How This Self-Storage REIT Adds Value

As one of the first players in the large-scale self-storage sector, public storage (PSA 0.20%) gained a foothold in some of the most attractive markets in the United States before others plunged, helping it become one of the largest and most profitable companies among self-storage REITs. Over the past year, Public Storage has begun to build muscle by accelerating acquisitions of mid-sized self-storage companies, integrating them into Public Storage’s portfolio, increasing their occupancy and expanding its operating funds per share. Here’s why this recession-proof company deserves your attention.

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Lock up your valuables

If you rent a self-storage unit, you know it can be a handy tool for storing valuables and creating space in your home or garage, especially in densely populated urban areas. Public Storage seized the opportunity early on before other large self-storage REITs. They racked up locations in prime markets like Los Angeles, San Francisco, New York and Miami, where they placed facilities in prime locations that commanded above-average rents.

If you have a self-storage unit, you probably also know that it’s hard to part with your unit, even if you wanted to. For example, would you really give up your stuff to save on rent? If so, you’d probably be okay with your rent going up a few dollars a month. Whether it’s nostalgia for your possessions or sheer laziness, customer commitment to their units creates a recession-proof business for Public Storage. For example, square foot occupancy dropped from 93.4% at the end of 2019 to 94.5% at the end of 2020 during COVID.

Public Storage’s first-mover advantage is revealed in the form of an industry-leading return on equity of more than 35%. Other self-storage REITs like Extra space storage (EXR -0.16%) and CubeSmart (CUBE -1.02%) generate ROEs of 27% and 9%, respectively, which means that Public Storage makes more profit against its assets and liabilities than its competitors.

In early 2021, Public Storage pledged to accelerate its acquisitions, and it followed with two major purchases: ezStorage and its 4.1 million square feet of leasable space for $1.8 billion, followed by All Storage and its 7.5 million square feet for $1.5. billion. The company’s acquisition strategy is to find good deals, rebrand, then increase occupancy where previous management could not. Public Storage’s scale gives it a marketing department whose powerful online platform can sell storage units without phone calls or paperwork, helping the company make significantly more money from the same properties than its larger competitors. small.

Properties that Public Storage purchased in 2020 saw 64.5% occupancy that year. By 2021, they had climbed to 88.2%. Overall, Public Storage’s weighted average occupancy per square foot was 96.3% in 2021, compared to 88.2% for Life Storage and 92% for CubeSmart.

REITs like Public Storage measure their performance in base operating funds (CFFO): the money left over after paying necessary expenses, plus gains and losses on the sale of real estate. The company’s CFFO per share rose from $10.61 in 2020 to $12.93 in 2021 — and only about $0.42 of the $2.32 increase came from acquisitions. Even before the pandemic, CFFO per share was $10.75 in 2019, and a fragmented self-storage industry could allow Public Storage to continue expanding in years to come.

Public Storage’s balance sheet has approximately $940 million in cash, $7.4 billion in debt, and 2021 free cash flow of nearly $2.3 billion. This financial strength should allow Public Storage to take advantage of future agreements. The company has a debt-to-equity ratio below the industry average of 76%, giving it both the scale and ability to raise capital where other self-storage bidders could not.

Is public storage a purchase?

Shares of the company have fallen sharply in recent weeks, likely due to rising interest rates. Investors may doubt that Public Storage can continue to acquire without borrowing at higher rates. With its impressive ROE and ability to increase occupancy after acquisition, it should be able to continue acquiring while earning a return above its cost of capital.

In addition, Public Storage owns 7.2 million shares of PS business parks (PSB -0.45%)which recently agreed to be acquired by black stone (BX -2.89%) for $187.50 per share. Public Storage will receive $2.7 billion in pretax proceeds to pay down debt or fuel opportunistic acquisitions.

After its recent fall, stocks are trading at a price relative to cash flow – like P/E, but adjusted for non-cash items like depreciation and working capital – of just under 21. That’s about the same multiple it had before its 2021 acquisitions. a healthy balance sheet and additional liquidity is trading at an almost unchanged valuation. The decline in the stock price could be a great entry point for investors. Additionally, in the event of an economic downturn, equities may perform better.

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