Public Storage’s (PSA - Free Report) expansion efforts, along with healthy demand for self-storage spaces, position it well for long-term growth. However, the rise in supply is likely to limit its pricing power.
One of the largest owner and operator of storage facilities in the United States, Public Storage has an extensive presence in all major metropolitan cities. In addition, the Public Storage brand provides a competitive edge to the company over other industry competitors.
Moreover, self-storage industry’s fundamentals are likely to be driven by high demand, backed by favorable demographic changes, healthy job market and rising incomes, migration and downsizing trend, and declining home ownership and the resultant increase in the number of people renting homes.
Last month, Public Storage came out with its third-quarter results. Though the company’s funds from operations (FFO) per share and revenues improved year over year, the estimate miss for both is disappointing. Expenses have been flaring up due to elevated marketing expenses and property taxes. Nevertheless, higher realized annual rent per occupied square foot and uptick in occupancy supported its same-store revenues. Additionally, Public Storage benefited from its expansion efforts in the reported quarter.
In fact, since the beginning of 2013 through Sep 30, 2019, the company has acquired 328 facilities with 22.8 million net rentable square feet from third parties for approximately $3 billion. Additionally, it opened newly-developed and expanded self-storage space for a total cost of $1.5 billion, adding around 14.5 million net rentable square feet.
Following Sep 30, 2019, the company acquired or was under contract to acquire eight self-storage facilities, spanning 0.6 million net rentable square feet of space, for $69.6 million. Such acquisitions and expansions augur well for long-term growth and its strong balance sheet and adequate liquidity make buyouts and developments feasible.
Nevertheless, Public Storage operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. In addition, in recent years, supply has been increasing in a number of markets, which is likely to fuel competition for the company, curb its power to raise rents and turn on more discounting.
The company has a significant development and refurbishment pipeline. As of Sep 30, 2019, it had several facilities in development (1.3 million net rentable square feet), with an estimated cost of $219 million, as well as expansion projects (2.4 million net rentable square feet) worth roughly $313 million. Public Storage estimates to incur the remaining $348 million of development costs related to these projects, mainly over the next 18 months.
Though this is encouraging, the substantial pipeline increases the operational risks and exposes the company to rising construction costs. Also, self-storage spaces are not usually pre-leased and new assets take time to generate yields.
So far in the year, shares of Public Storage have gained 5.2% compared with the industry’s rally of 20.3%. Currently, the stock carries a Zacks Rank #3 (Hold).
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