(By Kevin Donovan) Sometimes you can't take it with you in this life as well as the next.
Whether they suffer from an inability to discard the past or have need of a parking place on the way to the future, Americans willing to pay somebody to hold the stuff they don't want to throw away are generating steady income for investors in self-storage real estate investment trusts.
According to trade association NAREIT, the self-storage sector generated total returns of 29.83% last year, while the FTSE NAREIT All Equity REIT Total Returns Index was up 11.29%. In the first quarter of 2012, the self-storage sector had total returns of 2.70%, NAREIT calculates.
Occupancy rates for self-storage REITs were up 2.2% in the first quarter, compared with 1.1% nationwide for all self-storage companies, according to NAREIT.
Underpinning the group's attractiveness is a supply-demand imbalance that favors self-storage operators. Few new facilities are being built, and consolidation appears to be the likely growth strategy.
Here's a quick look at the four publicly traded self-storage REITS:
Dividend (latest Q)
Payout (latest Q)*
CubeSmart (CUBE), $11.15
Extra Space Storage (EXR), $28.13
Public Storage (PSA), $135.72
Sovran Self Storage (SSS), $48.81
Source: Ned Davis Research and Company reports. *Percent of FFO
FFO (funds from operations), akin to operating cash flow, is the preferred yardstick for REITs. It is equal to net income plus depreciation, amortization and acquisition costs minus capital gains on properties sold. REITs are exempt from income taxes if they pay out at least 90% of net income to shareholders. Treating properties as depreciating assets, as required by GAAP, distorts true profitability. Thus the FFO metric is used to get a handle on REITs' performance.
As is our wont, we prefer the least expensive avenue for buying into income. Based on forward price-to FFO multiples, we like CubeSmart. On expected 2013 FFO, the company trades at a multiple of 14.11, the cheapest in the group.
CubeSmart describes itself as a "self-administered and self-managed real estate company." According to the Self-Storage Almanac, CubeSmart is the fourth largest owner and operator of self-storage facilities in the United States. The industry in the United States consists of approximately 45,000 facilities with 2.1 billion rentable square feet, out of which the top ten operators collectively own approximately 14.8% of the aggregate rentable square footage market share, a condition that begs for consolidation.
In that vein, CubeSmart closed on acquisitions totaling $86.4 million during the quarter, including one asset in Houston and one asset in Atlanta for an aggregate $12.0 million, as well as four of the remaining six assets in the second pool of the Storage Deluxe transaction in New York for $74.4 million.
And it is keeping its eye out for more. CubeSmart continues to see "significant external growth opportunities," according to President and Chief Investment Officer Christopher Marr.
Transactions under contract include the disposition of 15 properties for potential proceeds of approximately $37 million and the purchase of three assets for about $30 million, the company says.
Meanwhile, the company recently announced that CEO Dean Jernigan is retiring at the end of 2013. That leaves plenty of time for an orderly succession.