospects look positive.

Since convenience is an important reason for choosing a facility (those near home or office are preferred), other drivers of demand have been associated with local market conditions like population growth and average household size and income. Competition and excess supply can also affect occupancy levels and rental rates.

Mixture of self-storage and U-Haul with an office feel

The self-storage concept has quickly evolved into a combination of self-storage and U-Haul with an office “feel.” Operators have begun focusing on generating income by offering additional services like truck rentals, moving and packing supplies, and tenant insurance. To further meet customer expectations, they have adopted innovative products and services, including online and automated kiosk rentals, climate-controlled and wine storage, 24-hour accessibility, customer service call center access and after-hours storage. Self-storage has changed radically.

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Click here to check out self-storage performance in the first quarter of 2015.


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.​