Although real estate investment trusts (REITs) are generally considered income vehicles, that doesn't mean investors can't focus on names with a growth bias. That's the case for Americold Realty Trust (NYSE: COLD) and Extra Space Storage (NYSE: EXR). Which helps explain why their dividend yields, at 2.3% and 2.7%, respectively, are so low. But is one of these fast-growing REITs a better option than the other? Here's some things to consider while you make your decision.
1. Very different businesses
The most obvious disparity between Extra Space Storage and Americold is what they own. Extra Space is focused on self-storage properties, where people put the "junk" they own when they have no more room in their homes. It's a fairly sticky business, since most people don't want to change storage units just to save a few bucks a month in rent. Americold, meanwhile, owns temperature-controlled warehouses. These are generally where things like groceries get stored as they are moved around the country to the stores that ultimately sell the products. It is a vital cog in the distribution chain.
Clearly, if you're looking for a self-storage REIT, then Americold won't fit your needs. And if you're looking for an industrial REIT, then Extra Space won't work for you. But if you are simply looking for a growth-oriented landlord, then either one might do just fine.
As noted, the yields on offer here are pretty tiny. But there's more to the dividend story than just the yield. For example, Americold has only been public since early 2018. It paid a partial dividend in its first quarter that year, but it has basically been increasing the dividend four cents per share per year since 2019. That includes an increase in pandemic-hit 2020. The quarterly dividend has increased over that span from $0.19 per share per quarter to $0.22, which isn't really much to write home about on an absolute basis, but the last hike was roughly 5%. Solid, but not huge. The company appears more focused on expanding its business than passing income on to shareholders, which is a fair tradeoff so long as you go in knowing what to expect. The REIT's adjusted funds from operations (FFO) payout ratio was roughly 73% in the first quarter.
Extra Space Storage has a longer history as a public company, IPOing in mid 2004. It started paying a dividend in 2005, only to cut it during the deep 2007 to 2009 recession. It got back on track in the second quarter of 2011 and has increased the dividend every year since. The dividend has increased from $0.10 per share per quarter when it was reinstated in 2011 to $1.00 per share after the most recent hike. That's a little more exciting as far as dividend increases go, with the last hike tallying in at 11%. If you're looking for dividend growth, Extra Space seems like the better option. The adjusted FFO payout ratio was 66% in the first quarter of 2020, which is even better than Americold.
3. A look at growth
Since going public in early 2018, Americold has increased its portfolio from 146 properties to 233. That's come largely from acquisitions. Extra Space owns 1,206 properties and manages 763 self-storage assets for others, bringing its total owned and operated count to nearly 1,969. It started life with a portfolio of around 110 owned properties. A lot has obviously happened since the IPO, with acquisitions and ground-up construction both notable contributors.
In fairness, a temperature-controlled warehouse is a much different building than a self-storage facility. So the absolute numbers here don't necessarily tell the whole story. However, the big takeaway is that both of these REITs are focused on building out their portfolios. Extra Space has had more time to do that, and the properties it owns are, perhaps, simpler assets, so its growth has been fairly rapid. And that has translated into notable dividend growth for investors, at least after it worked past the hit from the 2007 to 2009 recession.
4. The market take
The low yields here suggest that investors are placing a fairly high value on these shares, given that REITs are specifically designed to pass income on to investors. That said, since the start of 2020, Americold's shares are only up around 8%, while Extra Space Storage's shares have risen 37% or so. But there's more to the picture here.
Using the first-quarter adjusted FFO of $1.50 per share as a run rate, Extra Space Storage's price to adjusted FFO ratio is roughly 24 times. Americold's first-quarter adjusted FFO was $0.30 per share; used as a run rate, that puts the price to adjusted FFO ratio at around 31 times. That's not shocking, however, given that logistics assets are seen as hot commodities considering the boom in online sales. However, it suggests that Extra Space Storage, while perhaps not cheap, is still offering investors a better value today even after a big price run. Americold's modest stock price increase, meanwhile, suggests it may have to grow into its valuation.
The final call
Value-conscious investors will probably want to avoid both Americold and Extra Space Storage. So, too, will those focused on maximizing their dividend income. That said, for investors with more of a growth focus, Extra Space Storage probably comes out ahead in this pair-up. It has a more impressive dividend growth history, a more compelling valuation, a pretty sticky business model, and has expanded at an impressive clip. That's not to suggest Americold is a bad REIT, but it looks like investors are pricing in a lot of positives that have yet to show up in the company's performance just yet.