Hidden Gem: The Best-Performing REIT I’ve Ever Found…

When you write a premium newsletter dedicated to income investors, you end up spending a lot of time talking about real estate investment trusts (REITs).

It comes with the territory. These wonderful vehicles are an income investor’s dream.

As a refresher, a REIT owns, operates, or finances income-producing real estate. They trade on major exchanges just like regular stocks and offer several benefits to investors.

For starters, there’s the obvious. REITs offer a more liquid way to invest in real estate than owning physical properties. It’s like being a landlord without the headache. REITs also must distribute at least 90% of their taxable income to shareholders annually as dividends. Those dividends are fully taxed as ordinary income, but investors can avoid taxes on these distributions entirely by holding REITs in a tax-advantaged account (like a Roth IRA).

REITs can provide diversification to an otherwise equity-heavy portfolio. They come in all shapes and sizes, too. A given REIT could own a collection of apartments, commercial buildings, or retail shopping centers… You’ll even find REITs in specialized sectors like data centers and healthcare facilities.

But believe it or not, a corner of the real estate sector has consistently delivered the highest investment returns of all these property groups.

I’m talking about self-storage facilities.

The Case For Public Storage REITs

I’ve written about this growing sector before. As I said back then, the monthly rent checks from these tiny units may be small, but they’re also plentiful. It’s also still a very fragmented market — although this is changing quicker than you might think.

In fact, one of my favorites just got a lot bigger (more on that in a second). But first, let’s recap the case for storage REITs…

You’d be surprised at the wide assortment of neglected things in garages and closets (or maybe not). Moving these seldom-used possessions into a storage unit is the easiest way to de-clutter.

Back in 1995, there were about 25,000 self-storage facilities nationwide. But they have been popping up at an average rate of 1,700 per year. So the number of locations has already doubled to 51,200 and continues to grow. According to the Self-Storage Association, these warehouses contain 2.3 billion square feet of space for rent.

On average, about four new self-storage facilities are opening per day. That expansion reflects a growing demand from homeowners. You don’t open new facilities if older ones are empty. Despite doubling capacity over the past 15 years, national occupancy rates have remained stable at around 85% — higher in some locales.

Meanwhile, the average monthly rent for a standard 10×10 foot unit increased to around $123 in 2022, up 5% from the previous year. According to real estate firm Cushman & Wakefield, the breakeven occupancy rate for a self-storage facility is approximately 40%, meaning even half-full locations can still turn a nice profit.

The old mantra that propels the storage industry are the “four ‘D’s”: divorce, death, density, and dislocation. But in reality, you might need a storage unit for other major life events, like college graduation, marriage, career change, or even catastrophic weather events.

Then on a macro scale, there’s the downsizing among baby boomers as they age. Of course, the Covid pandemic uprooted many Americans, too. Whatever the cause, business has been booming year after year.

The Best Storage REIT Around?

As I’ve mentioned previously, there are just a handful of big publicly-traded players in this space. But Extra Space Storage (NYSE: EXR) just might be the best around.

Founded in 1977, the company has expanded through acquisition and now boasts a national portfolio of nearly 2,400 owned or managed properties. These facilities contain 1.7 million individual rental units comprising roughly 180 million square feet.

Now, if you’re like me, you’ve probably needed a storage unit temporarily when you’re in the middle of a big move. But somewhere around 60% of EXR’s customers stay at least 12 months, and 40% stick around for 24 months.

And thanks to rising rental rates, management has more than doubled its quarterly dividend over the last five years. Currently, that payment sits at $1.62 per share or $6.48 annually. That’s a respectable 3.1% yield. And as you can see from the chart below, the dividend has grown for more than a decade.

There’s (Still) Room For Growth

Remember earlier when I said this was a fragmented industry? According to the Self-Storage Almanac, the top six self-storage companies own or operate 37% of the available storage square footage in the United States. That leaves the rest of the sector ripe for acquisition.

In fact, just last month, EXR completed an $11.48 billion all-stock deal to acquire Life Storage. That will make it the largest self-storage operator in the country, both in terms of locations and square footage. And yet, the combined company’s market share will still only be about 13%, leaving plenty of room for more deals.

Most competitors have slowly adopted new technology (especially mom-and-pop-owned facilities). EXR was among the first to embrace social media, search engine optimization, algorithmic pricing models, and data analytics. The company shares these best practices with all its new acquisitions, helping optimize their performance.

They also manage locations for third-party owners under contracts, adding tens of millions in ancillary fees per quarter.

EXR has delivered the strongest total return of just about any publicly-traded REIT on the market. Not just self-storage REITs. The market.

Closing Thoughts

Dividend-paying REITs like EXR have taken a hit in this rising rate environment. But given the long-term track record here, you may want to seriously consider this name for your portfolio.

In the meantime, if you’re looking for long-term wealth builders that pay more than the measly sub-2% yields offered by the average S&P 500 stock, then you need to check out my latest research. Each month, we’re finding yields of 6%, 8%, and even 11% from securities you won’t hear about anywhere else.

Go here to learn more now.