When it comes to the self-storage business, there are a few big players, but Public Storage (NYSE: PSA) is still in a league of its own. In fact, Public Storage is larger than its next three competitors combined in terms of market capitalization.
While the company has a leading market share, self-storage is a cyclical industry and the stock isn't exactly cheaply valued. Here's a rundown of Public Storage's business, risks, and other key information, and whether the company is a good buy for long-term investors as 2018 comes to a close.
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Public Storage's portfolio and business
One of the largest landlords of any kind in the world, Public Storage, which is structured as a real estate investment trust (REIT), operates about 142 million square feet of rentable storage space and another 28 million square feet through its PS Business Parks subsidiary. At the end of 2017, the company owned about 2,400 U.S. self-storage facilities and 98 business parks, and had an interest in 222 European storage facilities through its roughly 50% ownership of Shurgard.
Public Storage grows through a combination of acquisitions and ground-up development. Through the first three quarters of 2018, Public Storage acquired 16 self-storage facilities for a total of $107.8 million and also completed 16 development and expansion projects for a total investment of $278 million. In recent years, the company's spending has shifted in favor of development, as it has higher potential for creating shareholder value in the current market environment.
Self-storage (and Public Storage in particular) is an attractive business for a few reasons. For one thing, it's a "forever" business, meaning that people will always need secure places to store their belongings. Furthermore, self-storage has an extremely attractive cost structure, as its warehouse-like properties have relatively low construction costs, maintenance expenses, and operating costs when compared with most other types of commercial real estate. In fact, Public Storage has said that it can break even with just about 30% of its properties occupied (the occupancy rate is currently well over 90%).
In addition, Public Storage has one of the most attractive balance sheets of any REIT in the market. The company avoided debt completely until a couple of years ago, when it decided that borrowing costs were simply too cheap to ignore. Even so, total liabilities of about $1.8 billion are a drop in the bucket for a REIT with a market cap of more than $34 billion.
Risks to know about
No stock that is capable of market-beating returns is without risk, and Public Storage certainly isn't an exception. With that in mind, here are a couple of major risk factors investors should be aware of before buying.
Self-storage is a cyclical business, meaning that it tends to do well during strong economies and tends to do poorly during weaker economic climates. With short lease durations (most self-storage leases are month-to-month), it's easier for tenants to vacate during tough times than with most other types of commercial real estate. The low-cost structure of the business, which I discussed earlier, helps to mitigate this, but if the economy falls into recession, it's a safe bet that self-storage profits will drop.
Interest rate risk is another major risk factor to know. Public Storage has an extremely small debt load, so the company doesn't need to worry about interest rates too much from a cost-of-borrowing perspective. Having said that, rising interest rates tend to put pressure on all income-based investments like REITs. The 10-year Treasury yield is a good indicator for REITs, and if it rises considerably, the real estate sector will likely come under pressure.
Valuation and income
Public Storage is an excellent income stock, with a strong track record of dividend increases. Although the payout hasn't been raised every single year, the company has done a great job of increasing its dividend over time. In fact, since 2000, Public Storage's dividend has grown by roughly 800%. Based on the current share price, Public Storage's dividend translates to an annualized yield of about 4.1%, well in excess of the S&P 500 average.
From a valuation standpoint, Public Storage trades for 18.9 times its last 12 months' funds from operations (FFO). This is certainly not cheap by any means, but given the company's stable income, industry-leading position, and strong balance sheet, the stock seems fairly valued. Plus, it's also worth mentioning that so far in 2018, FFO has grown by nearly 10% year over year, which also helps justify the relatively high valuation.
Public Storage has a market-leading position in a business with an extremely attractive cost structure. The company generates an excellent income stream for shareholders, and still has lots of room to grow in the years ahead. In a nutshell, Public Storage is a low-risk income investment that also has the potential to deliver strong total returns for investors over the long run. That's why it's a part of my own portfolio, and why I plan to hold the stock for decades to come.
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