Industry Giant Public Storage Flexing Muscles

From the perspective of Public Storage, the self-storage industry is doing just fine. Although the Glendale real estate investment trust practically founded the sector as an asset class and is the largest self-storage operator in the world, it aims to become much bigger. Founded in 1972, the company reported ownership interest in 2,396 facilities in 38 states and seven European countries as of June 30, representing 152 million square feet of rentable space. Occupancy stood at 95 percent. And so far this year, Public Storage has reported buying 31 properties in six states at a cost of $277 million. In addition, the company has started developing storage centers. “When you kind of look at the big picture of the industry from where it was four years ago, rates are higher, occupancy is higher and development is starting,” said Chief Executive Ron Havner during an Aug. 1 conference call. “We have a number of people in the development group that are looking at sites in certain identified key markets.” The company did not make an executive available for comment. Public Storage has a market capitalization of almost $30 billion, nearly five times that of its closest competitor, Extra Space Storage in Salt Lake City. The stock is trading near its all-time high of $175.51 and closed Oct. 15 at $169.88. The Self Storage Association, an Alexandria, Va. trade organization, estimates there are more than 48,500 facilities in the countryf. James Hanrahan, managing partner at RHW Capital Management Group LLC, an investment firm that acquires self-storage facilities based in Orange, said the five biggest REITs, including Public Storage, own about 10 percent of that total. And they all have money for acquisitions. “I won’t say these are the best of times, because I’m hoping they will get better, but it’s pretty wild right now,” Hanrahan said. “There is a lot of institutional equity money in the market.” Public Storage often makes deals for facilities that are fully entitled and under construction or newly completed, focusing on the 40 largest U.S. metro markets, he said. Ryan Burke, an analyst who covers Public Storage at Green Street Advisors, a real estate research firm in Newport Beach, said the demand for self-storage acquisitions has driven up prices to the point that Public Storage also has started building new facilities instead of acquiring them. “Public Storage recently turned up the dial on its development program as an incremental growth driver,” he said. Fueling all this, Hanrahan said, is Public Storage’s low cost of capital. The company offers 12 different preferred shares. Each one is a secondary offering that raises money to acquire facilities and then promises a rate of return, usually in the 5 to 6.7 percent range. Institutional investors are the main buyers. But Burke, who called Public Storage “the industry bellwether,” said some smaller REITs are gaining ground, creating a competition for investment dollars. “Investors often consider the sheer size of Public Storage, which has benefits and drawbacks,” he said. “The main drawback is that it is simply more difficult to grow via acquisitions and development, which is a sticking point for some investors.” Hanrahan, however, believes consolidation will continue, providing a growth engine for Public Storage and a profitable exit strategy for plenty of small operators and entrepreneurs. “I don’t think there’s a limit to how big these operators can get,” he said. “The four or five biggest REITs have resources and eventually they will own 20 to 40 percent of the market.”