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5 Top Self-Storage REITs to Buy Now


Millions of people across America have so many things that they need to find places outside of their homes to keep all their stuff. For many of them, renting a unit at a self-storage facility can be an easy solution, providing much-needed space into which they can pack up the objects they don't want to part with, but don't have space for elsewhere. Many of these storage solutions come at relatively low cost, with affordable rental rates that make it easy for users to hold onto their self-storage units indefinitely.

There are companies that specialize in building, managing, and maintaining self-storage facilities. Many of these companies are small businesses that own only a single storage location. However, you can also find larger businesses with huge networks that provide storage solutions to customers across the nation. One option available to these companies is to organize themselves as real-estate investment trusts , or REITs, in order to gain some tax advantages over other types of companies.

Because of the regular, dependable income storage-unit rentals provide, self-storage REITs can be a lucrative way for shareholders to benefit both from solid dividend yields and from the growth potential involved in developing new storage facilities. Later in this article, we'll reveal five of the top pure-play self-storage REITs available to investors. But first, it's important to understand the ins and outs of real-estate investment trusts more broadly and why businesses set themselves up this way.

Outside of self-storage property with gate, building, and company sign.

Image source: Public Storage.

What are real-estate investment trusts and how do they work?

Real-estate investment trusts are specifically structured businesses that hold interests in real estate. The majority of REITs -- including all self-storage REITs -- own real estate directly, either purchasing or constructing appropriate buildings on their land. REITs then take their real-estate holdings and find ways to generate regular income from them, most commonly by leasing out the property to tenants. The rent these tenants pay then comes back to the REIT, which meets the expenses of operating its business and managing the properties. What's left is profit for the REIT.

Not every company that works with real estate is allowed to set itself up as a real-estate investment trust. To be a REIT , a company must invest at least 75% of its total assets in real estate of various types. It also must get at least 75% of its gross income either in the form of rental income from real property or from mortgage interest or real-estate sales. It's this second requirement that divides REITs into two large categories : equity REITs, which hold real estate directly and collect rental income from tenants; and mortgage REITs , which invest in mortgage-backed securities related to financing for real-estate investments by others.

REIT status is also reserved for larger pools of investors. To qualify as a REIT, a company must be organized as a corporation and must have at least 100 shareholders. No five individuals can own more than 50% of any REIT's shares, and like most corporations, REIT management must be conducted by a board of directors or trustees.

Finally, REITs are required to pay out most of their income to their shareholders. If a company doesn't pay out at least 90% of its taxable income as shareholder dividends each year, then it can't be a REIT.

When new REITs initially form, they typically obtain capital from investors and seek to build up a portfolio of real-estate properties that fits with the intended purpose for that particular real-estate investment trust, through a combination of acquiring existing properties and constructing new ones. Beyond that point, REITs look like most other businesses, making strategic moves as necessary to capitalize on favorable trends while selling or discontinuing the operation of less successful properties.

Why do companies set themselves up as REITs?

For the real-estate businesses that want to elect REIT status, the payoff is that REITs are allowed to avoid taxation at the corporate level. Most corporate real-estate businesses that aren't REITs have to pay corporate income tax on any net income they bring in. Any remaining after-tax profit is available to the business, either to reinvest in more property, or to return to shareholders through dividends. However, investors in non-REIT real-estate businesses end up essentially having their profits taxed twice: once at the corporate level, and once when they pay any taxes due on the dividend income they receive.

REITs that meet the requirements above don't have to pay taxes on their income. Instead, all of the tax attributes of the income and expenses the REIT receives and incurs get passed through to the individual shareholders of the REIT. They then bear the brunt of paying any necessary tax. But because the profits that fund the dividend distribution from the REIT haven't been subject to tax, the REIT is able to pay a larger amount of income to its shareholders than it would ordinarily be able to pay if it were a regular corporation.

Why are REITs attractive to investors?

Investors like the real-estate investment trust structure because it ensures they'll be able to receive the lion's share of any income the REIT generates. With ordinary real-estate businesses, there's no obligation for the company to make any dividend distribution to investors, forcing shareholders to sell stock if they need cash from their investment. Because of the 90% net income payout requirement for REITs, shareholders can feel confident that they'll get valuable dividends as long as the REIT remains profitable.

