For investors looking for high dividend yields, you still can’t do any better than real estate investment trusts (REITs). Created by Congress to allow regular Joes the ability to own commercial real estate properties, the corporate tax-structure requires that REITs kick out much of their profits back to shareholders as juicy dividends. And there are REITs that cover every spectrum of the real estate market, from apartment buildings to shopping malls.
Yet some of the best performers around have been esoteric property styles. In this case, we’re talking about the public- and self-storage REITs.
Benefiting from America’s housing crisis — in both the trend towards downsizing and growth in the number of renters — self-storage REITs have managed to post great returns. In fact, according to the latest NAREIT data, the publicly traded self-storage sector managed to post a whopping 13.12% return for just the first quarter of this year. That performance builds on the self-storage REITs massive total returns over the last few years — thanks to the sector’s high 25% to 40% profit margins.
And with various positive factors — like rising M&A, continue baby-boomer downsizing and the rise of deed-restricted communities — self-storage REITs are poised to keep on growing into the future. For investors, the sector could be one of the best places to store their cash.
Here are three of the best players.
Self-Storage REITs To Buy #1 — Public Storage (PSA)
Dividend Yield: 3.2%
When it comes to self-storage REITs, no one is as big as Public Storage (PSA). The firm owns and operates more than 2,200 locations nationwide and has a hefty presence overseas as well. That size and brand recognition makes PSA the prime bet for investors looking at adding some self-storage to their REIT portfolio.
It also makes PSA a profit machine.
The firm managed to spend nearly 30% less on advertising in 2103, while boosting its rents by more than 5% throughout the year. That rent rate increase helped PSA see a hefty boost to its cash flows. For its latest reported quarter, PSA saw its funds-from-operations (FFO) jump nearly 11.8% versus the previous year’s quarter. That FFO metric of $2.08 per share also beat analyst’s predictions by around 3%.
All in all, that strong FFO number gives PSA one of the strongest balance sheets in the sector. It also allows the firm to snag smaller independent storage property owners with ease. For investors, that continued FFO growth helps PSA churn out steady dividend increases.
Self-Storage REITs To Buy #2 — Extra Space Storage (EXR)
Dividend Yield: 3.2%
If PSA is the king of the self-storage REITs, then Extra Space Storage (EXR) would be the prince. Operating just under 1,000 different properties, EXR is almost as big as PSA.
But being smaller has some advantages. Namely, EXR can be more selective when buying additional properties.
Throughout 2013, EXR spent $586 million on 78 different self-storage properties and added 70 different properties under management/branding. These buys allowed EXR to have a record high occupancy rate of 90.6% across its portfolio. Its smaller size allows it focus on more stable facilities rather than be forced to buy out larger owners to really move the needle — as PSA is forced to do.
That focus and high occupancy rate also led to rising cash flows and rental rates at EXR’s facilities. Overall, EXR saw a 3% bump upwards in its rents for the year. More impressively, its strategy of quality over size has helped EXR produce FFO growth of nearly 17% annually over the last five years. That growth has helped the self-storage REIT pay down debt and regain its dividend mojo.
EXR was forced to cut its dividend in 2010, but it has since recovered, and now the firm yields a healthier 3.2%.
Self-Storage REITs To Buy #3 — Sovran Self Storage (SSS)
Dividend Yield: 3.6%
Owning and operating more than 400 self-storage facilities under the Uncle Bob’s Self Storage brand, Sovran Self Storage (SSS) could be an interesting pick. Like EXR, SSS has been quickly — yet selectively — expanding its property portfolio via acquisitions and management deals.
Throughout 2013, SSS managed to add 11 self-storage faculties its own portfolio at a cost of $94.9 million and bring in seven properties into its management program. Under the terms of those deals, it will have the ability to buy the properties in 2015. So far in 2014, Sovran has added six additional facilities under its umbrella.
All in all, the focus on stable and high-occupancy facilities has been a boon to the bottom line of SSS stock.
FFO growth for SSS has been swift, with the latest quarter seeing a monster 27% increase versus the year-ago quarter. That huge jump in cash flows has made its way back to investors via a 28.3% hike in its quarterly cash dividend. SSS stock will now pay 68 cents per share every quarter, compared to just 53 cents paid in the prior three months.
That bump now puts SSS ahead of the other two storage REITs on this list in terms of overall yeild. At current prices, Sovran now yields a market beating 3.6%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.