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Public Storage (NYSE: PSA), the nation's largest operator of self-storage facilities, reported first-quarter results that edged market expectations but also offered evidence that its business was seeing a downturn in the pandemic.
The Glendale, California-based company, which reported $2.46 billion in 2019 revenue, is a real estate investment trust (REIT) with interest in 2,492 facilities in 38 states and 234 more in Western Europe through its 35% interest in Shurgard Self Storage (EBR: SHUR).
In a Thursday, April 30, press release, the company reported FFO (funds from operations) per share of $2.58 for the three months ending March 30 on revenue of $716.1 million. Occupancy of its 170 million rentable square feet in the U.S. was at 92.7% at quarter's end. Those were at or near levels of the year-before quarter.
"The need for self-storage, even in disruptive times like these, is yet again being validated," Public Storage President/CEO Joe Russell said in an earnings call on Friday, May 1.
Then the coronavirus arrived
That's the good news. Not so positive is that the company decided to stop its annual increases for new rentals, which it said is a significant source of new revenue, and that move-in volume began dropping as the pandemic worsened and prompted stay-at-home orders across the country.
COVID-19 also is delaying the company's auction sales, increasing absentee rates for onsite managers thereby forcing office closures, and prompting the use of social distancing, masks, and gloves.
Public Storage is also paying an extra $3 per hour and enhancing paid time off benefits for property managers and, according to its first-quarter earnings report, "will provide additional financial support to selected employees to enable them to continue working." All that will lead to increased operating expenses, the company said.
Time to question REIT investments?
In the earnings call, Public Storage said April activity was down 20% from March, despite decreases in rental rates of about 20% offered to help drive volume. And the company said in the press release that it expects to see reductions in rental and net operating income for the rest of the year.
Public Storage stock dropped 3.0% on Friday, May 1, the day after the results were announced. Other self-storage REITS also have had rough rides lately, including Life Storage (NYSE: LSI), CubeSmart (NYSE: CUBE), and Extra Space Storage (NYSE: EXR).
So, is it time to sour on the sector?
Not on Public Storage, according to its chief executive. Russell told analysts in the earnings call that his company has been through significant economic cycles in its nearly 50 years in business, "and this one will likely rank as one of the most extreme."
But, he said, "We have a proven playbook to maneuver through severe economic and natural disasters. Our teams are battle-tested, our product is resilient, and we have intentionally crafted a fortress balance sheet to not only survive but thrive in times like these."
But he's not sure about the competition, saying that he wouldn't be surprised if more recent entrants who have helped create "an abundance of new supply" in the self-storage market have owners and ownership structure "that may not be well suited to deal with something like this."
A time to capture assets?
Because of that, Public Storage might be looking to capture assets at a price point they think is "much more attractive than it's been over the last, say, three or four years," Russell said in the earnings call.
He said, "We're starting to hear … rumblings around assets that I would say are underwater, where they've been funded through a certain level of debt and the valuations are below that value. … The balance sheet's ready for it, and it's ready in a meaningful way. So we'll see how that plays through."
Millionacres on storage REITs
A Millionacres report on storage REITS last October discussed the continuing demand for space to put stuff that has helped drive the proliferation of such facilities and made some recommendations. And we posted a review of why they're attractive as an investment for tax reasons but also sensitive to market forces because of the short-term nature of their rentals a couple months earlier.
So, like everything else in these times of the coronavirus, it becomes a waiting game to see whether the self-storage industry recovers along with an economy full of individuals and businesses with storage needs who have made the competitive sector thrive so far.
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