Ability To Adjust Rents Monthly Painting a Path to Stronger Operating Results, Growth than in Other REIT Sectors
Fed up with stock analysts lumping his self-storage property REIT with all other equity REITs, CubeSmart CEO Dean Jernigan threw out a challenge to the analysts attending his firm's earnings conference call last month: paint us as an individual portrait, not as a book of paint-by-number pictures.
"It's very discouraging for me to see in corporate America good earnings reports by other companies, and see the REIT sector trade down, with all of us being painted with the same brush. And I think that's patently unfair," Jernigan said at the outset of his call. "I would like to challenge someone on this call to write a very thoughtful piece on the self storage sector to paint us with a different brush."
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From late July through the end of August, the Dow Jones Equity All REIT index has traded down more than $30 from $293 to about $260 - an 11% decline. CubeSmart has fallen 4% in that time to $16.49/share.
Other publicly traded REITs in the self-storage universe have seen their share prices slip as well. Sovran Self Storage Inc. was down from a high of $74.10 in early August to $66.27, off 10.6%;
Extra Space Storage Inc. was down 9.3% to $40.43; and sector giant Public Storage was down 6.7% to $152.40.
Together the four REITs own or control more than 3,556 self-storage facilities with more than 253 million square feet. Public Storage alone controls more than the other three combined.
But why does the industry need to be seen as a separate work of art compared to the broader REIT gallery?
"Clearly, we're an operating company in the real estate business,” Jernigan said, "But we're not just a real estate play. We're an operating company that has 30-day leases. We're very nimble, and we can be very nimble as it relates to pricing. So the basic question to me is, would you rather be in an environment of low growth or no growth with low interest rates, or a growth environment of 3% to 4% in GDP with higher rates and hitting a targeted 2.5% inflation rate? And I would tell you, I'll take the latter every time.”
Self-Storage To See Shift In Pricing Strategy?
Ki Bin Kim, director of US REIT Equity Research at SunTrust Robinson Humphrey, says rents are clearly a differentiating factor in self-storage REITs and the key to helping the industry stand out. He ranks self-storage as his favorite REIT sector and has buy ratings on Extra Space Storage, Sovran Self Storage and CubeSmart.
Over the past several years, changes in promotions have been the most important driver of self-storage growth, other than occupancy, and changes in 'street rates,' which essentially equate to monthly rental rates quoted to potential new tenants, have not mattered much, Ki wrote in a report late last month. But that is about to change, according to Ki.
"We are entering the first innings of a pricing strategy shift in self-storage where the changes in street rates will begin to matter more," noted the SunTrust Robinson Humphrey. "In the past three months, 90% of the increase in net rents was due to changes in street rates vs. changes in promotions, a complete 180 from the past.”
“Street rates aren’t just beneficial in capturing higher rents from new customers, they are equally beneficial to the business of sending out rent increase letters,” he added.
Year-over-year net effective rents increased 4.3%, driven by street rate that are 3.1% year-over-year, and promotional discounts that are -1.3% lower year-over-year, Ki said.
“There will be a time to be less bullish on this sector as self-storage NOI growth normalizes, but we think it’s too early to underweight this sector today given the very strong operating performance, reasonable valuation, and pending favorable real estate comps that should come to market,” Ki said.
Gearing Up for Growth
The self-storage industry is clearly gearing up for growth as the economy recovers and people need places to store all their 'stuff.'
As for REITs in the sector, expected higher interest rates will impact self-storage REITs’ net asset value as cap rates move up, but they will also present growth opportunity, asserts CubeSmart’s Jernigan.
“It will create more sellers for us,” he said. “Higher rates will give us more opportunities to buy more assets and to continue to consolidate the sector.”
CubeSmart had an active investment second quarter buying nine assets for $87.5 million and selling none. Subsequent to quarter end, it also acquired an additional asset in New York City for $13 million but exited the Knoxville, TN market for disposition proceeds of $25 million.
Public Storage expects to complete the acquisition of 29 self-storage facilities this month (21 in Florida, five in Massachusetts, two in California, and one in Rhode Island).
Extra Space Storage has acquired 27 properties in Arizona, California, Hawaii, Illinois, Maryland, and Texas for $275.2 million since year-end 2012. It has an additional 20 probable acquisitions expected to close during the fourth quarter in Arkansas, California, Connecticut, Florida, Georgia, Illinois, Massachusetts, North Carolina, Ohio and Texas for $128.3 million.
Sovran Self Storage has three properties under purchase contract for $28 million and no properties under contract for sale.
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