|The Inside Scoop|
Self-Storage and the Stock-Market See-Saw: Will Our Industry Be Affected?
The Down Jones Industrial Average plummeted 513 points yesterday in the worst stock sell-off since October 2008. Pundits cite fear over the U.S. economy and the European debt crisis as underlying factors. Are we staring down the barrel of another recession? And what, if anything, does the stock-market volatility mean for publicly traded self-storage companies and the industry as a whole?
Devin S. Huber, principal of The BSC Group, says the drop in the U.S. markets is a symptom of the macro-economic issues facing the U.S. and global economies, which have come to a head over the last month. “We have the hang-over of the debt-ceiling debate in Washington, sovereign debt issues abroad, talk of an S&P downgrade of U.S. debt, and an anemic recovery from the recession at best—all contributing to uncertainty in the market and talk of another recession,” Huber says. His company arranges debt and equity financing for commercial real estate investments. His particular expertise spans the self-storage, multi-family and medical asset classes.
“In retrospect, there have been many precursors to Thursday’s drop in the market, and you don’t have to look much past commercial real estate finance to identify a few," Huber adds. "Examples are the 10-year Treasury plummeting to the 2.5 percent range over the past couple weeks, and CMBS [commercial mortgage-backed securities] spreads blowing out as demand for these bonds by investors has dried up due to the uncertainties listed above."
But amidst financial anxiety and this week’s market fluctuations, self-storage experts retain a level of optimism. “As Nobel Prize winning economist Paul Samuelson once noted, ‘The stock market has forecast nine of the past five recessions.’ Therefore, the declines in the financial markets of the past few days are not likely to result in a double-dip recession event,” says R. Christian Sonne, executive managing director of the Self Storage Industry Group (SSIG) at Cushman & Wakefield. The SSIG is an international full-service real estate consulting team specializing in self-storage.
“With job growth reported this morning of 117,000 in July in the United States, it appears our sluggish recovery continues,” Sonne adds. “The uncertainties expressed by the market, such as the debt crises, are being resolved. Recessions caused by financial crises recover more slowly and are harder to predict.”
Even in the throes of recession, self-storage has fared well compared to other property types. "Self-storage's performance over the past couple of years has reflected the downturn in the national economy; however, most recently, it appears that self-storage is more resilient than everyone thought,” says Charles Ray Wilson, an expert in the field of self-storage operating-performance data who recently joined Sonne’s SSIG as a strategic partner. “This industry is now in recovery well ahead of most other real estate sectors,” Wilson says.
This week the four publicly traded self-storage REITs—Extra Space Storage Inc., Public Storage, Sovran Self Storage Inc. and U-Store-It Trust—released their second-quarter financial results, demonstrating strong performance. For example, Sovran’s earnings release indicated a 10.6 percent increase in net operating income over the second quarter of 2010, while Extra Space increased NOI by 7.8 percent.
“Self-storage REITs generally outperform all other REIT sectors in terms of dividend and pricing,” says Sonne. “This is one good measurement of the resiliency of the asset class to recession.”
The current market weakness has very little immediate impact on the public self-storage REITs outside of the loss of market capitalization of each individual company, which has been minimal, according to Huber. “The REITs have been able to avoid significant loss in market cap because of the extraordinary second-quarter performance posted by all. The public REIT stock prices go up and down on a daily basis as investors react to short-term catalysts. The companies’ fundamental businesses continue to be strong; and if they remain strong, so will the companies’ valuations.”
Huber sees two ways continued market weakness could affect the public REITs: “First, if any of them are planning any type of stock offering to raise capital, it will be more expensive to do so, as demand will not be as strong given the continued market weakness. Second, if the market weakness is a precursor to the U.S. economy re-entering a recessionary period, we will see pressure on operating income.”
Huber says that even if the United States enters a second recession, he doesn’t think we’ll see the same drop in the valuations of the storage REITS that we saw post-Lehman Brothers, as much of that drop was due to balance-sheet concerns, which have subsequently been addressed by each individual company.
The optimism expressed for self-storage isn’t all internal to the industry. Earlier this week an article on Seeking Alpha, a provider of stock-market news and financial analysis, advised long-term investors to diversify with equity REITs such as those in self-storage as part of a “sleep well at night” portfolio strategy. Author Brad Thomas specifically prescribes investment in Extra Space and Public Storage, giving them each a grade of B+ in his Margin of Safety Index. The self-storage sector and free-standing retail sector provide investors with diverse income and geographic distribution as well as sound lease occupancy metrics with high demand for facility rentals, Thomas writes.
If you’d like to learn more about the finance market as it pertains to your business, be on the lookout for the Inside Self-Storage November print edition, which highlights issues of financing in a recovering economy. You can also read current articles in the Finance section of the ISS website, such as the recent piece titled “Self-Storage Finance Market Healthy Again,” submitted by The BSC Group.
Finally, Sonne, Wilson and Shawn Hill, a partner of Huber’s, will be speaking on finance-related topics at the Inside Self-Storage World Expo in Tacoma, Wash. On Oct. 4, Hill will present a seminar on “Loan Workouts: Options and Strategies for Refinancing Self-Storage.” On Oct. 5, Sonne, will present “Self-Storage State of the Industry 2011: An Overview for Investors,” in which he’ll examine current market conditions and trends for the self-storage asset class. The early-bird registration deadline has been extended to Aug. 12, so if you haven’t yet signed up for the show, take advantage of this opportunity to save up to $300.
Have financial insights, opinions or predictions to share? What are your reactions to this week’s stock activity? Please share your comments on the blog; in particular, I’d love to hear from some self-storage owners out there.
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