Tuesday, August 20, 2013

Storage REIT Performance and Valuation Comparison

Storage is one sub-sector within real estate that may hold its value throughout an inflationary period provided it is not subject to local or national rent controls.  I want to start testing this theory to see just which leading storage REITs deserve my attention.  Let's pick a few, shall we?  Yahoo Finance gives me the P/E and margin.  Reuters gives me the EPS and ROE growth.

Public Storage (PSA)
P/E:  34.44
Profit margin:  51.91%
EPS 5yr growth:  26.64%
ROE 5yr growth:  10.99%

Extra Space Storage (EXR)
P/E:  32.31
Profit margin:  29.26%
EPS 5yr growth:  19.93%
ROE 5yr growth:  5.55%

Sovran Self Storage (SSS)
P/E:  32.46
Profit margin:  26.92%
EPS 5yr growth:  -0.99%
ROE 5yr growth:  5.19%

Cube Smart (CUBE)
P/E:  N/A, 3yrs net losses
Profit margin:  1.69%
EPS 5yr growth:  ???
ROE 5yr growth:  -2.52%

I can immediately rule out EXR, SSS, and CUBE for their poor ROEs.  I really don't need to look any farther than that if some potential portfolio selection fails even one of my screening criteria.  That leaves PSA as the sole self-storage REIT contender.  Their long-term debt has trended down for the last three years to the point where it's now less than 2x their net income (and that's been steadily rising BTW).  Their free cash flow is mightily positive.  Wow, Public Storage is really firing on all cylinders here.

The final step for me is to determine a REIT's intrinsic valuation.  I use my hand-dandy cap rate REIT valuation template just for these occasions.  Yeah, I know, I wrote that report with REIT ETFs in mind but it still works fine for stand-alone REITs of any kind because they still have to pass through their earnings as dividends.  I plugged in the last five years worth of dividends, left inflation at 5% (based on eyeballing SGS's revised estimate), and set my cap rate and discount at 10% each.  There's no expense ratio in a single REIT.  I got an intrinsic value of $44.99/share and a desired purchase price of $40.49/share.  This entry point is a long way down from where PSA currently trades at over $156/share.  That doesn't surprise me given PSA's P/E ratio over 34.  Everything is seriously overvalued thanks to quantitative easing.  I don't pay a premium for anything.

I keep reminding myself that entering the REIT space either through individual securities or ETFs is prohibitively expensive as long as markets are levitating based on nonsense.  I will wait for a market crash.  The good news is that I now have one more possible anti-inflation hedge.

Full disclosure:  No position in any of the securities mentioned at this time.