As the housing sector has continued to slump, many investors have turned their attentions to multi-family and apartment real estates as a way to profit from the change in homeownership. The iShares FTSE NAREIT Residential Plus (ARCA: REZ), which bets on a variety of apartment real estate investment trusts (REIT), has become one of the best performers in 2011, as investors have flocked to sector. With many analysts still predicting a terrible near-term future for the housing market, multi-family based real estate should continue to outperform. However, with some apartment REIT valuations getting a little rich, investors may want to bet on a side-play. Public storage real estate could be one of best ways to play the downturn in housing. (To know more about REIT, read: How To Analyze Real Estate Investment Trusts.)
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Too Much Stuff
One of side effects of downsizing from a home to an apartment, is often that the sheer volume of "things" that homeowners have accumulated, over the years, simply won't fit in the space. While eBay (Nasdaq: EBAY) is a solution for some, the truth is, most would rather hold on to their possessions. As more American's have decided against homeownership, face foreclosure or simply can't obtain credit to purchase a home, firms that provide a place to hold all of these belongings have flourished. A recent report from MJ Partners Real Estate Services showed that the sector had strong revenue growth of 4 to 5.8%, and net operating income growth of 7.3 to 8.6% during the third quarter. Occupancy for the storage REITs ranged from 80.8 to 91.7%. Over the last year, firms within the sector have been able to raise rent, increase cash flow and pay down debt. (To know about how to avoid foreclosure, read: 5 Ways To Avoid Foreclosure.)
These strong operating characteristics are also adding a growth element to the fragmented industry: Mergers and Acquisitions (M&A). With limited new development projects, consolidation has become the mantra for the self storage sector. Most storage assets are still independently owned and analysts believe that the heavily capitalized publically traded REITs in the sector will continue to seek out distressed assets. In the third quarter, storage REITs purchased more than $1 billion worth of facilities from independent owners. However, only about 10% of the approximate 45,000 self storage facilities in the U.S. are owned by public companies. This leaves lots of room for acquisitions.
Analysts also predict that the major players in the sector will see an extra boost from baby boomers, as they consider downsizing as they enter retirement. In addition, the Internet is changing the face of public storage. The major players in the sector essentially own Internet search results, resulting in higher demand numbers. They are able to steal tenants from private operators as people, increasingly, use their computers and smartphones to research problems.
Storing Your Cash
With the housing mess still ongoing, investors may want to consider the storage sector for a portfolio. While some of the major real estate funds, like the iShares Cohen & Steers Realty (ARCA: ICF), do include some exposure to the storage REITs, the sector is small enough to buy all the major players individually.
After spinning-out its warehouse operations, as PS Business Parks (NYSE: PSB) did in 1998, Public Storage (NYSE: PSA) has become the major player in the sector. Operating over 2,200 locations across the United States and Europe, the company has managed to increase occupancy and same-store sales year over year. Public Storage purchased nearly 217,000 net rentable square feet during the quarter, and reaffirmed its dividend. Similarly, competitor Extra Space Storage (NYSE: EXR) purchased 48 different properties this year adding to its cash flows.
On the smaller side, both CubeSmart (NYSE: CUBE) and Sovran Self Storage (NYSE: SSS) could offer higher growth prospects. Both firms have been quite aggressive over the last quarter in acquisitions of rental space, and each saw their FFO rise. Shares of the REITs yield about 2.9 and 4.4%, respectively.
The Bottom Line
With many analysts predicting that the housing mess won't fix itself anytime soon, investors have flocked to apartment REITs like AvalonBay Communities (NYSE: AVB). However, a better choice could be in the often ignored self storage sector. Benefiting from the same trends as multi-family housing, the sector should see continued gains in the future.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.