It's been a few months since I last looked at U-Store-It Trust (NYSE: YSI). I've considered the company an interesting turnaround opportunity for more than a year, but at prices between $20 and $22, I felt that recovery was largely priced in. With prices back below $18, however, it's time for another look.
Public Storage (NYSE: PSA) and Extra Space Storage (NYSE: EXR) are the leaders in the public storage space. Since going public a little more than two years ago, U-Store-It has lagged both of the big dogs, as well as Sovran Self Storage (NYSE: SSS). U-Store-It's less-than-spectacular performance stems largely from previous managers' poor investments, which rewarded asset growth, and the poor operational and financial results this policy created.
However, these past bungles -- and an experienced management team installed about a year ago -- make this an interesting turnaround. Thus far, we've seen gradual improvements at U-Store-It, but no sure signs that the business has definitely recovered. For one thing, the dividend still isn't fully covered by funds from operations (FFO).
In its first quarter, U-Store-It reported $0.21 per share in FFO, flat year over year, and lagging its $0.29-per-share quarterly dividend. The underlying results were mixed, with same-store occupancy rates down to 79.6% from 80.5%. Rents per square foot were up 4.1%, however, and net operating income rose 2% on a same-store basis. Part of the occupancy decline is likely due to the company's effort to remove delinquent tenants. This effort reduced occupancy and increased bad debt, but in theory, the company should eventually re-lease that space to higher-quality tenants.
With legal expenses down and operations a bit cleaner, the company expects to come closer to funding its dividend next quarter, with FFO in the range of $0.25 to $0.28. Based on current guidance of $1.05 to $1.12 per share for the year, the company should be able to cover its dividend in its third and fourth quarters, or be within a penny in each.
Unfortunately for U-Store-It, its sluggish turnaround comes as all of its public peers are also seeing their shares slide. So far this year, all four of the large publicly traded storage trusts have fallen from their February highs, leaving U-Store-It caught in a potential industry slowdown. However, any slowdown probably won't be severe; few businesses have historically been as dependable as storage. Even in hard times, when businesses contract in size, they often end up paying to store documents previously housed in more expensive office space.
U-Store-It's turnaround has hit a few bumps. But with its share price 25% beneath its high in February, and its current 6.6% dividend yield close to being fully funded, I think it's finally time to really dig into U-Store-It and see whether it's worth a purchase.
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Nathan
Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
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