On Thursday, Robert W. Baird & Co. analyst R.J. Milligan initiated coverage of the self-storage REIT sector with an Overweight sector rating.
This REIT subsector has been a strong performer during the past few years, and Milligan feels that there continues to be "a several-year runway for double-digit NAV growth in the backdrop of limited new supply."
Although he initiated industry giant Public Storage PSA at Hold, he still expects the entire sector to outperform the MSCI Equity REIT Index (RMZ).
The three Buy rated equity self-storage REITs are CubeSmart CUBE, Extra Space Storage, Inc. EXR and Sovran Self Storage Inc SSS.
Tale Of The Tape: Past Year
Tale Of The Tape: Past 5 Years
A look back shows that the recent outperformance by self-storage REITs was no fluke.
Related Link: A Peek Through The Door Of Upcoming Self-Storage REITs' Q2 Earnings
Another Top Pick
Additionally, Baird reiterated small-cap specialty mREIT
Jernigan Capital IncJCAP at Outperform, while noting it higher risk due to its recent IPO.
Dean Jernigan is a former CEO of CubeSmart and is now spearheading an effort to selectively lend to private developers and self-storage operators in order to build new facilities.
Related Link: Wunderlich Likes The JCAP mREIT IPO: Could It Be A Better Mousetrap?
Jernigan offers a participating loan product designed to address the lack of new supply, which essentially allows JCAP a 50 percent JV ownership stake at property stabilization.
Baird Sector Overweight Rationale
Solid Fundamentals: Occupancy gains are trending higher as are street rates for new customers going into "peak leasing season."
Limited New Supply: Baird noted, "The lack of development financing, an increasingly difficult land entitlement process, and increasing development land values have kept new supply relatively muted."
Technology Advantage: "Larger players continue to out-market smaller players online," according to Milligan, "technology and economies of scale are allowing the REITs to capture greater market share at better rates, while the data analysis is contributing to a more efficient use of marketing dollars."
Monthly Rentals: "Shorter lease durations allow rents to inflate with the economy." In the a rising interest rate environment, Baird prefers REIT sectors with short duration leases, which allow REITs to grow NOI, hopefully offsetting higher cap rates.
Consolidation Trend: Baird noted, "Given the highly fragmented self-storage market, low cap rates (willing sellers), attractive costs of equity, and the benefits of being on a large platform (improving going-in yields), we expect to see the REITs continue to consolidate the sector."
Anticipated NAV Growth: "While the sector is trading at one of the highest premiums relative to NAV across the REIT universe, we believe the stocks will work higher as NAVs continue to increase through mid-single digit internal growth and accretive acquisitions," according to Milligan.Investor Takeaway
While Baird noted that self-storage REITs are pricey relative to other subsectors, a fragmented industry full of "mom and pop" operators," strong self-storage fundamentals and the ability to raise rentals in a growing economy make this group of companies attractive moving forward.
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