The self-storage industry tends to be relatively recession-resistant. That's because people and businesses like to collect more stuff than they have space to store, keeping demand growing at a reasonably steady rate. As a result, self-storage properties typically produce stable cash flow, making them ideal options for those seeking a real estate investment option with a lower risk profile.
One easy way to gain exposure to this property market is by investing in a real estate investment trust (REIT). Two of the leading self-storage REIT options are Public Storage (NYSE: PSA) and Extra Space Storage (NYSE: EXR). Here are the bull and bear cases for buying either of these REITs right now.
The case for and against buying Public Storage
Public Storage is the world's largest owner, operator, and developer of self-storage facilities. The industry behemoth has about 2,500 facilities across the U.S., which lease space to more than 1 million customers. The company also owns stakes in Shurgard Self Storage (EBR: SHUR), which has 234 self-storage facilities across seven Western European nations, and PS Business Parks (NYSE: PSB), a U.S. REIT that owns industrial, flex, and office properties.
Those real estate investments generate steady cash flow from rental payments and dividends, which helps support Public Storage's 4.1%-yielding payout. It's a well-covered dividend, only consuming about 75% of the company's funds from operations (FFO).
The REIT complements that reasonably conservative dividend payout ratio with a top-notch balance sheet, which includes an excellent investment-grade credit rating backed by a miniscule leverage ratio of slightly more than 1.0 times debt-to-EBITDA and over $700 million in cash. Those metrics give it lots of financial flexibility to make acquisitions and invest in development projects.
However, one concern with Public Storage is the impact COVID-19 has been having on its operations this year. In the first quarter, the company warned that it had experienced more customer move-outs than move-ins, which will impact income this year. On top of that, the company has slowed its investment pace, including pulling an offer to buy Australia-based self-storage REIT National Storage REIT (ASX: NSR). These issues will negatively impact its FFO over the coming quarters.
The case for and against buying Extra Space Storage
Extra Space Storage has a sizable self-storage portfolio of about 1,850 properties. That makes it the second-largest self-storage REIT behind Public Storage -- measured by their square footage market share in the U.S. -- at 7.5% of the market compared to 9% for its larger rival.
However, one noteworthy aspect of Extra Space's portfolio is its makeup as it manages 37% of its locations for third-party owners. Public Storage, on the other hand, only manages about 55 of its facilities.
Extra Space's business model generates lots of steady revenue from rental payments on its owned facilities and management fees from the other properties. Those stable cash flow sources allow Extra Space Storage to pay an attractive 3.7%-yielding dividend. The company backs that payout up with a solid financial profile, including a healthy 71% dividend payout ratio and an investment-grade balance sheet.
Like Public Storage, the COVID-19 outbreak's impact is a concern because of its effect on revenue and the acquisition environment. Meanwhile, another concern with Extra Space is its balance sheet. While it has a solid investment-grade credit rating, it's not as strong as Public Storage. Because of that, it doesn't have as much flexibility as its larger rival.
A close call
Public Storage and Extra Space Storage both boast having large-scale self-storage businesses along with solid financial metrics. The only major differentiators between the two are the makeup of their portfolios -- Public Storage has two notable equity investments while Extra Space has a large third-party management business -- and the strength of their respective balance sheets.
That later factor tilts the scale in favor of Public Storage, in my opinion. Its top-tier credit rating and ultra-low leverage ratio not only reduce its overall risk profile but also give it lots of financial flexibility to potentially make needle-moving acquisitions in the current environment.