In addition, the fact that REITs don't have to pay corporate-level tax enables them to pay dividend yields that are often above what a typical corporation would pay. Yields in the 3% to 5% range are quite common for real-estate investment trusts, and some REITs pay even higher dividends. That compares favorably to the roughly 2% average dividend yield for the stock market as a whole, so it's easy to understand why income-oriented investors might find REITs quite attractive.

Why the self-storage industry is a smart place to invest

Self-storage facilities have become a popular niche for real-estate investors, and self-storage REITs have naturally followed. There are several reasons self-storage has advantages that many other REITs can't match.

First, self-storage facilities require just about the least amount of capital expenditure in order to build and maintain. Think about it: Residential and office buildings have to be built to strict codes to ensure the safety of residents and occupants, and malls and other retail operations have to be attractive enough to draw in shoppers and support the businesses who rent space there. By contrast, self-storage facilities can be as simple as inexpensive prefabricated metal buildings on open land on the outskirts of an urban or suburban area. With lower expenses, greater income is available.

Also, turnover at self-storage facilities isn't as high as you might expect. It's easy for a homeowner to rent out a storage unit and never even think about it, keeping their stuff there and making monthly payments for years on end. That tends to remain true regardless of whether the overall economy is strong or weak. In an environment in which mall occupancies are declining and technological changes like telecommuting could pose long-term threats to the office and mall REIT spaces, inertia serves self-storage REITs quite well.

Finally, there's still room for growth. Although demand has been climbing, only about 10% of U.S. households rent self-storage space, according to industry estimates. The potential for further share-price growth plus dividend income is a big draw for REIT investors, and self-storage has a lot of promise.

Key REIT metrics every self-storage investor should know

Evaluating real-estate investment trusts is different from looking at regular stocks. In particular, there are some specific metrics that apply to REITs that aren't relevant in most other industries, and they play a vital role in judging the relative success of different players in the industry.

First, funds from operations , or FFO, is an accounting term that shows how profitable a REIT is. It's similar to net income for regular companies, but it excludes the extensive depreciation that real-estate investment trusts typically have because of their large portfolios of real-estate holdings. REITS often make further adjustments to FFO to reflect what income came from regular operations and what came from one-time sales of properties.

For self-storage facilities in particular, occupancy rates are extremely important. They're typically measured as a percentage of square footage occupied divided by total square footage available. With some types of REITs, having substantial portions of space vacant is simply part of the business cycle, and it's worth holding a property empty if it can lead to finding a high-quality tenant that will make a long-term commitment. Storage space is more of a commodity item, though, and that makes it vital for successful self-storage facilities to have occupancy rates that are as high as possible. Investors should expect newly built facilities to take time to ramp up to full capacity, but persistent high vacancy rates can indicate poor decision-making in picking a location for the self-storage facility.

Certain other metrics can be helpful for REIT investors to consider, although they aren't quite as important in the self-storage context. Net asset value measures the total current market value of real-estate holdings in the REIT's portfolio, reduced by any outstanding debt. The debt-to-equity ratio gives an indication of how much leverage a REIT takes on by comparing outstanding debt to the shareholder equity measured on the company balance sheet.

Finally, REIT investors look for income, so it's helpful to know their dividend yield, or the total annual distributions divided by share price. This figure shows you how REITs compare in terms of the amount of income they're able to generate from their holdings, as well as giving an indication about whether a particular REIT's shares carry a higher valuation than others.

5 top self-storage REITs

Below are five of the most promising top self-storage REITs for investors to consider.

Stock

Market Capitalization

Current Dividend Yield

Public Storage (NYSE: PSA)

$37.6 billion

3.7%

Extra Space Storage (NYSE: EXR)

$13 billion

3.5%

CubeSmart (NYSE: CUBE)

$5.8 billion

4.2%

Life Storage (NYSE: LSI)

$4.4 billion

4.7%

National Storage Affiliates (NYSE: NSA)

$2.4 billion

3.9%

Data source: Yahoo! Finance.

These REITs all cover self-storage facilities, but they still have differences that distinguish them from each other. That gives investors a chance to tailor their exposure to match up with the risks they're willing to take and the opportunities they see in the self-storage space.

