Public Storage Financial Analysis

Public Storage (NYSE: PSA)

Overview

Public Storage is a U.S. based company, with national and international operations focused primarily on granting self-storage facilities to average consumers. Founded 47 years ago (1972) by Kenneth Volk and Wayne Hughes, Public Storage has become one of the largest self-storage service facilities in the United States with over 2,500 locations and 5,600 employees in the United States, Canada & Europe. It is currently structured as a publicly traded real estate investment trust (REIT) and holds a portfolio totalling over more than 142 million net rentable square feet of real estate. The company has also merged and acquired various companies such as Shurgard Storage Centers, Storage Equities and PS Business Parks, which have added significant value to its real estate portfolio and has helped them become one of the largest landlord in the world, considering the number of tenants it has in its rent roll.

As of today, Public Storage is part of the S&P 500, to which their common and preferred stock (NYSE: PSA) are traded every day on the New York Stock Exchange, with a total of $38.0 billion market cap, converting the company into the largest U.S. based self-storage company by a wide margin as it is larger than its next three competitors combined in terms of market capitalization.

Economic and Business Climate

Although Public Storage has a wide margin difference within their industry, the company has been driven by a business model of not diversifying into other real estate sectors and focusing primarily on self-storage facilities. Self-storage facilities are defined as a clear cyclical industry, which can be summarized that it tends to do well when there is a positive outcome in the global economy and very poorly when there is an economic down shift. As of today, Public Storage has had a very positive growth in the U.S. markets but has not reached positive performance levels in their European locations, this has led the company on having a very conservative and slow approach to any other business opportunities that promise a positive outcome in the medium and long term goals.

Many economic factors are taken into account for Public Storage’s business decisions, such as the rise of interest rates in the U.S. economy. Therefore, the company has structured a low-debt load which has resulted in favourable balance sheet results for over more than 16 years and counting.

In regards to Public Storage’s medium and long term business model, we can say that it has various reasons to be considered a prosperous, but very conservative trend. It can be considered a safe investment since average customers will always find a need to securely store their belongings in cities where the living spaces are being reduced every day. Additionally, the company’s structure for warehouse construction, maintenance and operation are below the average compared to other commercial real estate types.

Competitive Differentiation

As mentioned above, Public Storage has been operating for more than 47 years which has granted them a significant competitive advantage over other self-storage facility companies throughout the countries it operates within and has become one of the most successful REIT’s for investors to keep an eye on. Although Public Storage is the largest U.S. based self-storage company, major direct competitors include companies such as: Extra Space Storage (NYSE: EXR), Life Storage Inc. (LSI) and Cubesmart Inc. (CUBE)

Analysts concur that the biggest strengths that Public Storage has over their competition are their financial stability, global presence, low debt ratios and currently expanding an online service platform. Throughout the years, the company has faced many internal and external challenges to outperform their competition which include a massive competition from local expanding companies which offer lower prices and value added propositions for new customers, as well as an increasing number of legal claims from non paying customers trying to recover their property.

As of 1Q 2019, Public Storage has set out to commit to a more sustainable approach of their self-storage facilities by offering (i) a reduced energy consumption through use of LED motion lighting, (ii) reduced HVAC use by upgrading high-efficiency systems and controlling indoor temperatures, (iii) maximizing efficiency and minimizing exposure to leaks, moisture and humidity through annual building audits , (iv) reduced water consumption through efficient plumbing, irrigation, and drought-tolerant landscaping and (v) minimizing waste production and maximizing recycling measures.

Financial Analysis

Historically, the majority of the real estate sector has been a long-term investment industry which generally requires a very high capital expenditure and operating expenses to maintain all different asset types in a portfolio such as buildings, hotels, industrial facilities and apartments in good shape. Nevertheless, the self-storage facilities give a big upside to investors when it is compared to other products in real estate, that is, a low annual expense budget for operations and maintenance. This results mainly from the business model in which these storage facilities are run and offered to the average customer, with industrial style warehouses, few personnel requirement and no needed amenities other than good parking and maneuver spaces and security. In regards to Public Storage, as the absolute leader in the industry, their business model is quite replicated by many of their fellow competitors and simply follows a path of low ongoing maintenance, attractive prices, accessible locations and great brand recognition. For this, investors are quite interested for a long-term dividend yield due to the fact that currently the interest rates are rising in the U.S. and global markets, which would lead the population on having to spend less and saving more, thus in real estate, translates to a high demand for small living spaces. This rise in demand for small living spaces would affect Public Storage quite positively since it creates an opportunity to expand their locations and gain more clients into their portfolio. Also, Public Storage would generate a great opportunity in the following years for income seeking portfolio investors since it is structured and operated as a REIT, which means that they:

