Public Storage’s Rent Hikes Come at the Wrong Time By JACQUELINE FOX Staff Reporter Just five months ago, stock in Glendale-based Public Storage Inc. was selling at close to record levels at $39.29 per share and, while other companies were cutting back on their advertising expenses, it was boosting its ad spending by more than $6 million per year. But things have changed: The company reported a 3.5-percent decrease in rental income for the second quarter along with a 4.7-percent increase in operating costs. At the same time, stiff pricing competition Public Storage hadn’t anticipated when it decided to boost its rates two years ago has come back to haunt it, analysts say. Public Storage reported lower than expected earnings of $80.7 million on revenues of $212.5 million in the second quarter, compared to $82 million on revenues of $197.6 million for the same period in 2001. Consecutive-quarter declines were even sharper with net income for the first quarter of 2002 at $87.5 million on revenues of $219.2 million. As a consequence, analysts have downgraded the stock from “outperform” to “neutral” or, in some cases, “sell.” Many say an over-aggressive hike in rental fees in the spring of 2001, combined with a weak and still unpredictable economy, have led to declines in same-store sales for the self-storage operator. Public Storage’s stock price has fallen about 10 percent since the beginning of the year, trading at $32.49 on Aug. 30. Banking on the laws of supply and demand, Public Storage raised its rental rates and put an end to discounting programs when its facilities were found to be running at near-full capacity at the beginning of 2001. To insure those capacity levels stayed where they were, it also spent heavily on a national TV ad campaign for the first time. But the strategy appears to have backfired. The volume of calls to the Glendale call center initially increased after the first TV spots appeared in summer of 2001, but quickly fell off once the ad campaign ended a few weeks later. Harvey Lenkin, president of Public Storage, said the economy had less to do with the drop in same-store sales than with the rental rate increases. He called them “a mistake” and said the company should have run the ad campaign longer than it did. Lenkin said plans are in the works to resume both the discount programs and the TV ads. “I do not attribute 100 percent of our decline in same-store sales to the overall economic situation,” Lenkin said. “We made some errors in the marketing campaign. We stopped it too early and we are getting it back again.” John Sheehan, an analyst with St. Louis-based A.G. Edwards & Sons, agreed the price hikes were probably too aggressive. He disagreed, however, with Lenkin’s statement that the national economy had little to do with the downturn. “Clearly the slowdown in the economy has made consumers more cautious about where they are going to spend their money,” Sheehan said. “Self-storage rentals are a luxury item for most people and, even if the price hikes were implemented at what should have been the beginning of the height of the season for the market, I think, in hindsight, they pushed rents too far.” At the time of the hikes in the spring of 2001, same-store occupancy rates at the company’s roughly 1,380 facilities were just over 90 percent. But the 11.1-percent rent increases to an average $12.30 per square foot impacted both new and existing customers, and were simply too much for either investors or consumers to bear, driving occupancy rates closer to 86.4 percent. Today, according to Sheehan, the focus is on repairing the damage. But that will take some time. “What they are going to do now is, when prospective renters call in to their call center, they might be offered discounts right over the phone,” said Sheehan. “And remember, they don’t operate in a vacuum. They have competitors, and I think most of their competitors are also doing the same because they realize the economy is weaker and people are just not willing to spend where they don’t have to.” Public Storage also has 37 facility construction projects either in the pipeline or set to begin by year’s end, representing approximately $250 million in capital expenditures, $89 million of which was already spent by June. Lenkin said all the expansions and new facility construction are still on track but Sheehan did not rule out the possibility those plans could change, depending on third- and fourth-quarter results.
