Summary

• Public Storage is the world’s largest operator of self-storage facilities, serving more than one million customers in 38 states, particularly in the top 20 metropolitan areas.
• The company has equity interests in PS Business Parks and Shurgard Europe.
• Public Storage has embraced the digital age by using artificial intelligence to target advertising to drive customers to its enhanced website and nationwide call center.

Our SWOT analysis is meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company’s business, can we start to understand whether or not to invest our hard earned money.

Introduction to Public Storage

Real estate investment trust Public Storage (PSA) is the world’s largest owner, operator and developer of self-storage facilities, serving more than one million U.S. customers in 38 states with 162 million net rentable square feet with large exposure to the nation’s top 20 metropolitan areas. The company has enhanced its online presence through a redesigned website that offers user-friendly information and promotions and drives customers to its call center. Public Storage reinsures outsourced insurance policies for customers. PSA sells equipment such as locks and cardboard boxes.

Public Storage has a 42% equity interest in PS Business Parks, Inc. (PSB), a publicly-held REIT with 28.2 million rentable square feet of commercial space. As of May 24, 2019, the market value of PSA’s share of PS Business Parks was $1.899 billion.

The company has a 35% equity interest in Shurgard Self Storage SA (SHUR), or “Shurgard Europe,” which was publicly listed in October, 2018 on Euronext Brussels. SHUR owns 232 self-storage facilities with 13 million net rentable square feet in seven countries. Public Storage will receive dividends of $34 million and a license fee of $3 million annually. As of May 24, 2019, PSA’s 31.3 million shares were worth $1.05 billion at the closing price of €29.95 or $33.57

Public Storage is in the S&P 500 and FT Global 500.

Strengths

With an equity market capitalization of $35.8 billion and a Standard & Poor’s credit rating of A, Public Storage has the financial strength to effectively use the Internet and online advertising to market its well-known brand, maintain attractive properties and grow its business by expanding existing facilities, acquiring properties from competitors and through investments in other ventures.

• PSA conservatively manages a business model that attracts and retains customers by effectively marketing their brand nationwide through online advertising, a strong Internet presence via a mobile-friendly website and a national call center.
• Public Storage has a proven track record of success in growing the business and profits. Most of the company’s 5,600 employees are directly involved in property management. 
• PSA has successfully issued preferred stock as a cost-effective way to finance its expansion and by using its credit revolver only for temporary “bridge” financing. PSA has recently begun to issue debt securities.
• Public Storage has expanded into commercial real estate through PS Business Parks and has broadened its geographic footprint through Shurgard Europe in the Netherlands (61 storage facilities), France (56), Sweden (36), United Kingdom (31), Belgium (21), Germany (17) and Denmark (10).

Weaknesses

Public Storage is challenged by “boom and bust” sub-sector business cycles based on periods of self-storage oversupply due to relatively low barriers to entry, which requires excellent long-range planning and nimble decisions in each of its geographic markets.

• When faced with cyclical periods of oversupply, management must tailor local pricing and marketing in light of stronger competition.
• Periodic infusions of “start-up” competition are lured by a business that appears simpler than it is. Anticipated profits do not always meet expectations, creating opportunities for PSA to acquire facilities from less experienced owners who “want out.”
• These cycles in the self-storage business can be confusing to investors. When storage oversupply occurs, it may appear that PSA’s business model is faltering, when in fact it is a normal business cycle that enables the company to selectively acquire distressed properties.
• One potential weakness in the company’s organization is the ongoing involvement of the family of company founder Wayne Hughes, now 85, and their potential control of the company. The family owns 14.5% of PSA’s common stock and the company’s declaration of trust permits the Hughes Family to own up to 35.66% of PSA’s outstanding common shares while it generally restricts the ownership by others to 3%. The Vanguard Group controls 11.3% of PSA shares, BlackRock, Inc. (BLK) controls 9.2% and State Street Corporation (STT) controls 5.2%.

Opportunities

Public Storage is upgrading their facilities and is fully embracing digital technology through a redesigned website that is driving increased online inquiries and sales through a 100% paperless system and providing a stronger platform for possible value-added digital services.

• Public Storage has successfully refreshed their fifth-generation website and they are now well-suited to maximize their national presence on the Internet using artificial intelligence to target advertising, drive online inquiries and engage customers through their call center.
• The IoT (Internet of Things) and 5G wireless technology will make their way into the self-storage business, with value added services such as sensors that monitor conditions inside each unit.
• PSA has embarked on a $500 million renovation program that eventually refresh all facilities. These upgrades are improving their competitive advantage by creating a more appealing atmosphere.
• One possible area of natural expansion for their business customers is to expand the size of available units to create mini-warehouses in areas where there is demand. This could be accomplished through onsite expansions or through a joint partnership with an industrial REIT.

Threats

Public Storage operates in a very fragmented REIT sub-sector that looks easy, and is therefore attractive to private investors, leading to periodic increases in the supply of storage facilities in some of the markets served by PSA.

• Significant competition is a threat in the fragmented self-storage business. PSA has about 7% of the market. The top five companies combined have 15% of the market. PSA’s largest competitors are Extra Space Storage (EXR); U-Haul (UHAL), CubeSmart (CUBE), Life Storage (LSI); Simply Self Storage (NSA).
• Risk factors listed in PSA’s 2018 10-K include damage to facilities through natural disasters such as earthquakes, floods, hurricanes and tornadoes. 429 (17.7%) of PSA’s 2,429 U.S. storage facilities are in California, representing 18.2% of net rentable square feet. Texas accounts for 12.5% of PSA’s facilities and 13.6% of net RSF and Florida comprises 11.8% of facilities and 12.1% of net RSF.
• Some of the economic risks cited by PSA were unfavorable changes in tax policies, such as REITs’ exemption from federal income tax; a repeal of California’s Proposition 13 annual 2% cap on real estate tax increases; environmental regulations; and currency exchange risks related to PSA’s Shurgard Europe business.

PSA’s Long-Term Business Outlook

Public Storage should continue to build on its solid foundation of managerial experience, financial strength and an effective execution of its business plan, led by new Chief Executive Officer Joe Russell and Chief Financial Officer Tom Boyle. PSA should be able to maintain its commanding position in the highly competitive self-storage business.  

PSA is not immune to a recession, but it has capably navigated past economic downturns. Sometimes the rental of a storage unit can be part of a cost-effective plan to manage a relocation or the downsizing of a family or business. PSA will continue to effectively use flexible financing to grow its business through the investment of some of its free cash flow, the use of its credit revolver for temporary bridge loans and through the periodic issuance of preferred stock (and commercial paper when attractive).

Public Storage may find additional natural expansions of its business model (like PS Business Parks and Shurgard Europe), such as offering larger mini-warehouses or outsourcing larger scale storage services for businesses and governments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.