I have a fascination for investments in industries that seemingly fly under the radar, and that investors sometimes overlook in their pursuit of the “next big thing.” It’s a theme I’ve touched on many times before (see here, here, and here), when I examined the returns and characteristics of industries such as tobacco that historically have offered outsized and steady returns, perhaps because they are less subject to technological disruption than others.
Another such industry is the self-storage industry. We’ve all driven by the many storage facilities in our neighborhoods, and there are many of us who have our surplus possessions stocked away in their complexes. Chances are, however, that we haven’t thought too much about how these storage units could translate into amazing investment gains.
For example, Eddy Elfenbein of Crossing Wall Street wrote a few months back about the largest self-storage company, Public Storage (PSA), which has been an amazing performer. However, I would guess that relatively few investors ask their brokers about it, instead choosing to chase “hot” names like Facebook (FB), or Google (GOOG):
“The stock reached a low of $6.25 per share in 1990. Today, it’s at $203 per share. But that doesn’t include the quarterly dividend which has risen from 20 cents in 1990 to $1.70 per share today. That means PSA was yielding 12.8% at its 1990 low. With dividends, the stock is up 100-fold in 25 years.
So many people waste their time trying to find the “next Apple” or “next Google.” Few people think about the “next Public Storage.”
Or the current one for that matter.”
This piqued my interest, so I wanted to examine the industry further.
First of all, There aren’t many publicly traded self-storage stocks; in fact, the Self-Storage REIT Index has only five components, the combined market capitalization of which is among the smallest of the major REIT categories (table from REIT.com):
My Morningstar database has return data for the self-storage index going back to June 30th, 1989, although of its current components, only Public Storage has data going back that far. Here are the results:
Obviously, storage stocks have been huge winners, crushing the S&P 500 (stated benchmark; blue line) over that timeframe.
Given that REITs of all kinds have been very popular with investors over the last 15-20 years, I wanted to compare returns for the self-storage sector with other real estate sectors. The results were pretty astonishing. Not only did the self-storage sector crush its peers, it also suffered the least drastic 3-year performance:
Given that Public Storage has been such a huge winner, and is such a huge overweight in the self-storage index, I wanted to see if its performance somewhat skewed the results of the overall index, and whether its smaller peers had performed similarly well (Note: Because National Storage Affiliates (NSA) went public only last year, I left them out of my calculations. Also, yes, I got lazy and didn’t annualize the S&P returns. Sorry).
Obviously, each of the four major self-storage stocks has crushed the wider market by a sizable margin over a fairly extended period of time.
So, the natural question is what gives the self-storage such a huge advantage? Digging a bit deeper into the internals of the REIT sectors, I found that the self-storage stocks, on average, have higher margins than many of their peers, tend to have less overall indebtedness, and sport the highest returns on assets and returns on equity of the major REIT sectors:
Clearly, the self-storage companies are well-run with tremendous financial metrics, especially relative to other real estate sectors.
However, back to my original point about industries less subject to disruption than others, I think that is a huge factor here. After all, if you have stuff you want to keep, but for which you do not have extra space at home, the only solution other than your buddy’s garage is a storage unit. Furthermore, storage facilities have, in the past, tended to be somewhat recession-resistant; after all you need a place to store your stuff if you’ve lost your house, or have been laid off and are looking to relocate.
Interestingly, Americans have a somewhat unique tendency to be hoarders. By comparison to Europeans (at least from my experience), Americans seem unable (or unwilling) to part with their stuff. These are some pretty startling stats, courtesy of an Orlando Sentinel article written earlier this year:
• America has seven square feet of self-storage for every man, woman and child living in the United States.
• Over 90 percent of it is rented.
• The self-storage industry has been the fastest-growing segment of the commercial real estate industry for four decades running.
• Nearly one out of every 10 households currently rents a storage facility.
• Of those renting storage units, half have been renting over a year, and 30 percent for more than two years.
• Of those who rent off-site storage, 65 percent have a garage, 47 percent have an attic, and 33 percent a basement.
• The top four reasons Americans rent storage units in order are not having enough room at home, storing while changing residences, storing items they no longer need or want, and storing a relative’s items due to a change in living situations.
Despite the tremendous performance of self-storage stocks the last few decades, there are some concerns about whether such a high occupancy rate can be sustained; after all, in the case of Public Storage, occupancy rates are much higher than they were in the first part of this century. Doubtless the market could get overbuilt and saturated; per the Orlando Sentinel article referenced above, there are more self-storage facilities in the US than Starbucks and McDonald’s locations combined. Finally, American consumer behavior could change, and we could, as a society, learn to part ways with the stuff we seldom use, but, for some reason, pay to store.
However, just like a decline in the number of smokers was thought to be a death-knell for the tobacco industry, I think it’s similarly foolish to call a top to the self-storage cycle. While the performance of the past couple decades may not be duplicated, the fundamentals of the industry still seem largely intact. My guess is that Americans will continue to pay to have their stuff stashed for some time to come, and the industry will continue to profit.
Neither we nor our clients have any known positions in any stocks mentioned in this writing. This piece is for informational purposes only, and should not be construed as a recommendation of any kind.