econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 07 November 2017

When The Four Ds Are No Longer Enough

by Ari Charney, Investing Daily

Investing Daily Article of the Week

Fair or unfair, when a major player in a sector is first to report earnings, its results can color market sentiment for the rest of its peers. That’s especially true when the bears are already licking their chops.


Please share this article - Go to very top of page, right hand side, for social media buttons.


On Wednesday 25 October, after the market’s close, Public Storage (NYSE: PSA), which is by far the largest self-storage real estate investment trust (REIT) in the U.S., announced third-quarter results that met Wall Street estimates on the headline numbers, but disappointed on the details.

Going into earnings season, self-storage REITs were already the most heavily shorted securities in the sector, with average short interest at 8.1% of shares on the market. Traders go short by selling stock to bullish investors with hopes of buying shares back at a lower price and profiting from the difference.

Consequently, Thursday’s market session saw the entire self-storage REIT space drop by as much as 5% at one point, which is unnerving action for income investors previously attracted by yields of nearly 7%.

On a year-to-date basis, public-storage REITs are now down about 6.4%, lagging the overall REIT sector by about 9 percentage points.

Over the course of a full business cycle, self-storage REITs offer income investors a combination of offense and defense, with demand climbing during periods of turmoil and rents rising when things return to normal.

With only 60% of tenants generally renting for longer than a year, public-storage facilities rely on the four sudden life-changing Ds - divorce, disaster, dislocation, and death - to fill the balance of vacancies on a shorter-term basis.

That means self-storage REITs were major beneficiaries of the economic downturn and the ensuing anemic recovery. With so many lives disrupted by the foreclosure crisis, Americans needed a convenient and affordable place to store their belongings until they could settle down again.

Too Much Space

Just like any other industry experiencing a sudden boom in demand, the self-storage space raced to add capacity to meet it. But at a certain point in the recovery, supply eventually exceeds demand, and all that extra space can overwhelm the marketplace.

That seems to be where we are now, at least temporarily.

The self-storage buildout is expected to peak next year, with 40 million square feet, or about 800 facilities, opening in 2018.

For context, the four largest self-storage landlords had 156 million square feet of rentable space at the end of the second quarter, so the new units will add nearly 26% to existing capacity.

The good news is that the public-storage space is a highly fragmented industry, so the four biggest operators own less than 20% of total available square footage. Even so, the market will have to absorb a lot of capacity over the next 12 months.

As a result, self-storage landlords have been discounting rents to attract new tenants and maintain occupancy rates.

These industry headwinds have not escaped the attention of the smart money.

In mid-October, a $1.8 billion hedge fund announced its latest short bet to investors. The fund’s manager noted that the unnamed storage REIT in his crosshairs had been cutting expenses to deal with new supply hitting the market. As a result, he expects limited growth in net operating income.

In the case of Public Storage, despite aggressive price-cutting, the REIT saw average occupancy during the third quarter decline by eight-tenths of a percentage point, to 94.5%, while rental income growth came in three-tenths of a point below estimates.

Those numbers may sound trivial, but with an average valuation of 20.8 times funds from operations per unit, self-storage REITs trade at a premium to the sector’s average of 17.4. So that means any data that even hints at confirming the emerging narrative about oversupply is enough to move the market.

The industry’s biggest players expect it will take one to two years for the market to absorb all the new facilities opening their doors next year.

In the meantime, it’s important to remember that the cycle will eventually turn again.

While the economy is technically at full employment, it’s hard to shake the feeling that we’re closer to the end of this cycle than the beginning.

Of course, corporate tax cuts could help breathe new life into the expansion. But eventually there will be another downturn. There always is.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Investing








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved