Company Reports

We're transferring coverage of Public Storage and Extra Space to a new analyst, in addition to initiating coverage on CubeSmart. The three firms are the largest operators in the self-storage industry.

CubeSmart is one of the top three US self-storage operators, owning or managing nearly 1,600 stores with roughly 110 million net rentable square feet, about one-third the size of Public Storage or Extra Space Storage. Profit comes mainly from month-to-month rent at its 662 owned stores, supplemented by tenant insurance and other property income, along with third-party management fees. Because the core product is largely commoditized, CubeSmart competes on location, pricing, and cost control.

We are dropping coverage of CubeSmart CUBE. We adjust our coverage as necessary based on client demand and investor interest.

Thanks to dividend cuts and multiple capital raises, CubeSmart has considerably deleveraged and unencumbered its balance sheet during the past couple of years. While it has to digest its New York Storage Deluxe acquisitions, we generally think its financial health is on much higher ground than before. But while CubeSmart's operations have benefited from a rebound in consumer sentiment and a currently goldilocks multifamily sector, it nonetheless is captive to a highly competitive self-storage property sector. As such, we suggest a fair discount to our fair value estimate before investing.

Thanks to dividend cuts and multiple capital raises, CubeSmart has considerably deleveraged and unencumbered its balance sheet during the last couple of years. While it has to digest its New York Storage Deluxe acquisitions, we generally think its financial health is on much higher ground than before. That said, while CubeSmart's operations have benefited from a rebound in consumer sentiment and a currently goldilocks multi-family sector, it nonetheless is captive to a highly competitive self-storage property sector. As such, we suggest a fair discount to our fair value estimate prior to investing.

We have reviewed CubeSmart's CUBE fourth-quarter earnings release, and our fair value estimate for the self-storage landlord is unchanged. The multi-family sector's strength continues to bolster CubeSmart's operating performance. On a year-over-year, same-store basis, the company saw 3.4% revenue growth and a 0.5% decline in operating expenses, which led to 5.7% net operating income growth. Underpinning the revenue growth was a 14.7% increase in other property-related income, and 3.1% occupancy growth. We're of the opinion that double-digit increases and declines are anomalous in the storage space, though we do recognize that the near term represents a goldilocks confluence of positives for multi-family fundamentals, which is accretive to CubeSmart and other storage landlords.

After reviewing the third-quarter earnings release from CubeSmart, CUBE, formerly known as U-Store-It, we're bumping up our fair value estimate for the self-storage operator and landlord to $10 per share from $9 to account for its acquisition of Storage Deluxe's New York City properties and the time value of money since our last update. Storage Deluxe will tack on 22 properties to CubeSmart and make CubeSmart the largest owner of facilities in the city. Concurrently, the company raised equity and debt capital to facilitate the purchase.

Thanks to dividend cuts and multiple capital raises, CubeSmart has considerably deleveraged and unencumbered its balance sheet during the last couple of years. Though in better financial condition, we caution that its debt load still could cause problems for CubeSmart down the road if credit markets don't cooperate. Moreover, while CubeSmart's operations have benefited from a rebound in consumer sentiment, it nonetheless is captive to a highly competitive, no-moat self-storage property sector. As such, we suggest a substantial discount to our fair value estimate prior to investing.

U-Store-It has changed its name to CubeSmart CUBE in an effort to rebrand. It will likely take several quarters before the effects of the name change are reflected in operating performance, and for the time being, this does not materially affect our cash flow forecast for the firm. Our fair value estimate is unchanged.

We've reviewed U-Store-It's YSI second-quarter results, and while we'll update our valuation model to account for incremental acquisition activity announced in the earnings release, we don't anticipate a material change to our fair value estimate for the self-storage landlord. Similar to Public Storage PSA, U-Store-It's internal operations have improved with firmed fundamentals in the apartment sector. On a year-over-year, same-store basis, net operating income grew 7.4% on a 3.5% increase in revenue and a 2.3% decline in expense. Other property revenue, comprising items such as insurance commissions, and occupancy growth of 2.3% to 78.5% drove the same-property improvement, since realized annual rent per square foot was flat. While we think apartment fundamentals should accrue to U-Store-It in a small manner in the near term, we caution that growth prospects may be meager as the firm fights an uphill battle against the multitude of mom-and-pop storage owners and the goliath in the sector, Public Storage.

Thanks to dividend cuts and multiple capital raises, U-Store-It has considerably deleveraged and unencumbered its balance sheet during the last couple of years. Though in better financial condition, we caution that its debt load still could cause problems for U-Store-It down the road if credit markets don't cooperate. Moreover, while U-Store-It's operations have benefited from a rebound in consumer sentiment, it nonetheless is captive to a highly competitive, no-moat self-storage property sector. As such, we suggest a substantial discount to our fair value estimate prior to investing.

We have reviewed U-Store-It's YSI fourth-quarter earnings release, and we plan no immediate change to our fair value estimate for the firm. As anticipated, the self-storage sector is recovering from recessionary lows. On a year-over-year, same-property basis, U-Store-It's net operating income increased 4.1% due to a 3.2% increase in revenue, which offset a 1.8% growth in operating expense. Though its average physical occupancy level of 76.9% remains submerged below prerecession levels, the rate nonetheless reflects a 110 basis-point improvement from the fourth quarter of 2009, and helped drive a small 1% year-over-year increase in realized annual rent per occupied square foot. We think occupancy levels will continue to advance as an economic recovery takes hold in its operating geographies. However, in our view, rental rate growth will likely prove anemic, due to the highly competitive dynamics of the self-storage sector.

U-Store-It's YSI second-quarter performance metrics were in line with our valuation assumptions, and our fair value estimate is unchanged. In the second quarter of 2010, compared with the second quarter of 2009, net rental income dropped by 0.8%, while a 4.4% decline in operating expenses sent organic profitability, or same-store net operating income (NOI) higher by 2.1%. In contrast, in the first quarter of 2010, year over year same-store NOI fell 3.6%. We think profitability should prove steady for the balance of the year. Its largest competitor, Public Storage PSA, doesn't appear to be engaging in as much price competition now that its occupancy rate is hovering above 92%. Indeed, U-Store-It's end of period occupancy rate of 77.6% was higher than its period average by 110 basis points, a good sign.

U-Store-It staved off immediate refinancing concerns by raising expensive capital in 2009, but it isn't completely out of the woods yet, as substantial debt comes due in the next two years. Though consumer sentiment is on steadier ground, we think it will be difficult for U-Store-It to reap the fruits of operational improvement in the highly competitive, no-moat self-storage property sector. As such, we suggest a substantial discount to our fair value estimate prior to investing.

U-Store-It staved off immediate refinancing concerns by raising expensive capital in 2009, but it isn't completely out of the woods yet, as substantial debt comes due in the next two years. Though consumer sentiment is on steadier ground, we think it will be difficult for U-Store-It to reap the fruits of operational improvement in the highly competitive, no-moat self-storage property sector. As such, we suggest a substantial discount to our fair value estimate prior to investing.

U-Store-It Trust's YSI third-quarter results were roughly in line with our expectations, so we're sticking with our fair value estimate. This self-storage owner continues to be pressured by heightened unemployment, which leads to lowered job churn and diminished demand for U-Store-It's facilities. Total revenue on a year-over-year basis fell 4.3%. Same-store revenue was, dropping 4.9% from the third quarter of 2008, but pronounced cost-cutting kept its net operating income decline at 3.9%. With broader economic head winds expected to persist, U-Store-It Trust's operating metrics will remain pressured in the near term.