The Self-Storage REITs

Marc A. Boorstein Comments
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The self-storage market is experiencing a recent surge in transaction activity involving large and small portfolios. While each of the self-storage REITs is currently trading near its individual 52- week high, these investment trusts have been less active in acquisitions over the last two years.

In response to strong privatemarket pricing of self-storage transactions, Green Street Advisors has decreased the capitalization rates used to value the stabilized domestic portfolios of the two largest REITs. Public Storage’s cap-rate value has been revised downward to 8.2 percent, while Shurgard’s dropped to 8.3 percent, each from 8.5 percent.

Public Storage

Public Storage, based in Glendale, Calif., is by far the largest company and REIT in the selfstorage industry. With a market capitalization of nearly $5 billion, it is the ninth largest REIT overall. Public Storage has 1,411 properties in 37 states, with geographic concentrations in California, Florida, Illinois and Texas. It was founded in 1972 by recently retired CEO Wayne Hughes, whose family owns approximately 36 percent of the company at a value of nearly $1.8 billion.

While Public Storage has the lowest dividend yield of the selfstorage REITs (about 4.88 percent) it also boasts the lowest debt ratio (only 2.33 percent, compared to 38 percent to 41 percent for its REIT competitors). Its companywide average occupancy levels increased from about 85 percent last year to more than 91 percent. The increase, however, is partly due to about $5 million in promotional discounts on rentals and television advertising costs.

In October 2003, Public Storage issued 5.3 million shares of preferred stock at a price of $25 per share, generating $132.5 million in proceeds. The company plans improvements to existing operations by renovating up to 40 older properties on an annual basis. The company has not acquired any new facilities recently, although 44 projects are under construction, expanding or remodeling. Other plans include the closure of 28 pick-up and delivery storage facilities and an exit from the Knoxville, Tenn., market through the sale of four facilities.

Shurgard Storage Centers

Shurgard Storage Centers, based in Seattle, is the second largest self-storage REIT, with a market capitalization just under $2 billion and interests in 599 properties (493 in the United States and 106 stores in seven countries in Europe). Shurgard, founded in 1972, has a total portfolio of 38.2 million square feet of rentable space.

Shurgard Europe (Shurgard Self Storage SCA) is now the largest self-storage operator in Europe, with 106 properties in seven countries: Belgium, Denmark, France, Germany, the Netherlands, Sweden and the United Kingdom. The company also has 18 stores under construction.

Shurgard recently increased its ownership stake in Shurgard Europe from 61 percent to 81 percent through the $101.6 million purchase of equity interests held by AIG (AIG Self Storage GP LLC, AIG Self Storage LP LLC and AIRE Investments SARL) and Deutsche Bank (REIB Europe Operator Ltd. and REIB International Holdings Ltd.). Last year, Shurgard agreed to pay approximately $49.75 million in cash for Credit Suisse First Boston’s (CSFB) 10.6 percent stake in Shurgard Europe.

The 47 Shurgard Europe properties in its same-property pool have occupancies stuck in the mid-70- percent range—below proforma stabilized occupancy of 87 percent to 89 percent. Europe’s net operating income (NOI) is up 11.4 percent over last year vs. domestic operations, the same-store NOI of which is up 2.5 percent.

Domestically, Shurgard acquired a $90.1 million portfolio of 19 self-storage properties in Minneapolis, which was financed entirely with newly issued common shares of stock. These facilities (17 of which have stabilized occupancies) are operated as Minnesota Mini-Storage, but will be rebranded under the Shurgard name. Using the stock price on the day the deal was announced, Shurgard anticipates achieving a 9.4 percent initial yield. Substituting a netasset value estimate of $33.75 for the market price adjusts the acquisition to about an 8.25 percent capitalization rate.

Shurgard plans modest future expansion, with 15 new stores added to the 35 newly opened facilities. Company focus will include upgrading 75 to 80 stores, many of which are 20 to 25 years old. Additionally, all Shurgard facilities are now open for business on Sundays.

Sovran Self-Storage

Sovran Self-Storage, headquartered in Buffalo, N.Y., is an equity REIT with a market capitalization of about $444 million. Sovran operates its stores under the name Uncle Bob’s Self-Storage and owns and operates 266 facilities. Uncle Bob’s facilities are predominantly located in the eastern United States, Arizona and Texas. With 15.4 million square feet, it is the fifth largest self-storage company in the United States. Founded in 1982, the company had its initial public offering in June 1995 and is traded on the New York Stock Exchange.

Sovran just announced new financing arrangements of $300 million of senior, unsecured debt. A total of $209 million was used to repay outstanding balances, and the remainder of the financing package will be used to fund acquisitions and improve and expand existing self-storage properties.

Sovran has recently advanced its revenue initiatives and expects to incur $3 million to $4 million in capital expenditures during the year. The Dri-Guard humidity-control program is installed at 54 stores, encompassing 700,000 square feet. A total of 158 stores now feature free use of an Uncle Bob’s truck. The company’s call center has become fully operational as an integrated sales and reservation system.

Strong performance was shown at stores throughout Florida, Georgia, North Carolina, South Carolina and Virginia, while some of the Arizona, Texas and New England area stores experienced slower than expected growth. The company could sell some facilities based on market conditions and acquire facilities with high growth potential. Sovran recently made a $5.2 million acquisition of an 80,000-square-foot self-storage facility in Dallas after acquiring another in the city for $4.5 million. There are now 16 Uncle Bob’s stores in the Dallas metro area.

Conclusion

Each of the self-storage REITs appears poised for continued income growth as economic activity picks up. Concentration on improving and upgrading existing facilities will remain a focus as private buyers continue to accept low cap rates (i.e., low initial yields) and sellers enjoy high prices.

Marc A. Boorstein is a principal with MJ Partners Real Estate Services in Chicago. He is an expert in the disposition, acquisition and evaluation of self-storage facilities nationwide, as well as a featured speaker and author regarding market trends in the self-storage industry. For more information, e-mail mboorstein@mjpartners.com; visit www.mjpartners.com.

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