More Than Holding Their Own

Stocks of self-storage warehouse operators have been among Wall Street’s steadiest climbers in recent weeks, and analysts maintain that there’re more gains in store.

The operators are structured as real estate investment trusts, which pass along most of their earnings to stockholders in the form of dividends. As a result, most mini-warehouse REITs are carrying dividend yields of 6% or higher.

And as with REITs in general, the self-storage stocks have benefited lately from investors’ nervousness about the stock market’s historic rally this year.

Fearing that the market is poised to drop sharply from its lofty heights, investors have been diverting a growing amount of cash into the REITs because their stocks are viewed as high-yielding protection against an overall market decline.

The gains reflect “investor desire for a more defensive investment,” said analyst Jordan Heller of Salomon Bros. Inc.

In the last three months, such mini-warehouse operators as Storage USA Inc. and Storage Trust Realty have advanced between 11% and 18%, compared with a 7% gain by the Standard & Poor’s 500 composite index.

The operators’ fundamentals also point in the right direction, analysts said. Low vacancy rates, manageable debt levels and the prospect of mergers and acquisitions in the highly fragmented industry--which still has hundreds of “mom-and-pop” operators--bode well for further price gains, analysts said.

“The industry is ripe for consolidation,” PaineWebber Inc. analyst Jonathan Litt said in a recent report, noting that the top 10 operators own only about 12% of the 25,000 total self-storage properties in the nation.

One of Litt’s favorites is Sovran Self Storage Inc., a Williamsville, N.Y.-based operator of 109 self-storage facilities in 15 states along the East Coast and in Texas. The stock--currently trading around $29 a share--has a dividend yield of 7%.

Sovran’s occupancy rate is averaging a solid 90%, and the company has no debt. That enhances its ability to buy other properties and makes it an attractive merger partner for another operator, he said.

There are caveats, of course. Investors need to keep an eye on the self-storage firms’ operating costs, which have been rising of late and limiting the firms’ earnings gains, said Lawrence Raiman of Donaldson, Lufkin & Jenrette Securities.

In this year’s third quarter, for instance, Sovran’s property taxes jumped 18.4% from a year earlier, and Public Storage Inc.’s personnel costs “rose considerably” because of the roll-out of a new reservations center, he said.

But compared with other real estate investments, mini-warehouses’ costs tend to be lower and their results much more predictable. The break-even occupancy rate for a self-storage facility is about 35% to 40%, compared with 60% or so for apartments. When various real estate markets sour, mini-warehouses also tend to hold their value better and recover faster than other properties, analysts said.

Public Storage, based in Glendale, is the granddaddy of self-storage operators and by far the industry’s largest player, with more than 1,000 properties displaying its familiar orange signs in 38 states.

Public Storage’s yield, at 3.4%, is subpar relative to other self-storage REITs, and Wall Street suspects a raise in the dividend is coming. But investors haven’t been disappointed: The company’s stock surged 30% this year, and with dividends included, Public Storage provided a total return of nearly 41%. And Raiman expects the firm’s earnings to rise 15% more in 1997.

Gregory Whyte, analyst at Dean Witter Reynolds Inc., is recommending Storage USA, the fourth-largest operator in the country with 219 facilities in 29 states.

Since going public in 1994, Columbia, Md.-based Storage USA has been an aggressive buyer of other properties. Yet with a market capitalization approaching $1 billion, the company still has “ample access to capital to fund” more acquisitions, Whyte noted recently.

Another self-storage stock, Shurgard Storage Centers Inc., has risen with its peers and gained 11% in the last three months, and it’s carrying a yield of 6.6%. But Shurgard is making up for lost ground: The stock is up only 5.5% for 1996.

Shurgard, a Seattle-based operator of 265 mini-warehouses, has been busier than its peers in building additional facilities in selected locations instead of buying properties from someone else, “which has been a drag on their cash flow” and stock price, Whyte said.

But “longer term that’s going to be a benefit” for Shurgard, he said, as those properties come on line with above-average rents.

Times staff writer James F. Peltz can be reached via e-mail at [email protected]

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Unlocking Value

Stocks of self-storage operators have been climbing in recent weeks, and analysts say further gains are likely as the industry consolidates and investors flock to the shares’ yields. A look at the sector’s key issues:

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% Change from Stock Ticker Recent price Sept. 13 Yield Sovran Self Storage SSS $29.63 +15% 7.0% Storage Trust Realty SEA 25.75 +18 6.8 Shurgard Storage SHU 28.50 +10 6.6 Storage USA SUS 37.88 +14 6.0 Public Storage PSA $27.25 +26 3.2 Standard & Poor’s 500 +10 2.0

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Source: Bloomberg Business News