Trading Down In The Housing Market

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I've written several articles about how big finance companies like Blackstone are entering the housing market and how that is likely a sign that the market is ripe for a turnaround. Buying home builders, lumber real estate investment trusts (REITs), furniture stores, and home improvement related stocks are just a few of the ways investors can tag along for the ride. One other way is by investing in self-storage REITs. However, there's more than just a housing turnaround to support this REIT segment.

A Housing Turnaround
With financial giants stepping in to buy distressed homes directly from banks and distressed mortgages directly from the U.S. government, there is no question that there is serious interest in the housing market. While one-family homes were once dominated by individuals who owned their own homes and mom and pop landlords who rent out a relatively small number of homes, the market clearly looks like it's on its way to being institutionalized.

If this is the precursor to a housing rebound, than storage REITs are in line to benefit. Two of the key benefits of putting one's “stuff” in storage are to hide it when the house is being sold and to store it while in-between homes. However, many people find that the extra storage is highly desirable and simply keep their excess belongings under lock and key, and out of the house. So, a housing turn will definitely be a good thing for the storage market.

Other Reasons to Like the Sector
That alone, however, isn't the only reason to like storage REITs. There are two other supporting arguments that should be even bigger long-term boosters. First if the graying of America. While many Baby Boomers never move, a large number do. Often this is an attempt to downsize from homes large enough to raise a family into places more appropriate for just two people and an occasional guest.

Going from a three or four bedroom home to one with just two bedrooms means consolidating a lot of “stuff.” For those Boomers who can't stand to throw out baby's first clothes and toys, and the memories they hold, storage is often the only option. This will be a huge long-term trend that will help support the self-storage industry's growth for several decades.

The economic weakness we've seen of late is another supporting factor. Not because people need a place to put their things when they lose their home, which may be true, but because some industry watchers are seeing a shift toward renting. And not because homes are out of reach, but because jobs are scarce and moving where the work is looks like it is becoming a necessity.

Thus, why buy if you are just going to have to sell in a few years, or less, anyway? Since apartments are often smaller than homes, collecting one's extra, but still important, “stuff” in a self-storage unit makes moving that much easier. It’s also easier to never move one's stuff in the first place, if it isn't vital to begin with.

The Storage Industry
The self-storage segment of the REIT industry is fragmented and highly competitive. It simply doesn't take much to put up a new facility when it can be little more than a collection of cheap concrete garages. Moreover, it is still largely populated with small players.

The large publicly traded REITs have operational advantages over mom and pops, including scale and computerization, but that isn't enough to offset the low barriers to entry. However, there are some benefits to the industry being fragmented. Most notably, the ability to act as a consolidator. So competition is fierce, but growth opportunities abound.

Some Companies to Watch
There are a number of large REITs in the self-storage space that investors can look at. One of the oldest and largest is Public Storage (NYSE: PSA). Although most of its business is domestic, it has notable operations in Europe, adding some diversification to its portfolio but also some risk, since the “old world” is struggling economically right now.

California, Texas, and Florida represent large positions for the company, which puts it in decent position to benefit from downsizing and space constrained markets. With well more than 2,000 facilities, however, growth will likely be slow since large-scale purchases in a fragmented industry are likely to be hard to come by and competitively priced. With a yield below 1%, this stock is only suitable for momentum and growth-focused investors.

CubeSmart (NYSE: CUBE) is a company that has worked diligently to improve its finances since the 2007-2009 recession. With more manageable debt levels and a lower dividend payout, the company continues to expand its reach. With material exposure to New York, Texas, and Florida, the company appears to be in the right places to benefit from some of the shifts noted above. It owns around 400 storage centers. A low yield won't interest dividend investors, but momentum accounts might want to take a look.

Extra Space Storage (NYSE: EXR) owns or operates more than 900 storage facilities across the United States. Its yield is multiples of Public Storage's, and it increased its dividend disbursement 25% at the end of 2012. Still, with a yield below 3% it won't likely light a fire under dividend investors, though those with a focus on dividend growth might find its prospects appealing.

Interestingly, Extra Space is the largest third-party manager of storage facilities in the United States, allowing it to leverage its existing systems to produce a relatively low-cost revenue stream. Approximately 20% of the properties it controls are managed, not owned. California, Florida, and the Northeast are big markets for the company.

Sovran Self Storage's (NYSE: SSS) yield of 3% is similar to the yield offered by Extra Space Storage.   The company just increased its quarterly dividend three cents a share to $0.48. The company owns or operates more than 400 storage facilities across the United States, with notable exposure to the Texas and Florida markets. It continues to act as a consolidator, adding 10 properties late last year. This is a positive for the company, which will find growth easier to achieve than a giant like Public Storage. Income investors might be better served avoiding this one, but those with a growth bent should consider taking a look.

An Indirect Beneficiary, but a Longer Curve
A housing turnaround would likely benefit the storage industry, but that's not the only story here. In fact, a housing turn would probably just be icing on the cake. Investors looking for income have never really been attracted to this historically low-yielding segment of the REIT space, but growth investors could find some compelling stories here.


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ReubenGBrewer 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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