The self-storage business is boring -- which is exactly why it's such an interesting niche in the real estate investment trust (REIT) sector. In fact, both CubeSmart (NYSE: CUBE) and National Storage Affiliates (NYSE: NSA) increased their dividends in 2020, a fairly impressive feat given the coronavirus pandemic. That said, one of these REITs is doing better than the other right now, and that might make it the better option today.
Like watching paint dry
Self-storage REITs basically own and operate buildings filled with closets. They rent out those spaces to businesses and consumers who need some extra storage room. When you shove something into a dark corner of your house (like an attic), it tends to stay in that corner for a long time. That's even more true in the self-storage space, because people have to actually go to their units to retrieve things. Yes, there's the cost of rent, but it's usually modest. And saving a few dollars isn't likely to be enough incentive for consumers to move their "junk" to a new facility.
To put some numbers on that, CubeSmart's occupancy increased to 94.1% in Oct. 2020, up from 92% in the same month of 2019. Meanwhile, National Storage's occupancy rose to 91.1% in the third quarter, up from 90.1% in the same stanza of 2019. That's likely because new customers kept showing up while old ones, put off by the pandemic, stayed home and left their stuff where it was: happily sitting in storage.
Regardless, these numbers show that self-storage is a pretty resilient sector and help explain why these two REITs were able to increase their dividends at a time when a large number of REITs were cutting their disbursements.
Digging in a little deeper
That said, these two self-storage REITs aren't performing at the same level right now. CubeSmart, for example, increased its dividend once in 2020, upping the payment by 3%. National Storage increased its dividend twice last year, each representing a 3% increase. The ending dividend was roughly 6% higher than the starting payment.
Looking at funds from operations (FFO) growth, which is akin to earnings for an industrial company, at each of these REITs helps explain the difference on the dividend front. CubeSmart's FFO was flat year over year in the third quarter and actually fell by a penny over the first three quarters of 2020, while National Storage's FFO increased 10% in the third quarter and was higher by around 8% over the nine months. Both REITs have payout ratios of around 75% or so. But National Storage appears to be executing better right now. So it's not shocking at all that the company with the better FFO growth would have better dividend growth, too.
CubeSmart owns and operates roughly 1,260 properties, notably more than National Storage's 800 or so locations. And that speaks to the opportunity for growth at National Storage, where smaller deals will be more meaningful. This is a big part of the story in a consolidation-driven sector, where the top 10 players only have around a quarter of the market share.
Go for growth
Here's the thing: National Storage's dividend yield is roughly 3.9%, and it's growing its dividend more quickly than CubeSmart right now. But CubeSmart's yield is also around 3.9%. All in, investors comparing these two REITs should probably go with National Storage.