High Demand Means Buy Time at Public Storage

Executives with Public Storage discussed acquisitions with research analysts during their conference call on third-quarter earnings.Joseph Russell, chief executive of the Glendale real estate investment trust focused on storage space, said during the Nov. 5 call that the company was poised to have a strong year in buying new units.

Whereas early in the coronavirus pandemic when a number of sellers were “reticent” to bring product onto the market, the reverse is now happening. Sellers see a good opportunity to make deals, Russell said, adding there were a number of factors as to why.“One is, it’s still a very good time to do a trade,” Russell said. “There are very low interest rates; (the) availability of capital, there’s a lot of capital sitting on the sidelines that has been anxious to get into the storage sector. And frankly, the storage sector continues to perform well.”Russell described the quarterly results as “solid.”In the third quarter ending Sept. 30, the company reported net income of $247 million ($1.41 a share), compared with $337 million ($1.93) in the same period a year earlier. Revenue dropped by 2.7 percent to nearly $612 million.

The share price has increased in value by 7 percent since the start of the year. The share price closed at $224.52 on Dec. 2. Public Storage trades under the symbol PSA.

Analysts who follow Public Storage were pleased with the quarterly results.Jonathan Hughes, an analyst with Raymond James & Associates, said in a research note that Public Storage reported third-quarter results that surpassed expectations and kicked off a strong start to earnings season for self-storage REITs.

Todd Thomas, equity research analyst at KeyBanc Capital Markets, wrote in a research note that while same-store growth came up short versus Wall Street expectations, it appeared that rental income growth would be positive in the fourth quarter.

Additionally, Thomas wrote, the company had spent $716 million during the third quarter and into October on acquiring 58 storage facilities, which included a 36-site portfolio in 13 states of which 12 are still under construction and expected to be closed on next year when they open.“I would call them Class A properties in very good locations, and we’re very excited to bring them into the portfolio knowing that we’re looking for opportunities to lease-up properties because we have very good customer demand,” Russell said during the conference call.

That customer demand was reflected in the move-in and move-out numbers that the executives shared.

High occupancyChief Financial Officer Tom Boyle said in the conference call that during the third quarter the move-in rate increased by 8.2 percent. Russell said that on average during the quarter, the move-out rate declined by 12 percent to 15 percent each during July, August and September. Public Storage had an average occupancy rate of 95.5 percent in the third quarter.“And dissecting the geographies, the customer tenures, the customer segments with which move-outs are lower, it is really across the board and clearly being driven by the current health care environment,” Russell added.Ki Bin Kim, an analyst with Truist Securities Inc., called the 8.2 percent growth in move-in rates an “outstanding comeback” by Public Storage.

“(Year-over-year) this was a significant improvement from 2019’s -3.3 percent and second quarter 2020’s -13.9 percent,” Kim wrote in a research note. “It’s the best growth rate since 2015.”The icing on the cake to Public Storage’s strong third quarter, was, to Kim, the purchase of the 58 stores during the quarter and October. Those transactions allowed it to put its under-levered balance sheet to use, Kim wrote in the research note.

In a note from late October on the public storage REIT market, Kim asked what would happen if Public Storage put its balance sheet toward a major acquisition.

“We certainly don’t have that modeled in,” Kim wrote in the note. “But if PSA (and other storage operators) see stabilizing internal growth trends, stocks prices at healthy levels and balance sheets in pristine shape, we see large scale acquisitions becoming more of a reality.”During the conference call, Russell said there has been a window of opportunity that has increased over the last month that sets the company up well to have an active 2020.

“The things that we continue to do are look for assets that are particularly well positioned from a location and quality standpoint that meet our requirements relative to location and opportunity to round out presence, whether they’re in our prime core markets or other markets that we want to add additional product to,” Russell said.