Not Sexy, But Investors Should Consider The Simplicity Of Self-Storage

Posted on November 15, 2017

Recently, the boring world of self-storage somehow became one of the most sought-after ways to invest in real estate.

It doesn’t sound sexy, but, like anything with a good return, it actually is.

In days past, it used to be that those looking to invest in real estate were mostly interested in apartment property, real estate investment’s “gold standard.”

There are many reasons to branch out, one of which is, you guessed it, millennials.

Millennials, one of the largest groups in history, can’t afford single-family homes (which are going up in price), but they still want to move out of their parents’ houses. This brings the demand for apartments up, setting off an excess supply of apartment construction, in part due to the slowing of job expansion.

So why purchase shares of a REIT that focuses on the self-storage industry?

For one, it’s recession-proof. This was proven by Forbes 400-member B. Wayne Hughes when he built a $2.4 billion fortune on self-storage. He was clearly doing something right. You can’t argue with that.

In a bad economy, people start trading in luxury goods for, well, less luxury goods. Apparently, storage units, are – ding ding! – not luxury! Which turns out to be their appeal.

In fact, during the 2008 economic downturn, self-storage was the only REIT sector that posted a positive return of five percent including dividends. We think that’s kind of big deal.

We all need storage. The demand for them is inelastic. Which is why, in 2015, self-storage was up 40 percent while other REIT sectors and stocks as a whole, were either flat or nothing to write home about. This year, self-storage is in third place among REITs in terms of returns. Again, we think this is kind of a big deal.

Storage facilities need little capital outlay or upkeep, their property taxes are modest, and net acquisitions in that sector have surged.

And so, in good times and in bad, kind of like marriage, good old storage units are like a trusty old spouse. They smell kind of bad, but they’re not going anywhere.

In my newsletter, Forbes Real Estate Investor, I cover all of the self-storage REITs, including the big gorilla, Public Storage (PSA) that was cofounded by Wayne Hughes.

Self-storage REITs comprise roughly 8% of the REIT Index, i.e. the Vanguard REIT Index (VNQ). Within my self-storage index, I track these five REITs, which account for roughly $60 billion in market value: CubeSmart (CUBE) Extra Space Storage (EXR), Public Storage (PSA), Life Storage (LSI), and National Storage (NSA).

In the third quarter, earnings were better than anticipated: Extra Space Storage, CubeSmart and Life Storage beat funds from operations (FFO) expectations while Public Storage lagged. CUBE and EXR raised full-year guidance while LSI maintained guidance, and PSA does not provide guidance. Same-store metrics were slightly better than expected with average revenue growing 3.0% and net operating income growing 2.9%.

NSA’s management team has been raising the dividend about 2x per year, and according to REIT analyst, Bill Stoller, “given the latest FFO per share increase of 13.8%, it would not be a shock to see the next distribution bumped by at least $0.02 per share.” Stoller warns that the “$26.00 share price seems to have that baked into the cake. I do not expect to see shares go much higher in the near-term.”

As Hoya Capital explains, “After flying under the radar for many years, the robust rent growth that peaked in 2015 has prompted a wave of institutional money to enter the space. High levels of new development continue to weaken rent growth and pressure occupancy.

Supply growth, which was once believed to be constrained by tight zoning regulations, has surged in recent years. Full-year 2017 revenue growth is expected to decelerate to 3.5%, down from the peak of 7.4% in 2015. Fundamentals are expected to weaken further in 2018 before recovering in 2019 as development activity cools after the “easy money” has been made.”

Hoya, believes that “within the sector, self-storage REITs appear fairly attractive at these levels relative to other REIT sectors. Even after incorporating lowered guidance and a lower expected growth rate through 2019, our models see value in the self-storage sector relative to other REIT sectors and believe that the sell-off continues to be overdone.”

I currently favor Extra Space Storage (EXR) and Public Storage (PSA).