Self-Storage REIT Expert: Expect 'Another Robust Year'

On Monday, Cantor Fitzgerald published a note containing key takeaways on the self-storage sector from an interview with Aaron Swerdlin, executive managing director with Cantor Fitzgerald affiliate NGKF Capital Markets.

Cantor Fitzgerald covers all four publicly-traded self-storage REITs:

• CubeSmart (NYSE: CUBE) – Buy rated; $23.50 PT
• Extra Space Storage, Inc. (NYSE: EXR) – Hold rated; $57.50 PT
• Public Storage (NYSE: PSA) – Buy rated; $199 PT
• Sovran Self Storage Inc (NYSE: SSS) – Hold rated; $89 PT

Tale Of The Tape – Past Year

No updates or price target changes were included in the Cantor Fitzgerald note.

Cantor Fitzgerald – Self-Storage Overview

Cantor remains overweight the sub-sector, noting that self-storage REITs "have out-performed broader markets in the last few years driven by 1) robust consumer demand, 2) limited new supply, 3) increasingly sophisticated revenue management systems and 4) technology advantages over private/smaller owner/operators."

Cantor Fitzgerald – Swerdlin Key Takeaways

Outlook – Depends On Pricing Power:

• Cantor noted, "As occupancy approaches historical high levels, Mr. Swerdlin believes that pricing (especially renewals) should drive growth."
• Swerdlin "believes that optimum occupancy is in a range of 89 - 91 percent (average) and leads to revenue maximization."
• "Private operators pricing," he added, "remains well below public REITs pricing driven by lack of revenue management systems, technology, and the conservative nature of private operators."
• This gap might dampen public REIT pricing power.
• "On the expense side, the biggest variable is property taxes — as [Cantor] had expected."

Supply – Remains In-Check (For Now):

• Swerdlin "expects net absorption to remain positive in the sub-sector driven by robust demand drivers (e.g., population growth)."
• "In attractive, high barrier markets (e.g. New York, San Francisco), land prices remain competitive. As such, secondary and tertiary markets could see more development."
• "Construction financing is disciplined as compared to pre-financial crisis levels with equity in the form of cash being the primary requirement. Terms include rates that are 300-500bps over LIBOR, 3 - 5 year term with two one-year extensions available and 25 - 35 percent equity."
• "Development yields stand at approximately 8 - 10 percent—attractive as compared to market cap rates."
• "While there has been an uptick in 'certificate of occupancy' deals [...] Swerdlin doesn't expect it to grow due to risks associated with delivery 2-3 years from now."

Related Link: What You Don't Know About REIT Management Could Cost You

More Transactions, Lower Deal Size:

• "In 2014, the self-storage sector saw transactions valued at approximately $2.0 billion." In 2015, due to fewer large portfolios, Swerdlin "expects transactions at approximately $1.5 - 1.8 billion range with larger number of transactions and deals in a range of $50 - 70 million."
• "As the deal volume slows in the top 10 MSAs, more capital is flowing into top 25 MSAs."
• "Buyers include public REITS, private equity, pension funds, hedge funds, et cetera, while sellers include institutional partners/funds reaching the end of holding periods."
• In Swerdlin's view, typical underwriting on a $50 million deal "includes: 55 - 70 percent leverage, 2 - 5 year interest only loan with all in coupon in a range of high 3s (floating) to low 4s (CMBS) and 5 - 7 year holding period."
• Stabilized cap rates stand in a range of 5.75 - 6.50 percent with exit cap rates approximately 100bps higher assuming a 5-year holding period."
• Image credit: Ed Chambliss, Wikimedia