U.S. self-storage stocks' foreclosure ride nearing end

A foreclosed home is shown in Stockton, California May 13, 2008.

BANGALORE (Reuters) - Shares of U.S. self-storage companies have surged this year on expectations that rising foreclosures will force space-strapped customers to use their facilities, but the sector is losing steam as the stocks approach what could be a peak.

Self-storage companies had performed strongly in 2005 and 2006, helped by occupancy increases in areas hit by hurricanes. But their market value fell significantly in 2007 as reconstruction efforts picked up in hurricane-hit regions and concerns about a slowing U.S. economy grew.

The sector staged a comeback this year as foreclosures swelled and fourth- and first-quarter results proved reassuring.

Stocks of Public Storage (PSA.N), Extra Space Storage Inc (EXR.N), U-Store-It Trust YSI.N and Sovran Self Storage Inc (SSS.N), which are all real estate investment trusts, have risen between 30 percent and 75 percent since early January, but are now heading close to several analysts' price targets.

The stocks have outperformed the wider MSCI U.S. REIT Index .RMZ, which through Wednesday had risen about 22 percent this year.

"Would I expect a major pullback (on self-storage stocks)? No," said analyst Mike Salinsky from RBC Capital Markets. "But would I expect another 20 percent from this point? I think you would be hard pressed because fundamentals are softening relative to the past several years."

Self-storage companies also gain business when people move to a new home, change jobs, get married or divorce.

The top five companies, including Amerco's (UHAL.O) moving and storage services unit U-Haul, own and operate about 4,550 facilities, or 8.8 percent of all primary self-storage facilities, according to the trade group Self Storage Association.

FUTURE IN STORE?

But analysts do not expect a major downturn in the sector and believe the two biggest companies, Public Storage and Extra Storage Space, still have potential.

"Greater market share and brand recognition enables (them) to maximize revenue growth by boosting ads and concessions to raise occupancy and then pushing in-place rents on existing customers," Banc of America Securities analyst Christy McElroy said.

Glendale, California-based Public Storage has interests in more than 2,000 self-storage facilities in the United States, and about 177 storage facilities in Western Europe.

Salt Lake City, Utah-based Extra Space Storage operates 654 U.S. self-storage properties.

But BMO Capital Markets analyst Paul Adornato sees more potential in U-Store-It, which has about 400 U.S. facilities.

"Its level of occupancy is below average, so if they can just increase occupancy to industry average that would provide a great boost to their bottom line," Adornato said.

But analysts agree that the expectations of further foreclosures boosting the companies' performance have ebbed.

Mounting foreclosures may help the companies' margins, but they are not going to create a massive inflow of new rentals, Deutsche Bank Securities analyst Christeen Kim said.

RBC's Salinsky said, "If you are in foreclosure or getting close to foreclosure, aren't you going to cut back on other expenses and just try to maintain your house? Or are you going to spend $785 a month on storage property?"

(Editing by Pratish Narayanan)