Even with the Federal Reserve planning on raising interest rates in the near future, real estate investment trusts (REITs) are great places to find big dividends and huge total returns.
Most REITs will continue to outperform as the Fed raises rates, thanks to the combination of dividend increases that typically outpace rate hikes and rising rent growth.
But some REITs will do better than others. In this case we’re talking about the self-storage REITs.
The owners of self-storage facilities have been hot over the last few years as the dour housing market has persisted. The trends in downsizing, kids moving back home after college and the increase in the number of renters has played directly into the sector’s hands. The self-storage REITs have managed to post great returns, rising cash flows and, of course, big dividends for shareholders.
According to the latest NAREIT data, the publicly traded self-storage sector has managed to post a whopping 25.4% annual total return over the last five years.
And those kinds of returns should continue into the new year, since nothing has changed for the sector. Housing is still in the dumps and the economy, while better, still isn’t exactly surging. Rising M&A, consolidation and continued trends in housing will only serve to benefit the storage REITs.
For investors, that means there’s still plenty of “oomph” left for the storage REITs.
Here’s three to buy today.
Self-Storage REITs to Buy: Pubic Storage (PSA)
Dividend Yield: 2.87%
When it comes to the self-storage REITs, no one is bigger than Public Storage (PSA).
PSA owns and operates more than 2,200 locations nationwide and has a hefty presence in Europe as well. All in all, we are looking at more than 142 million net rentable square feet of real estate. That size and brand recognition makes Public Storage one of the best REITs to own period — forget about the just in the storage subsector.
But it’s not just PSA’s size that makes it worth buying. It’s also its profits.
For the latest quarter, PSA managed to report a big increase in funds from operations (FFO). That’s basically the amount of cash flows that a REIT will have to pay dividends. Public Storage saw a 9.1% increase in FFO over last year’s numbers to reach $2.27 per share. Driving that gain was increased revenue per storage facility — a fancy way of saying PSA was able to charge more for renting its units per month. Occupancy for the quarter also rose to 95.3%.
Going out further, the firm continues to be selective about adding facilities to property mix — such as its recent buys in Colorado. These buys are designed to instantly add to cash flows and boost dividends.
All in all, when it comes to the storage REITs, PSA is really king of them all.
Self-Storage REITs to Buy: CubeSmart (CUBE)
Dividend Yield: 2.2%
If PSA is the steady-eddy of the Storage REITs, then CubeSmart (CUBE) could be the fast grower.
The firm is the smallest of the sector, but has managed to become a great performer nonetheless. The firm operates only 361 storage facilities. That’s still a large number in the fragmented industry, but when it comes to the REITs, that’s a drop in the bucket.
However, a small ripple in that bucket actually makes big waves. That’s because any boosts to rents, cash flows from acquisitions and occupancy mean more over such small base of storage units.
This last quarter, CUBE managed to see revenues-per-unit rise, thanks to higher rents. Additionally, it added five storage buildings to its arsenal. These two simple things resulted in a big 21%-plus gain in FFO for the quarter.
And there is more to come before the end of the year and into the first chunk of 2016. CUBE has four built properties under contract for a purchase, four facilities under contract to purchase at completion of construction and another five joint-venture properties under development. All of these will help boost the REIT’s FFO even further.
That means the REITs current 2.2% dividend should be growing like weeds in the next year.
Self-Storage REITs to Buy: Sovran Self Storage (SSS)
Dividend Yield: 3.4%
Operating under the Uncle Bob’s Self Storage brand, Sovran Self Storage (SSS) could be the middle-of-the-road pick for investors — bigger than CUBE but not as large as PSA. And that’s not a bad place to be. All in all, SSS owns and operates just over 500 different storage facilities.
Those units continue to be the firm’s bread-n-butter — churning out steady cash flows. Sovran saw its FFO jump nearly 13% over last year during the latest quarter. Like the rest of the storage REITs, part of that jump was due to higher occupancy and higher rents. SSS has some of the highest rents per unit of the entire sector in key market areas.
However, the other part was due to SSS’s moves into auxiliary businesses that complement the storage units — among them, offering rental/moving trucks and corporate storage options. That includes offering office and warehouse space for small- and medium-sized businesses.
Sovran has seen pretty decent growth in these areas.
The combination of the two — plus its third-party management division which helps smaller independently owned storage facilities tap into their network for a fee — should help Sovran continue to drive FFO and dividend growth.
SSS currently yields 3.4%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned REITs.