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Pack Rats Give Self-Storage Companies Solid Earnings Growth
By Michael Brush
Exclusively for InvestorIdeas.com
June 8, 2006
Do you ever wonder where people put all that stuff they buy on eBay? Or where they stash all the junk they can’t sell?
It looks like a lot of it goes into self storage.
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By the end of the first quarter this year, the self-storage sector had posted five quarters of operating income growth of more than 5% excluding acquisitions and new storage centers, capping eleven straight quarters of growth.
That’s attractive by itself. What’s more, the five publicly-traded companies in the group are all real estate investment trusts (REITs). So they also happen to offer a decent dividend yield often above 5%.
But which are the best to buy? As always, we will let the insiders show us the way. Recently, insiders have been big buyers at two self storage REITs: U-Store-It Trust (YSI) and Public Storage (PSA).
Before we get to details on these, here is a brief look at some of the big picture trends in the sector, thanks to AG Edwards analyst John Sheehan.
Storage sector trends
- Self-storage REITs trashed both the S&P 500 and the Morgan Stanley REIT Index last year. The five self-storage REITs averaged total returns of 25.9%, compared to S&P 500 returns of 4.9% and REIT index returns of 12.1%, according to Sheehan.
- They’ve clocked five quarters in a row of better than 5% net operating income growth – even though they had to lap strong results for the year before. During the past four quarters net operating income has grown at 6.9% on average for the group. “Strong performance in face of these challenging comparisons speaks to the strength of the self-storage REIT sector,” wrote Sheehan in a recent report on the group. Absent a major economic slowdown, he thinks decent growth will continue.
- With the recent arrival of two new publicly traded self storage REITs -- Extra Space Storage (EXR) and U-Store It -- the group now has a higher profile among investors.
- Pricing trends were strong in March with 12% price increases compared to a year before, according to an AG Edwards survey. That’s a lot higher than the 5.8% price increases AG Edwards measured in a survey last December.
- The self-storage industry is highly fragmented. The five self-storage REITs own only 9% of the self-storage properties in the United States. This means there is lots of space for growth by acquisition – a strategy at many of the publicly traded REITs. That brings risks too, because it is hard to acquire and integrate properties. But it leaves an avenue for growth if the economy slows down.
Here’s a quick look at the two self storage REITs where insiders have been buying.
Public Storage
Based in Glendale, CA, Public Storage is the largest public operator in the space, with over 1,500 self storage facilities in 37 different states. So it isn’t exposed to the whims of any single local economy. Public Storage also has a retail operation that sells locks and other supplies, and it offers truck rentals, container storage and a moving service.
The company plans to purchase another public self-storage company called Shurgard Storage Centers (SHU). Public Storage is also developing three new facilities and expanding over 45 storage sites.
Shares of this company have fallen to $73 recently from a high of $84.62 in March. But Public Storage has solid financial strength, and it’s slated to pay a forward annual dividend of $2 per share for an annual dividend yield of 2.7%. Two insiders purchased over $2.2 million in stock in May.
U-Store-It Trust
Based in Cleveland, OH, U-Store-It Trust has 374 self storage facilities, with a concentration in California, Florida and Illinois. It is the sixth largest operator. But U-Store-It Trust plans to grow through aggressive consolidation of the highly fragmented self-storage sector.
This goal is one reason U-Store-It Trust trades for a valuation below the group average. The stock has slipped $5 since early March, to recently sell for $17 a share. At these levels, the company trades for less then AG Edwards’ estimated net asset value of $17.43 per share. It also carries a juicy annual dividend yield of 6.8%, based on an expected annual dividend of $1.16 per share.
Another reason the stock has been weak is that U-Store-It Trust recently went through a management shake up when both the chief executive and the finance chief were replaced. But insiders don’t seem to be bothered. Since March, three insiders have purchased over $1.7 million worth of stock.
Risks
These stocks won’t do well in a sharp economic decline. Self-storage leases are short term and people who use storage are presumably not in the high-income brackets – otherwise they would simply buy a bigger house.
The bottom line: I don’t think the bottom is falling out of the economy, so these companies should continue to do well. After being punished so much, both of these stocks offer decent potential share price gains plus attractive dividend yields to boot.
Other recent purchases of note
In the current market ugliness, insiders were recently buying even more shares of several stocks I’ve featured in columns including:
What’s more Mel Karmazin was recently in the market again buying shares of Sirius Satellite Radio (SIRI) where he is chief executive. He recently made a huge $4.5 million purchase.
And insiders at MasterCard (MA) had a powerful appetite for the stock after the initial public offering. The size of the buying is bullish, and I may report back on MasterCard next week unless other stronger candidates pop up.
Disclaimer
At the time of publication, Michael Brush had long positions in Cash Systems, Pegasus Wireless and Chesapeake Energy. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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