Public Storage YTD: -7% NYSE: PSA Glendale Self-storage provider enjoys strong market, but competitive supply grows faster than demand. Situation With the housing market tilting toward apartment-dwelling, the market for self-storage units has surged. Public Storage is the largest supplier in the market, but other players have engaged in aggressive expansion campaigns by building new facilities. During the most recent quarter, Public Storage missed analyst expectations on both income and revenue. A report from Calabasas brokerage Marcus & Millichap Inc. found strong demand for self-storage, with rents climbing 3.6 percent last year to an average $1.90 a square foot. However, the report said that “supply additions will outweigh demand in 2017.” Public Storage is a real estate investment trust, or REIT, which by law must pay out at least 90 percent of profits to shareholders. During the first half of the year, the company paid out $4 a share, which at current prices works out to about a 3.8 percent annual return. In the company’s annual report, it noted that it usually pays out 100 percent of its taxable income to shareholders. As a result, it can’t save extra cash for investments in new facilities, and must access capital markets routinely. Operationally, Public Storage hasn’t missed the expansion trend. In June the company opened the largest facility in its history. It occupies an entire block in Jersey City, N.J. and offers 3,978 units for rent within driving distance of New York City. Their Words “In our top 20 markets … every market had a lower growth rate than last year. … With respect to the most challenged markets, they remain Denver and Houston.” – Chief Executive Ron Havner on April 26 conference call “We believe that the ‘Public Storage’ brand name is the most recognized and established name in the self-storage industry in the U.S, due to our national reach in major markets in 38 states, our highly visible facilities and our facilities’ distinct orange colored doors and signage. … The ‘Public Storage’ name is one of the most frequently used search terms used by customers.” – 2016 annual report “We certainly had above historical trend-line growth the last four years or so. If you take a 20-year average … it’s about 3.9 to 4 percent, so we’ve been above trend-line through 2016. … So we’re coming back down towards trend line. The second thing is new supply … and the third, which I actually think is probably a bigger factor, is macro factors affecting our customers. … If you look at the aggregate amount of consumer debt in both credit cards, auto loans and student loans, over $3 trillion, that’s up about $800 billion in the last four years. So you’re seeing a variety of things where the consumer, which is basically our customer, is stretched or under stress. … We’ve seen an uptick in delinquent tenant sales for the last two to three quarters and a decline in merchandise sales, locks and boxes. So I’d say it is more than just supply, I’d say that in general the customer is under a little stress.” – Chief Executive Ron Havner on April 26 conference call Analysts & Observers “The development of new self-storage properties in top markets across the U.S. had kicked in by H2 2016, accelerated into 2017 and is expected to peak during 2018. … The supply/demand fundamentals after the Great Recession had driven several years of record growth in revenues and all the metrics that REIT investors love. … It was a virtuous cycle for the big four self-storage names: Public Storage, Extra Space Storage, CubeSmart and Life Storage, and many investors were shocked to see it end.” – Bill Stoller, Seeking Alpha “We think growth will moderate late in the year (2016) and in 2017 as year-over-year comps prove difficult and new supply begins to materialize in a number of markets (e.g., Chicago, Denver, Houston and New York). Estimates for new construction in 2016 and 2017 stand at 600 and 900 new facilities nationwide, respectively, and we think the impact from new supply coming online may be greater than anticipated.” – Jordan Sadler, analyst at LeyBanc, in July 16, 2016 report “It’s important to approach a stock like Public Storage from a long-term perspective, and be willing to ride out the ups and downs along the way. Over long periods of time, there is no reason to believe that Public Storage won’t continue its track record of strong performance. – Matthew Frankel, Motley Fool Average Analyst Recommendation: 3.0 1 Strong Buy 2 Buy 3 Hold 4 Underperform 5 Sell Source: Thomson Reuters
