Real estate investment trust (REIT) Public Storage (NYSE: PSA) owns exactly what its name implies, storage facilities. It's not an exciting business, but that's really a big part of the allure here. More important, however, is that industry giant Public Storage has ample room to keep executing its long-term growth plans. Basically, in five years, Public Storage will be boring and bigger. Here's why.
Boring, but reliable
The core of Public Storage's business is its portfolio of roughly 2,500 domestic self-storage facilities. In addition, it has exposure to the European self-storage market and offices via investments in publicly traded companies Shurgard Self Storage (EBR: SHUR) and PS Business Parks (NYSE: PSB), respectively. That said, the U.S. self-storage business makes up roughly 85% of the company's net operating income, so it's the key driver of the real estate investment trust's financial results.
Self-storage is fairly simple to understand. A company like Public Storage builds a facility that's essentially a collection of different size storage rooms. It then leases those rooms out to customers who fill them with things they don't want to keep at homes or in their offices. The cost per month is generally reasonable. And once a person puts their belongings into a storage facility, they are usually loath to move all of their "junk" just to save a couple of bucks a month at a new facility.
The global pandemic has actually shown the resilience of the self-storage model. In the early stages, the REIT retrenched a bit, looking to ensure both the safety of its employees and lessees -- basically what all companies did. However, during Public Storage's second-quarter 2020 earnings conference call it highlighted that it added more than 400,000 new customers during the pandemic and, at the same time, saw fewer move outs. Yes, costs went up and the company froze rent hikes for a time, but the core of the business remained resilient. That's the foundation on which Public Storage grows over the long term.
The future is filled with opportunity
There are multiple ways for Public Storage to execute its growth plans, including building its own facilities, managing properties for others, and buying pre-existing self-storage assets. The long-term desirability of self-storage hasn't gone unnoticed, and right now there's a rush to build new properties. That makes construction of new assets more difficult because there's increased competition for locations and, once a facility is open, there's often more competition for customers. However, with the scale Public Storage has, it can keep building and muddle through this rough patch. It also has the option of investing in existing properties to increase their size and desirability, which allows it to grow without the need to build from the ground up. It may not be as aggressive here for a bit, but ground-up construction will continue to be an important effort.
Operating assets for others is a newer growth avenue for Public Storage, but one that is likely to be helped along by the spike in new construction within the industry. It's one thing to build a self-storage property and another to successfully operate it as competition heats up. Public Storage has the skills to do just that and is happy to earn fees running a property for someone else that doesn't have the scale or expertise. Although this will probably never be a giant business, it offers incremental growth prospects that are well worth the effort for Public Storage given the minimal added costs involved.
Last up is acquisitions, which are also likely to benefit from the building boom. Indeed, as companies build self-storage facilities into an increasingly saturated market, many may choose to sell rather than try to compete. Public Storage's reputation, scale, and ability to get deals done quickly make it an attractive partner for sellers. In fact, in the first six months of 2020, Public Storage bought 15 properties. As long as new development and industry competition remain high, acquisitions should be a solid growth platform.
Bigger and better
So, when you step back from Public Storage and look at the REIT's position in the industry, there's no reason to doubt that it will be an even bigger player in five years. The current yield is roughly 3.4%, which is generous compared to the broader market but not exactly huge for a REIT. That said, Public Storage has always been more of a growth story than an income story. Still, the dividend has increased 150% over the past decade, it just hasn't been increased every year. There's not likely to be an increase over the near term while the pandemic is still impacting the increasingly competitive operating environment. But, for long-term investors, Public Storage's growth focus will likely play out well as it uses the three levers at its disposal to keep expanding.