Top REITs To Build Wealth: While legacy REITs focusing on commercial and residential properties are still great investments, self-storage REITs represent a new frontier for real estate trusts.
Why buy self-storage real estate investment trusts and what are three of the top investments in this space that could build serious wealth over the long haul?
Why Invest in Storage REITs?
REITs of all varieties are popular investments for generating income, but self-storage REITs offer some unique advantages.
To begin with, self-storage facilities are much cheaper to build than residential or office buildings. They are also cheaper to maintain, leading to lower recurring costs. The rents on these units are typically on a month-to-month basis, making it easier for operators to raise them as market prices go up.
Self-service technology has also injected new life into many facilities, allowing the trusts that own them to generate higher revenues. With self-service apps, occupancy rates tend to increase markedly. Technological innovations like this are simple and inexpensive but can make considerable differences to the top lines of property owners.
Because self-storage REITs are relatively new, the dividends these trusts offer are still growing at rapid rates. Investors who get in early could see considerable wealth built as dividends are reinvested and compound dividend growth raises payouts going forward. This is a slow approach to building wealth, but the long-term payoff could be quite large.
Life Storage (NYSE:LSI) currently yields 3.74 percent for an annual payout of $4.00. While not particularly high for a REIT, Life Storage has been raising its dividend fairly aggressively in recent years. The payout has grown at a CAGR of 7.0 percent over the last five years.
Life Storage appears to have plenty of room left to run when it comes to growth. Since 2018, the company has made $2.1 billion in acquisitions, including $351.5 million in the most recent quarter alone. Earnings for Q1 totaled $0.88 per share, up from $0.63 in 2021. Same-store revenues also increased by 15.6 percent year-over-year, indicating that the company can still lean on existing properties for growth.
In addition to a decent current yield and strong possibilities for future dividend growth, Life Storage could have an attractive amount of upside. The median target price for LSI over the next 12 months is $142.40, an increase of 35.4 percent from the current price of $105.27.
CubeSmart is the highest-yielding of the three REITs highlighted here at 4.26 percent. This equates to an annual payout of $1.72 per share.
The trust has grown its dividend at an impressive 5-year CAGR of 9.91 percent. CubeSmart is also the trust that has been the most aggressive when it comes to acquisitions. The company has acquired $2.2 billion in new properties, plus a $1.7 billion buyout of competitor Storage West.
Despite its obviously strong prospects, CubeSmart does have a history of underperforming expectations on earnings. In the most recent quarter, for example, the trust reported just $0.17 per share against a consensus estimate of $0.57. The previous quarter’s results were similar, with $0.21 reported against an estimate of $0.56.
CubeSmart offers comparable upside to Life Storage. The median CUBE target price among analyst forecasts is $55.50, 38.7 percent higher than the most recent price of $40.02.
At the lowest target of $46, the trust would offer a 14.9 percent upside. Paired with its dividend yield, these targets make CubeSmart quite attractive as both a growth and income asset.
CubeSmart likely offers higher rewards than the other two trusts discussed here, but the string of earnings misses raises some concerns. In part, this trend is likely due to the company’s aggressive spending on new facilities. Over time, these investments should pay off and bolster both earnings and, by extension, dividends. If earnings don’t rise to more closely meet estimates, however, the share price itself could see some downward pressure in the future.
Extra Space Storage
Extra Space Storage (NYSE:EXR) yields 3.72 percent for an annual payout of $6.00 per share. Although its yield is lower than CubeSmart and almost exactly in line with Life Storage, Extra Space has the most impressive 5-year compounded growth rate for its payout at 12.01 percent.
Extra Space’s most recent quarterly report was a bit of a mixed bag. Same-store revenue rose by 21.7 percent, and the company acquired 11 new facilities to fuel further growth.
Net income, however, was down by about 1.3 percent over the same period in the previous year. Excluding adjustments, funds from operations rose by 34 percent. Overall, these metrics point to reasonably strong growth, albeit with less focus on net income.
Extra Space offers a less certain upside forecast than CubeSmart and Life Storage. While the median EXR target price of $209.50 would give the stock a 31.4 percent upside over the current price of $159.47. The lowest estimate, however, would put it down by a further 2.2 percent, indicating that there is at least some analyst bearishness on Extra Space.
Which Fund Is Best?
As you can see, all of these funds are quite attractive income investments and have at least the potential for building long-term wealth. Because they all focus on the same niche of real estate, a safe approach would be to own all three for a diversified play on the self-storage industry as a whole.
If you were going to pick just one fund, though, Extra Space Storage is likely the best option. CubeSmart is also quite attractive, but its string of earnings misses is somewhat concerning.
Although CubeSmart offers a higher yield, Extra Space has grown its dividend at a faster rate. With new acquisitions coming quickly, the fund could continue to see more growth going forward. Life Storage could be a more conservative pick, but its dividend may not grow as quickly as the other two.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.