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With signs of a bear market brewing in the horizon, there may be some opportunity to open positions in the Self-storage companies. This segment of the REIT industry is much less prone to market swings and recessions, though it may not be totally fool proof.

Self-storage REIT Industry Outlook

Since inception in the early 1970s, the self-storage industry has experienced significant growth. In the past few years, there has been even greater growth. According to the Self-Storage Almanac (the ''Almanac''), in 2001 there were only 33,833 self-storage properties in the United States, with an average occupancy rate of 86.1% of net rentable square feet, compared with 50,048 self-storage properties in 2011 with an average occupancy rate of 79.7% of net rentable square feet. The top 10 self-storage companies in the United States owned approximately 11.1% of total U.S. self-storage properties, and the top 50 self-storage companies owned approximately 15.1% of the total U.S. properties as of December 31, 2011. This fragmentation poses tremendous opportunity for consolidation in the self-storage industry. The companies with strong financial positions and efficient management will be able to take the lead in the consolidation and growth. Furthermore, these industry leaders can take advantage of the depressed real estate market and the historic lows of interest rates, to acquire more locally owned self-storage facilities. (Source: Extra Space 2011 Annual Report)

Occupancy Trends

The number of new self-storage construction starts is declining. This means the self-storage the supply side is not growing as fast as the demand, and thus the increasing trend in the occupancy rate observed in the past few years. As a result, these companies can also increase rental rates. The increasing trend in the occupancy rates can also be attributed to a housing market downturn as the demand is driven my mobility of the renters. This mobility happens in both economic expansions and contractions, making the self-storage industry resilient to recession.

The Big Players

The top four companies are as shown in the table below. U-Haul (AMERCO) is also in this game, but is not a self-storage pure play.

Public Storage

ExtraSpace

Sovran Self Storage

Cube Smart

Ticker

PSA

EXR

SSS

CUBE

Market Cap

$23.9B

$3.12B

$1.52B

$1.51B

Rental Units (Owned)

2,247

356

410

370

Third Party Managed/Joint Venture

526

25

103

Total Rental Units

2,247

882

435

473

Total Rental Area (million sqft)

168

64

28.9

24.4

Tenant Base

1,073,000*

448,000

200,000

173,000

Rent / sqft

$12.99

$13.67

$10.89

$12.79

Occupancy

90.70%

86.30%

80.70%

78.40%

* Estimated.

Public Storage

This is the largest company in the self-storage REIT sector. It has been around since 1972 and based on the number of tenants, it is one of the largest landlords in the world. Due to its sheer size and vast presence across the U.S. and also in the Europe, it has the economies of scale advantage. Apart from the self-storage business, it also operates commercial spaces under its Public Storage Business Parks (PSB) entity. Although the European unit and commercial property units are not performing due to the severe economic slump, the strong growth in the self-storage business far outweighs the negative outlook in the above two segments. The European unit's share in the net income was only 4.6%, and the commercial property unit's share was only 6.7% in 2011.

Extra Space

This is the second largest company in the industry and has been in the business since 1977 and as of 2011, it owned, operated, and managed 882 rental units with a total area of 64 million square feet and a tenant base of 448,000. In 2011, it had acquired 55 wholly owned properties.

Sovran Self Storage

Founded in 1982, it operates self-storage facilities under Uncle Bob's brand. Its growth strategy includes: improving operating performance by differentiating itself using value added offerings like the truck move-in program, dehumidification system of climate controlled spaces and aggressive marketing; acquiring new stores; expanding the third-party management business; and enhancing existing stores by converting ordinary spaces into premium storages.

Cube Smart

It owns 370 facilities and manages 103 units, and in addition has 860 partner facilities. Its climate-controlled facilities constitute 72% of the total storage volume compared with the industry average of 36%. In November, 2011, it acquired Storage Deluxe, adding about 1.6 million square feet of storage space. The company has acquired 38 units in the past two years and is planning to continue its growth by acquisition strategy.

PSA

EXR

SSS

CUBE

Revenues

Revenues - 2011 ($millions)

$1,814

$330

$212

$238

2009

$1,728

$308

$196

$204

2007

$1,893

$256

$195

$195

3 yr growth

5%

7%

8%

17%

5 yr growth

-4%

29%

9%

22%

Dividend

2011

$3.65

$0.56

$1.80

$0.29

2010

$3.05

$0.40

$1.80

$0.15

2009

$2.20

$0.38

$2.18

$0.10

2007

$2.00

$0.93

$2.49

1 yr Div growth

20%

40%

0%

100%

3 Yr Div growth

66%

47%

-17%

190%

Dividend Yield

3.20%

2.70%

3.40%

2.60%

Fundamentals

Net Profit Margin

45.41%

15.30%

14.42%

-1.66%

5 yr Avg.

40.65%

13.01%

16.84%

-1.71%

Price to Book Ratio

4.67

3.05

2.32

7.6

Debt Ratio

0.045

0.54

0.47

0.4

Funds from Operations (FFO) ($millions)

2011

1,256

115.8

67.4

60.76

2010

1,153

83.72

67.3

51.1

2009

1,135

90.28

54.5

Y/Y growth

8.9%

38.3%

0.1%

18.9%

Of the big four players, Public Storage seems to have the strongest fundamentals. It has the highest net profit margin of 45.41% and also has the lowest total debt. Its dividend growth has been very consistent in the past 5 years. Cube Smart seems to have the highest growth in the revenue, although it has reported a net loss of income in the past 3 years. Extra Space has shown the strongest revenue growth in the past 5 years.

A key measure when evaluating REIT companies is FFO (Funds from Operations), which generally represents net income before depreciation expense and gains and losses on sales of real estate. It is helpful to investors, because net income includes the impact of depreciation expense, which assumes that real estate declines in value predictably over time, while we believe that real estate values change due to market conditions and inflation. Public Storage exhibits a consistent growth in FFO in the past three years. Whereas, Extra Space shows erratic FFO.

Price Movement

PSA

EXR

SSS

CUBE

Last Close (May 11, 2012)

139.42

30.04

52.39

12.28

YTD price change

3.69%

23.98

22.78%

15.41%

1 yr

19.85%

41.50%

26.76%

25.82%

All stocks have soared along with the bull market of Q1, 2012. Public Storage dropped nearly 4% in the past week due to weak growth in FFO. One can wait for the market pull back to open positions in Public Storage, which is the best bet for the long term. Cube Smart may be a short-term speculative play. Whichever choice one makes, one should consider including a Self-storage REIT in his/her portfolio to retain value, beat inflation, and reap some dividend benefit.

Source: Safely Store Your Investment With Public Storage