Artwork worth hundreds of thousands of dollars…
An enormous collection of My Little Pony memorabilia…
A “voodoo” box complete with bones and chicken beaks…
Those are the kinds of items people might keep in self-storage units – at least the ones featured on A&E’s Storage Wars. Most of the time, admittedly, the finds are much more ordinary such as furniture, holiday decorations, seasonal clothing, books, and the like.
But whatever these storable items are, there are certainly enough of them. Americans have a lot of “stuff.” That’s why they need the estimated 50,000 self-storage facilities built from sea to shining sea.
Any decently-sized town might feature four or more of them within a five-mile radius. And two or three might very well have opened within the last five years.
There’s a reason for that. And that reason is COVID-19.
The 2020 shutdowns put entire companies out of business, forced mass layoffs, and prompted many people to move. And while that was miserable for most of the American – and global – population, it did positively impact some businesses through no fault of their own.
We all remember how Netflix (NFLX) outperformed since people were stuck at home, watching more movies… Walmart (WMT) since it was one of the few brick-and-mortar stores left to shop at… and Home Depot (HD) as people sought to renovate their new living-work spaces in 2020, 2021, and 2022.
But what many don’t realize is how well self-storage owners did – or how much more money there is still to make in this industry.
If the markets have you on edge lately, then I’d encourage you to read on. Investing in self-storage may not be flashy, but it’s a sturdy business. And it’s one that pays reliable income as a result.
Given the recent volatility, I imagine reliable income could be exactly what investors are looking for right now.
The Self-Storage Boom That Was
If you ask any seasoned self-storage operator about demand for their space, they’ll tell you about the four Ds: downsizing, decluttering, divorce, and death. In other words, major life changes – or major new mindsets – oftentimes require additional room.
And the shutdowns certainly led to major life changes.
There were college students who had to move back in with Mom and Dad when campuses closed and their typical jobs evaporated. There were workers who, realizing that their homes were now their offices, had to rearrange their living spaces to accommodate desks and office equipment. And there were those who quite simply did too much online shopping with all their free time and nervous energy.
Regardless of the reason, since there’s only so much room for extras, self-storage rentals surged.
Unfortunately, there were also those who faced the monumental challenge of going through loved ones’ belongings after they passed. I don’t mean to be macabre, but that was the reality we dealt with in 2020.
Once again, self-storage had the solution: space to store reminders of loved ones that just simply couldn’t fit anywhere else.
Thankfully, those days are over and will hopefully never return. But with those previous catalysts in the rearview, the sector stagnated. As COVID-19 became much more like a common cold, self-storage performance turned negative in 2023.
And it has remained weak ever since. Moreover, analysts expect average rental prices to stay flat and net operating income to fall further through 2025.
Self-Storage Versus Overall National Property Index (“NPI”) Total Returns
Source: CBRE
But I still see a buying opportunity here.
As shown below, vacancies now sit around the industry average of 8%. And move-in rents of $143 per month are still well above the 2019 average of $124.
Self-Storage Effective Move-In Rent and Vacancy Rate
Source: CBRE
In addition, self-storage demand remains above pre-COVID levels, with an estimated 10.2% of U.S. households renting units versus 9.3% in 2019. Better yet, real estate expert CBRE estimates that percentage will rise to 16% within the next 10 years.
Estimated Penetration Rate and Occupied Space (“SF”) per Household
Source: Yardi (inventory levels as of 2023); Green Street (vacancy and supply trend); U.S. Census (households); CBRE Investment Management H2 2024 Investment Outlook.
You just have to know which publicly traded self-storage companies to consider.
Public Storage: The Reigning Self-Storage King
Publicly traded self-storage companies tend to be real estate investment trusts, or REITs. That works just fine for me since it means they’re more likely to follow conservative financial practices…
And pay out regular dividends as well.
There’s a lot to like in the self-storage sector in general. But if I had to choose just one of these REITs, it would have to be Public Storage (PSA).
It’s the largest of its peers with more than 3,300 facilities across the U.S. and another 300 Shurgard Self Storage properties in Europe. (Yes, Europeans can own too much, too.) That’s on top of its ancillary tenant reinsurance business.
So it seems safe to say that Public Storage is well-diversified in its income sources.
It’s also well respected in the business community as a member of both the S&P 500 and FT Global 500. Knowing that, you shouldn’t be surprised that it features a balance sheet rated A2 by Moody’s and A by S&P.
PSA keeps its leverage low relative to its peers, which gives it more strength and flexibility during downturns. It has generated 8% adjusted funds from operations (“AFFO”) – the real estate equivalent of earnings – per share growth since 2007. And that figure rises to 10% when looking at the past five years.
Source: Wide Moat Research
My main quibble with Public Storage is its dividend, which it didn’t touch from 2017 to 2022. However, that did finally change in 2023, when it bumped it from $8 to $12 per share.
Source: Wide Moat Research
The stock now trades at a price-to-AFFO multiple of 19.2 times, which normally sits at 22.8 times.
Public Storage is yielding 4.1% under a well-covered dividend. Analysts expect the REIT to grow 6% this year, then an average of 5% in 2026 and 2027.
Wide Moat Research believes shares could return 18% over the next 12 months.
It may not be flash, but this is a sturdy business. And if your goal is to sleep well at night, PSA could deserve a closer look.
And remember to watch our YouTube show which will air on Thursday. Nick Ward and I will be sharing the details on our Top 10 sleep-well-at-night stocks, or SWANs.
Happy SWAN investing!
Regards,
Brad Thomas
Editor, Wide Moat Daily
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What other operations do you think were a secret success during the pandemic? Write us at feedback@widemoatresearch.com.