Public Storage

Public Storage is by far the largest player in the self-storage REIT space. The company built its first self-storage facility back in 1972, but today, it has almost 2,400 locations in the U.S. as well as more than 220 facilities in seven different nations in Western Europe through its 49% interest in Shurgard Europe. All told, the REIT has more than 170 million rentable square feet of real estate, and based on the number of tenants it serves, Public Storage is one of the biggest landlords of any type in the world.

Size gives Public Storage the advantage of stability. In its most recent quarter, the REIT posted a nearly 5% rise in core funds from operations, with a better than 2% rise in same-store revenue among more than 2,000 facilities. Rental rates and revenue per available square foot have showed consistent gains, and occupancy rates well above 90% show the high levels of demand for storage space right now.

Public Storage owes its success to its early vision . Historically, the self-storage business was highly fragmented, with local owners typically having, at most, a few locations concentrated within a close distance. Early in its history, Public Storage saw the potential network effects that could come from pulling together self-storage facilities in different cities under one corporate umbrella, building a brand that those who needed storage space could rely on wherever they lived. Smart acquisitions of those local, mom-and-pop storage facilities have added up to a nationwide presence for the REIT, making it harder for other local owners to compete, and thereby clearing the field for further dominance in key markets. As Americans have accumulated more possessions over time, and have consequently needed more storage space, Public Storage has become the go-to provider for many of those seeking a place to put their things.

For income investors, Public Storage has been a reliable dividend-payer . The company has boosted its payout nine times in the past decade, quadrupling its payout since late 2007. Even with the share price having climbed substantially, the current $2 per share quarterly payout still works out to a solid 3.7%. Combine that with the long-term share-price appreciation that the stock has shown, and Public Storage deserves its reputation as a strong leader in self-storage.

Extra Space Storage

Extra Space Storage is a smaller company than Public Storage, but it's been aggressive in its efforts to expand. Since its start in 1977, Extra Space has acquired a portfolio of more than 1,400 stores in 38 states, with only a wide swath of the Northern Plains and Mountain West standing out as an obvious gap in its geographical coverage. It's been expanding aggressively, spending billions of dollars to bring its total network to about 910,000 units and 103 million square feet of rentable space.

Extra Space has done a good job of treating dividend investors well, paying a current yield of 3.5% and having grown its quarterly payouts by more than eightfold since 2010. The REIT's most recent boost came just last month, with a 10% increase bringing the payout to $0.86 per share on a quarterly basis. Yet Extra Space has also rewarded its shareholders with growth. Even when you ignore the impact of dividends, the REIT's share price has jumped more than 500% over the past decade.

Further expansion is in the cards for Extra Space. In its most recent quarter, the company spent more than $300 million on acquisitions, including three operating stores and 41 properties to its third-party management platform. By both owning and operating facilities, Extra Space makes maximum use of its expertise and broadens its options beyond solely company-owned storage facilities. That's been a winning strategy for the REIT thus far, and it looks poised to continue to succeed going forward.

CubeSmart

CubeSmart aims to make itself the one-stop storage option for all sorts of customers. In addition to traditional personal storage options, the company also highlights its selections for business, vehicle, and military storage. The REIT also offers ancillary related services, such as logistics support for receiving packages or retrieving items from storage, moving services like truck rentals and professional movers, organizational supplies, customized storage, and even office amenities like workstations with Wi-Fi.

CubeSmart owns 485 stores with 33.8 million rentable square feet, with an occupancy rate of about 90% as of the first quarter of 2018. It also has third-party management responsibility over nearly 500 additional locations, providing another 32.5 million square feet to its overall portfolio. CubeSmart has been acquiring properties both outright and through partially owned joint ventures, and the REIT has seen good enough results that it boosted its guidance on earnings and funds from operations for the full year.

For dividend investors, CubeSmart's 4.2% yield is fairly high, even in the storage space. Its current quarterly payout of $0.30 per share is 12 times the $0.025 per share it paid as recently as late 2010. Long-term price gains haven't been as impressive as what Extra Space has seen, but the stock is still up more than 30% in the past year even before you include the impact of dividends. With a long history of strong performance , CubeSmart is still well-positioned to keep growing.

