REITs: Storage Wars Intensify

Nov. 06, 2017 1:00 PM ETCUBE, EXR, IEF, IYR, LSI, SPY, VNQ, PSA13 Comments

Summary

  • Storage REITs have surged over the past quarter after a dismal start to 2017. Fundamentals have continued to deteriorate, however, as supply growth and competition have intensified.
  • Robust rent growth and favorable demographic trends prompted a wave of institutional money to enter the space. High levels of new development continue to weaken rent growth and pressure occupancy.
  • 3Q17 earnings were generally better than expected, led by strong results from CubeSmart and ExtraSpace. Same-store revenues are expected to grow 3.5% in 2017, down from the 7.5% peak in 2015.
  • We note that CubeSmart and ExtraSpace have invested heavily in technology to maximize effective rents and improve customer retention. These REITs have significantly outperformed their peers in rental metrics.
  • Public Storage has fallen short of estimates in recent quarters and management doesn’t seem to have answers.  A similar investment into technology platforms could unlock substantial value for shareholders.

REIT Rankings: Self-Storage

In our REIT Rankings series, we analyze one of the fifteen REIT sectors. We rank REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives.

self storage investing

We encourage readers to follow our Seeking Alpha page (click "Follow" at the top) to continue to stay up to date on our REIT rankings, weekly recaps, and analysis on the REIT and broader real estate sector.

Self-Storage Sector Overview

Self-storage REITs comprise roughly 8% of the REIT Index (VNQ and IYR). Within our value weighted self-storage index, we track the four largest self-storage REITs, which account for roughly $55 billion in market value: CubeSmart (CUBE), Extra Space Storage (EXR), Public Storage (PSA), and Life Storage (LSI).

storage REITs

While all four REITs are diversified across the country, we note the geographic and quality focus of the four REITs above. CubeSmart has a high-quality portfolio with a focus on metro areas in NYC and along the east coast. ExtraSpace has a similarly high-quality portfolio but is more evenly diversified across the country. Public Storage, the largest storage REIT, has a large west coast presence and owns a higher percentage of suburban and international assets than its peers. Life Storage has the lowest-quality portfolio of the group with a more suburban-focus in the sunbelt states.

Recent Developments and Quarterly Performance

After last earnings season, we published a report, “Storage REITs Hit Rock Bottom” where we presented a positive outlook on the sector. We wrote “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 may be overdone. The sector ranks in the top 5 across all of our sector-metrics. If it hasn't

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