1. Be structured as a taxable corporation, which means they can deduct all income related taxes that are coming from operations
2. Invest at least 75% of its total assets in real estate
3. Derive 75% of its gross income from rents
4. Have a minimum of 100 shareholders
5. Have no more than 50% of its shares held by five or fewer individuals
6. Pay at least 90% of its taxable income in the form of shareholder dividends each year

This last point being the most important aspect of its REIT structure, it will certainly guide investors that are looking to hold their cash in a high interest rate environment and will result in a number of benefits, such as diversification, dividends, liquidity, performance, inflation protection, portfolio enhancement and transparency.

Ratios

In regards to Public Storage’s current (all data as of Q1 2019^[1]) financial ratios, we can divide it into four main categories: Valuation, Profitability, Efficiency and Capital Structure.

As we can see in the financial ratios above, Public Storage has uplifted itself as the most valuable self-storage REIT in the market today and has a market capitalization of more than their next three competitors combined. If we go into detail on how Public Storage’s stock compares to their next three direct competitors, we can visualize the following key statistics and per-share information:

Key Statistics vs. Competitors (all data as of Q1 2019^[2])

There are currently 6 Self-Storage REITs, which is quite low for a REIT industry that has been shown to be a safe investment. Nevertheless, these REITs represent:

1. Total Market Capitalization ($M): $61,463
2. Dividend Yield: 3.75%
3. YTD Total Return: 6.43%
4. 2018 Total Return: 2.94%
5. FFO ($M): $2,890
6. NOI ($M): $3,630
7. Dividends Paid ($M): $2,569

Further along, we will break down each of the REITs key statistics so we can see how Public Storage compares to their Top 3 direct competitors mentioned above and support how we can reach a positive investment objective

Comparing the latest financial data in the table above, we can see important factors that are quite positive for Public Storage’s company attribution, which are:

1. Highest Market Capitalization by more than $23,697,058 to the next top competitor
2. Highest Annual Sales by more than $1,563,520,000 to the next top competitor
3. Highest Annual Net Income by more than $963,210,000 to the next top competitor
4. Highest Recent Earnings by more than $1.47 to the next top competitor
5. Highest Paying Dividend by more than $1.00 to the next top competitor

Despite the fact that demand for self-storage facilities has been increasing by a large amount in recent years, due to an increase in residential prices that require average consumers in the U.S. and global markets to reduce their living spaces and find secure self storage facilities for their personal goods, Public Storage has been the leading and most stable growing self-storage REIT in the industry, which has led them to be considered a very safe investment in the stock market. Additionally, many financial & market analysts have estimated that only 10% of families in the U.S. rent self-storage, so there is also many exponential opportunities for growth and to increase that % in high interest rate economies like the ones we live today, will result beneficial to Public Storage’s income.

Discussions & Forecasts

We can clearly see from the comparing numbers above, that Public Storage and all other competitors in the self-storage REIT industry are a popular choice for investors for many reasons. First of all, the low amount of CAPEX that are needed for this asset type to be build and further maintained in the popular location the have chosen, typically, urban or suburban areas with good access, open land, which results in lower expenses and increased income per location available for each REIT. Also, turnover at self-storage facilities isn’t as high as you might expect. It’s easy for a homeowner to rent out a storage unit and never even think about it, keeping their stuff there and making monthly payments for years on end. That tends to remain true regardless of whether the overall economy is strong or weak. In an environment in which mall occupancies are declining and technological changes like telecommuting could pose long-term threats to the office and mall REIT spaces, inertia serves self-storage REITs quite well.

Finally, there’s still room for growth. Although demand has been climbing, only about 10% of U.S. households rent self-storage space, according to industry estimates. The potential for further share-price growth plus dividend income is a big draw for REIT investors, and self-storage has a lot of promise.

References & Appendix

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