America is a land of hoarders. We buy stuff that we don’t need and don’t have the space to keep in our houses or apartments. To free up space and relinquish the feeling of guilt we would feel if we actually sold any of our precious belongings we now turn to the self-storage facilities to house our things in an out of sight, out of mind capacity.
In theory, self-storage is a great business concept. You build inexpensive building primarily out of cinder blocks, put them on some vacant land, and accept monthly checks for basically keeping the light on after that.
A key benefactor of the self-storage concept has been Public Storage (PSA). PSA is a real estate investment trust (REIT) that is the largest owner and operating of storage space in the U.S. As reported in PSA’s quarter ended of September 30, 2014, the company had 2,234 self-storage facilities located in 38 states with approximately 144 million net rentable square feet.
In addition to the core U.S. operations, PSA had 188 storage facilities in Western Europe and has interests in commercial rental facilities throughout the U.S.
And while PSA has been chugging along nicely, it will be difficult for the stock to outperform expectations.
PSA Performance
PSA stock has soared over 248% over the past 10-years compared to the S&P 500 which is up only 70% in comparison.
It’s easy to understand why PSA has done so well when you look at rental income and occupancy levels. From 2011 to 2012, PSA saw rental income increase 4.9%, and in the 9-month period ended September 30, rents increased 5.4%. The record low interest rate during the same period make these numbers just that more impressive.
PSA has been able to garner increased rents, and it continues to operate at close to capacity — increasing its weighted average square foot capacity from 91.3% in 2011 to 94% as of September 30. In short, PSA is charging more to people to store their excess stuff and demand is still plenty high.
The overall public storage industry appears to be on a growth path through 2015, with the industry continuing to build capacity to meet demand. This growth is supported by an improving economy, a shift to a more mobile population and what Ronald Havner, the CEO of PSA, has called the “four Ds”: death, divorce, disaster, and dislocation.
PSA’s Growth and Quality Already Reflected In Price
The overall public storage market is highly fragmented with a few dominated players. Companies like PSA are frequently able to acquire attractive facilities at lower cap rates and then re-brand or re-position them as part of its larger portfolio.
PSA is well positioned to keep on outperforming, thanks to its low debt level, strong brand name and market pricing power, which has garnered PSA stock a price-to-estimated-full-year-2014-funds-from-operations of over 23 — a key measure of relative valuation for the REIT industry. This compares to the S&P 500’s current Price/earnings ratio of 19.52.
The current consensus stock price target of $191.75 allows for some price appreciation to the markets current trading range, and PSA Stock offers a 3% dividend yield, to ease the price of holding. Overall, I think PSA is a well-run and financially strong company that will see increased earnings into 2015.
The problem is that everyone else thinks the exact same thing, which makes it harder to earn above-average returns on PSA stock that is already priced to perfection. So, for now, there’s no reason to buy into PSA stock — there are better growth opportunities out there.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
