In this industry, well-run companies manage profit margins anywhere from 25% to 40%. Yet this industry passes the Peter Lynch tests of investing in an idea that you can illustrate with a crayon, as well as investing in a business that a monkey could run. And, along with keeping your money with one of these companies, you can throw in your old records, books, and power tools.
This is the self-storage business. It offers one of the only solutions for those who have stuff but nowhere to put it, which gives the companies a stable and sustainable business. And, given the industry's fragmentation (the top 10 companies operate only 11% of facilities), choosing the right self-storage operator could result in long-term gains. But which company has the best shot at winning such a storage war?
Two storage companies have a jump on the competition. Here are their advantages and weaknesses:
Public Storage (NYSE:PSA)
Public Storage is the largest in the business, and its financials show the benefits of that brand recognition. Last year, while it spent 30% less on advertising, revenue increased over 5% because of higher rents and higher occupancy rates. The company only lacks 12 states in its national footprint, and it also operates internationally. For a customer base that moves frequently, having brand awareness no matter where its users go is a definite advantage over more regional companies.
However, the company is also exposed to much more real-estate risk than a pure-play self-storage company, as it runs commercial business parks that made up about 8% of net income last year. Additionally, the Hughes family owns a significant 16% of Public Storage, and while that may incentivize the family to grow the value of shares, there are also some potential conflicts of interest. For example, the family uses the Public Storage brand for their own Canadian storage business, even though Public Storage receives no profits from that operation.
Extra Space Storage (NYSE:EXR)
Extra Space Storage also had a great 2013 in terms of revenue, which was up 27%. But expenses also increased 22%, though a bulk of that boost was due to acquiring 78 properties. As a point of differentiation, Extra Space wants to expand its management of properties, as opposed to outright owning all of its storage facilities. This strategy can expand its brand without the large capital cost of purchasing property, while also allowing the company to determine whether it should acquire a property via an intimate knowledge of how a location will perform.
On the negative side, Extra Space carries the highest relative debt of the storage companies, about $2 billion, which places its debt-to-equity ratio at 1.1. This meant $73 million in interest payments last year, from $520 million in revenue. Debt is never inherently bad, but if Extra Space makes any poor acquisitions, repaying such debt could become cumbersome.
Smaller storage companies could make for potential acquisition targets, or simply great bets on organic growth given the industry's intense fragmentation. As with any investment, make sure you have a great grasp on the value of the company. Many of these storage companies are expensive based on a variety of traditional measures; for example, the price-to-earnings ratios are all above 30. Even if industry dynamics and company expertise favor growth, an investment should be based on growing the present value.