U-Store-It Trust: Keep In Storage

On November 5 we projected that U-Store It Trust (YSI), a leading self storage operator, which trades under the ticker YSI, would cut its dividend. We estimated the lowered dividend would be 20 cents or lower a quarter, down from 29 cents. A week ago the Company did announce a reduced dividend for the IVQ 2007: 18 cents, a whopping 38% drop. The stock price has tumbled 58% from its 52-week high back in February. Today the stock is just shy of $10.0 and has been trading between $9.5-$10.5 since late October when it dropped off a cliff. Time to buy ? We say no. YSI is still too expensive for our blood.

Look for example at the margin between FFO after maintenance capital expenditures and the new, revised dividend. The Company gave FFO guidance for 2008 (mid-range) of $0.91 per share. After we deduct out capital spending (which is higher than expected in future years as YSI plays catch up), AFFO is $0.78. With the dividend at $0.72 a share, the Company is covering the pay-out by just 108%. Or put another way, a less than $1mn a quarter swing in FFO and the dividend could be under water. We had a look at some of the assumptions management disclosed for 2008. Many of the metrics seem reasonable enough but YSI faces difficult trading conditions in the year ahead with all the public storage companies anxious to buoy their sinking stock prices and the uncertain impact of an economic recession on the business. In this context, projecting Same Store NOI growth of 4.5%-6.0% seems optimistic to us. In the third quarter of 2007, this metric (which accounts for over 80% of the Company's total Operating Income) was down over the prior year. Even in the fourth quarter of 2007, YSI was only projecting a 1%-2% increase. Sadly a 4.5% projected increase seems a stretch.

As for longer term growth, with little internally generated capital, difficult operating conditions and a low stock price, there do not seem many prospects for material FFO upside in the next 3 years. The best bet for a bump up in FFO per share may come from turning around the performance of the 14 self storage facilities acquired from Rising Tide in September, but this can only have a minimal impact on a Company with 411 facilities.In our rating system, U-Store-It's dividend paying capacity merits a BB, which means we're relatively comfortable that the dividend can be maintained, but we do not expect any increase in the pay-out over the next 3 years. On this basis, on a risk-adjusted basis we require a 10% minimum return on an investment in YSI (all of which will be derived from the dividend) which means we're looking for a stock price of $7.2 before we'd buy. That's down from the $7.6 we had set earlier, due to the slightly higher than expected dividend cut. Given today's stock level the price will have to sink another 25%, so we'll probably have to put this name in storage for some time.

Disclosure: none