PS Business Parks (NYSE: PSB) has done a masterful job creating shareholder value since its spinoff from self-storage real estate investment trust (REIT) Public Storage (NYSE: PS) in 1998. The industrial REIT focused on business parks has grown a $10,000 investment around the time of its formation into more than $140,000. That works out to an impressive 12.2% average annualized total return, crushing the performance of the S&P 500 during that time frame, as the broader market's total return has averaged 7.8% annualized.
While past performance is no guarantee of future success, the REIT has proven it can enrich its investors faster than the broader market. Here's a look at whether that implies it can turn its investors into millionaires someday.
The magical math to $1 million
While any investor would love to hit the jackpot and turn a relatively small initial investment into a $1 million windfall, those are rare occurrences. However, it's quite possible to grow a reasonably sized investment into a $1 million nest egg over time, thanks to the miracle of compounding.
For example, a $10,000 investment in an S&P 500 Index Fund has historically compounded its way to $1 million in about 46 years, assuming the market produced a 10% average annualized total return. Boost the return, and an investment can mint millionaires at a faster pace. For example, PS Business Parks is on track to turn a hypothetical investor who bought $10,000 of its stock in 1998 into a millionaire in 2036, or about 38 years in total, assuming it maintains its current pace of producing a 12.2% average annualized total return.
Can PS Business Parks maintain its millionaire-making pace?
A key to PS Business Parks' success over the years is its differentiated strategy for investing in industrial real estate. Instead of focusing on owning massive single-tenant logistics properties or light manufacturing facilities, PS Business Parks primarily owns multi-tenant industrial, office, and flex space (an office and warehouse combination with several uses including office, assembly, showroom, laboratory, light manufacturing, and warehouse). The company focuses on prime markets (mainly major metro regions along the coasts or fast-growing markets). It also targets smaller tenants, providing them the space they need to grow their business.
That strategy has enabled the REIT to capture higher revenue per available foot (REVPAF) compared to its industrial peers. It's also helped drive a higher same-park cash net operating income (NOI) growth rate than the industry average. As a result, the REIT has grown its FFO per share at a 6.3% compound annual rate over the past five years, helping support 13.8% compound average dividend growth.
PS Business Parks has complemented rent growth by making select investments in development projects and acquisitions. For example, the REIT recently completed an 83,250-square-foot multi-tenant industrial building in Dallas near the airport earlier this year. It's currently building an 83,000-square-foot multi-tenant industrial facility in Seattle on surplus land in an existing park. It's also developing some multifamily properties as part of a multi-phase redevelopment project in Virginia. Meanwhile, last year it bought a 246,000-square-foot multi-tenant industrial park in Virginia.
The REIT has delivered consistent growth while maintaining a top-tier financial profile. It currently has A-rated credit, backed by a low leverage ratio. Because of that, it has the financial flexibility to continue investing in development projects and making select acquisitions as the right opportunities arise.
The company should be able to continue growing its rental rates and property footprint in the coming years, propelled by twin tailwinds driving demand for additional industrial space. The accelerated adoption of e-commerce is showing no signs of slowing down, while shifting inventory strategies due to the pandemic will likely further boost demand in the coming years.
There is some concern demand for office space might wane in the future as more companies adopt remote working environments. However, that shouldn't have too much impact on PS Business Parks. Only 12.2% of its portfolio is office space, with the rest either industrial (64%) or flex/office (23.8%) space, with the latter used for productivity activities that aren't as easy to do remotely.
Slow and steady is a winning strategy
PS Business Parks won't mint millionaires overnight. However, the REIT has steadily enriched investors over the years by focusing on multi-tenant industrial parks in prime markets. Those existing parks should continue driving steady rent growth, while the company's top-tier balance sheet gives it the flexibility to make value-enhancing investments. Because of that, PS Business Parks should be able to continue outperforming the S&P 500, which could turn some of its ultra-long-term investors into millionaires one day.