As one of the first movers in the full-scale self-storage business, Public Storage (PSA 0.26%) gained a foothold in some of the most attractive markets in the US before others dove in, helping it become one of the largest and highest-return-on-equity companies among self-storage REITs. Over last year, Public Storage started flexing its muscle by ramping up acquisitions of mid-sized self-storage companies, tucking them into the Public Storage portfolio, increasing their occupancy, and growing its funds from operation per share. Here's why this recession-resistant company deserves your attention.
Lock up your valuables
If you rent a self-storage unit, you know it can be a handy tool to store valuables and create space in your home or garage, especially in densely populated urban areas. Public Storage seized the opportunity early on before other major self-storage REITs. They accumulated locations in leading markets like LA, San Fransisco, 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 instance, would you really give up your stuff to save on rent? If so, you'd probably be OK when your rent increases a couple of dollars per month. Whether it's nostalgia for your belongings or sheer laziness, customers' commitment to their units creates a recession-resistant business for Public Storage. For example, square foot occupancy rose from 93.4% at the end of 2019 to 94.5% at the end of 2020 during COVID.
Public Storage's first-mover advantage reveals itself in the form of industry-leading 35%-plus returns on equity. Other self-storage REITs like Extra Space Storage (EXR 1.15%) and CubeSmart (CUBE 0.89%) generate ROEs of 27% and 9%, respectively, meaning Public Storage earns more profit relative to its assets and liabilities than its rivals do.
At the beginning of 2021, Public Storage vowed to ramp up its acquisitions, and it followed through with two major purchases: ezStorage and its 4.1 million square feet of rentable 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 involves finding great deals, rebranding, then ramping up 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 a lot more money from the same properties than smaller rivals can.
The properties Public Storage bought in 2020 registered 64.5% occupancy that year. By 2021, they'd 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 core funds from operations (CFFO): the cash left over after paying necessary expenses, plus gains and losses on the sale of real estate. The company's CFFO per share rose to $12.93 in 2021 from $10.61 in 2020 -- and only about $0.42 of the $2.32 increase came from acquisitions. Even pre-pandemic, CFFO per share was $10.75 in 2019, and a fragmented self-storage industry could allow Public Storage to continue its expansion in the years ahead.
Public Storage's balance sheet has about $940 million in cash, $7.4 billion in debt, and 2021 free cash flow of nearly $2.3 billion. That financial strength should allow Public Storage to take advantage of future deals. The company has a below-industry average debt to equity ratio of 76%, giving it both the scale and ability to raise capital where other self-storage bidders may not.
Is Public Storage a buy?
The company's stock has tumbled quite a bit over the last few weeks, likely because of rising interest rates. Investors may be skeptical that Public Storage can continue acquiring without borrowing at higher rates. Through its impressive ROE and ability to ramp post-acquisition occupancy, it should be able to continue acquiring and still earn a return greater than its cost of capital.
On top of that, Public Storage holds 7.2 million shares of PS Business Parks (PSB), which recently agreed to be bought by Blackstone (BX -1.13%) for $187.50 per share . Public Storage will receive pre-tax proceeds of $2.7 billion to pay down debt or fuel opportunistic acquisitions.
After its recent fall, the shares trade at a price-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. It seems crazy that a company in such an attractive business that made accretive long-term acquisitions, has a clean balance sheet, and additional cash coming in would trade at a nearly unchanged valuation. The lower share price could be a great entry point for investors. Plus, in an economic downturn, the shares could be an outperformer.