Life Storage

Life Storage is the highest-yielding self-storage REIT on this list, with a current yield of around 4.6%. The Buffalo-based company has about 700 self-storage facilities with more than 45 million square feet in 28 different states, and it serves about 390,000 customers. The company has recently gone through a brand change, having previously been known under the Uncle Bob's Self Storage and Sovran Self Storage names . Interestingly, the REIT was originally opened as a financial planning firm, but it opened a Florida self-storage location shortly thereafter, in 1985, and then grew very quickly. Expansion took it first along the East and Gulf Coasts, and then into the Midwest before making it to the West Coast in 2016 with the acquisition that gave the self-storage REIT its current name.

The pace of Life Storage's historical dividend growth hasn't been quite as impressive as those of some of its peers, but it's still a notable increase. Since 2013, the company has boosted its quarterly payout seven times, going from $0.45 to $1 per share. Unfortunately, the stock has lagged behind some of its peers in recent years. But with the branding change, Life Storage has been able to add third-party management as a more significant part of its overall business. Management fees hold the prospect of improving overall profit substantially, and that's led to a bounce for the share price.

Recent results for Life Storage have been encouraging. In the first quarter of 2018, net income jumped by more than 60%, and funds from operations were up modestly from year-ago levels. Same-store revenue and net operating income were both higher by 2.5%, and Life Storage sports an occupancy rate of about 91%. Like its competitors, Life Storage has continued growing by acquisition. With a new image, investors will be interested to see how far the self-storage REIT can climb.

National Storage Affiliates

The smallest REIT on the list is National Storage Affiliates. It's also the newcomer of the group, having come public back in 2015. It has more than 550 storage properties located in 29 different U.S. states, and it has about 34 million rentable square feet in its portfolio. This puts the company at No. 6 in terms of owners and operators of self-storage facilities in the U.S., and its overall strategy is to take the best regional operators in the business and tie them together with markets that have the best fundamental prospects for growth.

For dividend investors, that's been a good philosophy so far. In just over three years, the REIT has almost doubled its quarterly payout, with seven increases in just a dozen quarterly periods. Also, National Storage has seen its share price more than double, leaving its rivals on this list in the dust. Even with that rise in the stock, National Storage still sports a yield approaching 4%, putting it in the middle of the pack.

Fundamentally, National Storage is working hard to grow. Funds from operations in the first quarter of 2018 were up more than 20% from year-ago levels, and the REIT spent about $145 million on acquisitions of roughly 25 self-storage properties. Occupancy was a bit low, at 87%, but that arguably reflects the pace at which the self-storage specialist has worked to build up its portfolio of properties. For those who prefer smaller players in an industry with plenty of room for growth, National Storage Affiliates has a lot of runway left to compete with its bigger rivals.

What risks do self-storage REITs have?

It's important to understand that self-storage REITs aren't a perfect investment. They do have risks associated with them, and it's important to assess those risks carefully before investing.

The biggest risk among self-storage REITs right now is the threat of over-expansion. After having been off the radar for many investors who saw these facilities as low-rent, low-quality real-estate holdings, self-storage has shown how lucrative it can be, and that's invited more competition. If too many players move into a given market, the result will be reduced occupancy rates that threaten profitability.

In addition, like any REIT, self-storage REITs are vulnerable to interest rate increases. As rates rise, the interest expense on loans that self-storage REITs borrow to buy or build facilities goes up. In order for their dividend yields to rise in line with prevailing interest rates, share prices for REITs typically have to fall. Investors have seen that trend play out recently.

Finally, changes in overall economic conditions in a particular location can dramatically affect the supply and demand dynamics for storage facilities. That's less of an issue with broadly diversified national self-storage REITs, but smaller companies that have greater concentrations in particular areas can take bigger hits. For instance, the shift in population away from the Rust Belt toward the South is likely to put pressure on self-storage holdings in areas with declining populations while promoting rapid expansion in popular locations.

Give self-storage REITs a closer look

Real-estate investment trusts can be a great way for investors to get the combination of income and growth they want, and REITs that concentrate in the self-storage arena have largely escaped notice even among those who've paid attention to other types of real-estate investments. With these five selections, you can choose from a well-diversified set of self-storage REITs that can help you round out your income-producing portfolio.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Personal Finance , Stocks
Referenced Symbols: CUBE , NSA , LSI , PSA , EXR


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