Why This Sector Has 2 Shining Stars for Investors

Public Storage , Extra Space Storage , CubeSmart , and Sovran Self Storage make up the self-storage REIT universe. This universe is well worth exploring for investors interested in both growth and income.

I recently wrote an article explaining how this sector has embraced technology during the past five years while outperforming the S&P 500. There are several reasons I feel Extra Space and Public Storage will take the spotlight moving forward.

Here is a look back at the last five years


PSA Total Return Price Chart

PSA Total Return Price data by YCharts.

The self-storage industry "big picture"
The highly fragmented U.S. self-storage universe contains about 50,000 facilities. The vast majority of these are private company owner-operators. The five largest public companies that operate in this sector account for about 12% of the total -- there is plenty of room for growth. In addition to the four REITs, AMERCO is a public company that operates 1,200 self-storage sites of 41 million square feet, in addition to its huge fleet of U-Haul rental trucks.

Hitting it out of the park for the quarter ending June 30, 2013
One of the key metrics when analyzing any REIT is funds from operations. All four of these companies announced double-digit increases year over year. Another critical metric is "same store," or stabilized property occupancy rates. All four of these public REITs posted increases in occupancy -- all reporting 90% and above.

Who is best positioned for future success?
There are distinct differences in how each of these REITs approaches the U.S. self-storage market: strategically, operationally, geographically, and financially. 

These two REITs have some challenges moving forward Sovran Self Storage has a market cap of $2.2 billion. SSS operates 471 self-storage properties in 25 states under the name "Uncle Bob's Self Storage." However, of the 362 facilities it owns, it derives 40% of its earnings from just two states: Texas and Florida. It didn't close on any acquisitions for the first half of 2013 and currently only has three properties under contract. 

Sovran currently has 24 properties under third-party management (99 if you add in joint ventures), which is less than CubeSmart, and way behind leader Extra Space Storage. Although SSS just raised its quarterly dividend from $0.48 to $0.53 per share, the annual yield is 2.96%, which puts it in the bottom half on that metric as well.

CubeSmart has a market cap of $2.3 billion and owns 386 facilities comprising 25.8 million square feet located in 22 states and the District of Columbia. It manages 133 facilities for third parties, having added 10 new management contracts in the first half of the year.

During the first half of 2013, 11 assets were acquired for over $107 million, and 13 assets were sold for roughly $36 million. During 2012, CubeSmart purchased 14 properties formerly under third-party management. The company is now focusing on "core urban markets."

Despite great performance this quarter, CubeSmart's operating margin was only 14%, and its profit margin was slightly negative (0.20%). This puts the company dead last among its peers. Its quarterly dividend of $0.11 per share, an annual yield of 2.54%, is also the lowest of the self-storage REITs. 

Compare these two superstars Extra Space Storage is a $4.6 billion company that continues to grow profitably and has the highest dividend yield, almost 4%. Inside Self Storage magazine recently recognized Extra Storage as the "Best Third-Party Management Company," for the second year in a row. These 521 managed properties are also a built-in acquisition pipeline moving forward.

This past quarter, four properties totaling $48.3 million were added to the portfolio -- and subsequent to the quarter ending June 30, 2013, two more properties closed for $9 million. Extra Space has an additional 37 properties located in eight states (including a 20 property portfolio in California) under contract for $305.3 million, all expected to close in 2013.

Public Storage has a fortress balance sheet and currently pays investors a $1.25 quarterly dividend, yielding over 3%. However, its $27 billion market cap makes a high growth rate much harder to achieve. That said, Public Storage expects to complete the purchase of 29 properties located in four states for $374 million during the quarter ending Sept. 30, 2013. It also has the infrastructure and a management team willing to grow by selectively developing new properties.

The current 94% occupancy level presents an opportunity to raise renewal rates. A profit margin north of 50% means those increases will show up on the bottom line. Since Public Storage has almost no debt, the second highest dividend yield in this sector is something investors can count on. 

The bottom line
These two self-storage REIT superstars appear to be well positioned to continue to outperform for the next five years.

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The article Why This Sector Has 2 Shining Stars for Investors originally appeared on Fool.com.

Bill Stoller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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