While the self-storage business is highly fragmented and Public Storage (PSA, Financial) only needing around 10% of the market to be the leader, the long-term prospects remain very good. Self-storage is a highly fragmented industry with the five largest players owning 19% of U.S. inventory, with the remaining 81% being owned by a large selection of regional operators and solopreneurs. Despite that, Public Storage has real estate assets totalling $15.3 billion, of which somewhere in the vicinity of 90% are performing.
The self-storage industry (as a whole) outperformed all other real estate asset classes during the global financial crisis and is considered by most to be a recession-proof sector as the demand is driven in part by difficult life events. One caveat would be interest rates keeping more people in their homes and less likely to get storage.
A history of success
Public Storage was founded in 1972 by B. Wayne Hughes and Kenneth Volk Jr. Hughes partnered with Volk with a $50,000 initial investment. The company has grown into the largest self-storage business in the United States.
The company is set up as a real estate investment trust and, as such, is required to distribute a significant portion of its income to shareholders as dividends. Also, instead of net income, the financial metric most used with this industry is funds from operations. As far as the dividends, Public Storage has been paying them for 27 consecutive years and recently bumped the quarterly payment to $3 per share. That puts the yield just under 4.30%.
Current operations and sustainability initiatives
As of June 2023, Public Storage operated over 2,877 self-storage facilities with about 1.8 million customers across 208 million net rentable square feet. In the last 12 months, this has equated to $4.2 billion in revenue at extremely high margins, with $3.1 billion in net operating income. The core self-storage rental business accounts for around 95% of its revenue.
Like many companies, Public Storage has been focusing on sustainability initiatives. Some of its facilities utilize solar power, and there has been a push for more energy-efficient designs in new properties. Energy, carbon, water and waste intensities are 82% lower than other property types on average.
Future growth and acquisitions
By the end of 2023, the company is expected to close on a $2.2 billion acquisition of Simply Self Storage. This will add 152 properties with 91% occupancy across 11 million net rentable square feet at 69% net operating income. Under the leadership of Public Storage, the NOI is likely to be pushed higher, which should be accretive to future results next year.
Understanding storage demographics
So will people keep renting storage units? Yes. While Public Storage is the leader, other major public competitors include Extra Space Storage Inc (EXR, Financial), CubeSmart (CUBE, Financial), Life Storage Inc. (LSI, Financial) and National Storage Affiliates (NSA, Financial) target similar prime markets.
With the typical storage customer middle-aged, middle-class and residing in an urban area, they use the space to accommodate lifestyles and living needs. Approximately 50% rent units for less than six months, which 30% utilize them between six months and 2 years. The remaining 20% are long-term renters of more than two years.
There are approximately 50,000 self-storage facilities in the U.S. with a total rentable space of around 1 billion square feet. The total addressable market is around $48 billion and expected to grow to $75 billion by the end of the decade. Increasing population in urban environments causes smaller and increasingly expensive cities with more renters who move around more frequently, which is why the segment will hold through any recession on the horizon.
Valuation and future prospects
During the second quarter, the company had record customer move-in volume growth of 13.6% and same-store net operating income growth of 6.6%. It has also set itself apart from the market in terms of same-store operating income with a compounded annual growth rate nearly double that of the real estate sector average.
Public Storage aims to drive growth by acquiring new properties and expanding and upgrading existing sites. Geographic expansion also remains a key strategy, particularly in major metro markets where it already has a strong foothold and where prices can continue to rise to meet inflationary demands. That said, this is likely not going to be much more than a strong income-producing investment.
Financial health and dividend prospects
Despite a growing unsecured debt burden, the interest expense remains low and the operating cash flow remains strong. In fact, cash from operations has grown from $1.4 billion to more than $3.2 billion. It seems to be just a matter of time before the company posts much higher earnings consistently and the market revalues the stock higher. In that time, it will likely pay out a minimum of $120 in dividends at the current rate; however, this number could easily rise as the company grows further.
Long-term growth projections
Let’s just say that year-over-year growth in earnings will run around 5% for the next decade. That means Public Storage could likely earn over $200 a share in net income during that time period and by trading at around 10 times future earnings based on today’s price. Historically, the company has carried a price multiple of around 23 times earnings. If that holds, then in the years to come, as Public Storage’s earnings per share hits $24 a share, the price could be in the $550 range.
In 2014, Public Storage paid out $4.40 in dividends. If history repeats itself in the next decade, investors could be looking to receive at least double the amount of income as they would today. Add all that together and the price definitely seems like a bargain.
