Stocks mentioned in this story: PSA, CUBE, SSS, EXR, TSLA
We love our stuff. Many of us might even be considered hoarders, which makes self-storage a good industry. Occupancy rates are generally high, turnover and maintenance is low. When the economy slows, people tend to downsize and put their possessions into self-storage, which makes some consider storage a recession-proof investment.
In 2011, when stocks were crashing, self-storage was the best-performing real estate investment trust sector with a 35.2 percent total return, according to REIT.com.
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Even when the economy improves, self-storage benefits, as people buy more stuff, or get jobs in the cities, often putting their stuff in a storage unit instead of cramming it into a tiny city apartment. You get the point.
So how do we invest in this space?
REITs dominate the storage market. They include Public Storage (ticker: PSA), with 2,200 properties nationwide and expansions overseas; CubeSmart (CUBE), with 708 facilities and a market capitalization of $7.3 billion; Sovran Self Storage (SSS), with 550 properties and 90 percent occupancy rate; and Extra Space Storage (EXR), which recently hiked its quarterly dividend 32 percent to 78 cents per share.
“Each of the four companies outperformed the S&P 500,” says Lawrence Hamtil, investment advisor for Fortune Financial in Overland Park, Kansas.
The storage REIT index was the racehorse of the REITs for decades. “I looked at the return data for the storage REIT index. And that has performed the best out of all the REIT indexes that I can tell, at least, over the last 20 or so years, from June of ’95 through May of this year,” Hamtil says.
Storage REITs average 17 percent returns, beating the next highest average of residential REITs at about 13 percent, Hamtil says.
“They typically have higher margins, cleaner balance sheets,” he says. “They seem to be a little bit less impacted by downturns and recessions.”
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Business could boom from people losing their houses and having to buy temporary storage, and the fact that people tend to hold onto what they have, says Hamtil, who notes there are also lower drawdowns than the other REIT sectors.
REITs are popular because 90 percent of any income generated is returned to shareholders, usually through generous dividend yields. But investors should know that the dividends are taxable income, so consult with a tax professional before instigating a position, Hamtil says.
A case for ETFs. Exchange-traded funds in this space often give a similar return with lower risk of volatility, according to research by AnalytixInsight, a technological stock analysis company.
“This particular sector seems to have been doing fairly well over the last few months,” says chief executive Chaith Kondragunta. “Basically, there’s a shortage of supply and there’s growing demand in the marketplace, compared to the amount of demand that’s there. So any ETF investing in these companies is also benefiting from the stocks as well. There aren’t that many storage facilities available or coming online into the marketplace.”
Most of the ETFs are not solely focusing on storage stocks. The top-performing ETF with the largest exposure to Public Storage stock is iShares Residential Real Estate Capped ETF (REZ), which has an 11.6 percent weight to PSA. That’s twice the exposure to that of the Schwab US REIT ETF (SCHH), or the SPDR Dow Jones REIT ETF (RWR).
“And that is translating into the performance as well. It’s also a more focused play,” Kondragunta says. “They seem to be having a pretty good run (and) iShare’s REZ seems to be the pick of the bunch.”
Potential threats to self-storage stocks. Storage companies may have some fierce competition with MakeSpace, a new private self-storage company that picks up customers’ items, stores it and redelivers on demand, eliminating the need for a storage facility to be hyperlocal.
While other storage companies often pay a premium for space in city centers, “you contrast that with MakeSpace, whose buying warehouses way outside city centers that are underutilized or currently vacant,” says Jacob Chapman, partner of Gelt Venture Capital in San Francisco. “So they’re getting very, very inexpensive storage. And so they can end up charging rates that are about, 60 percent or 70 percent of what Public Storage charges.”
Along with added delivery and drop-off service, MakeSpace also offers cataloging, in which it takes photos of customers’ belongings in their bins and gives them codes so they can go online and check on their belongings.
“There’s almost no way for a traditional public storage provider to compete on a cost basis, because their cost structure is so much higher,” Chapman says. “They just raised almost $20 million in venture capital.”
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He also sees driverless cars such as those being tested by Tesla Motors (TSLA) as a potential threat to storage stocks. “The Tesla S, for instance, can park itself in your garage,” Chapman says. If a driverless car can eventually park elsewhere, like a municipal lot, “people will start reclaiming their garages for higher value uses,” he says.
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3 Things to Know About Investing in Self-Storage Spaces originally appeared on usnews.com
