Public Storage

Moat: 3/5

Understandability: 1/5

Balance Sheet Health: 4/5

Public Storage is a self-storage REIT that focuses on the acquisition, development, and operation of self-storage facilities in the United States and Europe, where it leases space to customers on a monthly basis.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Public Storage operates a vast network of self-storage facilities, benefiting from high brand awareness and a strong geographic presence, providing a certain level of pricing power and stability in cash flow. However, the industry also has low barriers to entry and is relatively easy to replicate, making it difficult to attain a wide economic moat.

Business Overview

Public Storage (PSA) is a real estate investment trust (REIT) primarily focused on the self-storage sector. It is the largest owner and operator of self-storage facilities in the world. The company’s revenues primarily come from rental income generated by leasing out storage units to customers. These storage units vary in size and purpose, from small lockers to large units designed for furniture. The company also generates a smaller portion of its revenue from a series of ancillary services including tenant insurance and management of third-party owned facilities.

  • Revenue Distribution: PSA’s main source of income is self-storage rental revenue, driven by leasing out units to a diverse customer base that ranges from households needing temporary storage while moving to businesses requiring storage for excess inventory or equipment. It also derives revenue from other sources such as merchandise, tenant insurance, and property management.
  • Trends in the Industry: The self-storage industry is generally regarded as recession-resistant because of the variety of customers and needs that are fulfilled by self-storage units. However, it can be sensitive to changes in population density, housing trends, and broader economic cycles, including the credit market and interest rates. Emerging markets are growing, and companies with global scale will benefit the most.
  • Margins: PSA generally operates with high gross margins due to the relatively low cost of providing a storage space. That being said, the operating margins can have volatility based on occupancy and price controls. Their operational expenses are kept low by a small workforce and are largely fixed costs.
  • Competitive Landscape: The self-storage market, although appearing fragmented with many local competitors, is often dominated by a few larger players that have established locations and brand recognition. As such, the major national players can often capture a greater share of potential revenue and operate with higher profitability, due to having advantages through the use of technology, access to more customers, and optimized business models.
  • What Makes the Company Different: PSA’s strengths derive from its scale, brand name, and sophisticated operation capabilities. Given its massive size, the company has access to cheap capital and can also take on opportunities that smaller competitors can’t such as entering new markets, or re-developing existing facilities. In addition, their in-house management system, centralized call centers, and brand name recognition are a major competitive advantage.
  • Recent Concerns: There have been recent concerns of increased supply in some markets that could lead to occupancy and pricing pressures in the short term. A recent earnings call also mentioned a dip in pricing power for newer facilities. In addition, the management has commented on the fact that their current acquisitions are at high prices with not much upside.

Financials Deep Dive

Public Storage’s financial performance can be considered quite strong from the surface level due to it being a large, consistently profitable business with significant pricing power. However, there are some nuances that we need to go into.

  • Revenue Growth: For most of 2021 to 2022, the company benefited from pricing power and high occupancy rates, due to the increase of people moving post-pandemic. Their total revenues rose more than 20% in 2021 to $3.6B. In contrast, however, revenue growth is decelerating over the past year from 14.8% in 2022 to 6.5% in the three months ended September 30, 2023, which can partially be attributed to the high growth in 2021.
  • Profits: Over the past several years, the net operating income of the company has increased and maintained a positive trajectory. Net income for the years 2021, and 2022, and nine months ended in 2023, has been around $1.7B each period, which shows its consistently high profitability. Though net income has been flat across the periods, the company has also incurred increased depreciation expenses as a result of acquiring new properties, which results in a lower level of profitability. In contrast, looking at the Funds from Operation (FFO), which is net income adjusted for depreciation expenses, the numbers have been higher, implying that the company is more profitable on a cash basis than what the net income figures might be leading you to believe.
  • Cash Flow: PSA has a history of generating solid operating cash flow. Free cash flow can often fluctuate based on acquisitions. Despite the fluctuations, the firm is consistently free cash flow positive, which indicates its ability to grow its business.
  • Capital Structure: The company relies on debt to fund a significant part of their business, as they have debt of roughly $10B, with a debt to equity ratio of roughly .8. That being said, the company has consistently had high cash flows and is able to meet its debt commitments.
  • Balance Sheet: The balance sheet, as of September 30, 2023, shows $662 million in cash and marketable securities, $8.2 billion in real estate assets (net of depreciation) and $8.1 billion in total debt obligations. As a REIT, PSA has the ability to tap into capital markets to raise capital and also maintains a good interest coverage ratio. There has been some recent concern that their acquisitions are expensive and may lower returns going forward, which needs to be monitored.
  • Dividend: PSA pays a consistent dividend, and has increased this dividend over time as the cash flow has increased.

In general, the company has good financials, but the slowing growth rate in the past few quarters and also their reliance on debt requires further monitoring. They have also been increasing the acquisition and re-development of their facilities at a large pace, which means that they will continue to have to raise capital to fund that growth.

Moat Analysis

Public Storage does have a competitive advantage, but it is not a wide moat. It scores a 3 out of 5 in moat rating.

  • Intangible Assets: PSA has a strong brand recognition and a large geographic presence, which acts as a competitive advantage against smaller and newer entrants into the self-storage industry. This advantage allows them to be easily visible, both online and offline, as well as generate a lower cost for marketing efforts.
  • Switching Costs: Switching costs are low, since it is relatively easy to move to another storage unit from another company, so this is not a major driver of competitive advantage.
  • Network Effects: This is not a factor for Public Storage, since the value to the consumer does not increase as the users of the service increases.
  • Cost Advantages: In some markets, PSA has a location-based advantage, as the company is generally a first mover in markets where its competitor is not fully established yet. Additionally, due to its size, the company can also achieve scale, which allows them to have economies of scale for some of its expenses.

While all these points are true, the self-storage industry as a whole has low barriers to entry and it is extremely easy for a company to replicate their business model. Therefore, the competitive advantages it possesses are not impossible to erode and as such, I’ve given the company a score of 3 out of 5.

Risks to the Moat and Business Resilience

Despite its relative stability and strong brand recognition, there are still key risks that Public Storage needs to consider.

  • Increasing Supply of Self-Storage Facilities: As the industry has high profitability, new competitors and new supply of self-storage units can put pressure on prices and reduce margins. The company is trying to combat this with increased acquisitions, but this will also increase the amount of debt on their balance sheet.
  • Changes in the Economy: The business is somewhat recession-resistant, due to the nature of its customers and uses, but a prolonged economic downturn or reduced movement could impact the demand for storage. In addition, the company relies on debt to fund most of its growth, which means they are vulnerable to changes in interest rates.
  • Competition From Smaller Players: The self-storage business is not complicated and is relatively easy to replicate. As such, smaller players can offer competitive prices and can cater to a more local audience, and take market share.
  • Technology Disruption: New tech or innovations could challenge the industry or reduce its need. For example, if people could more easily sell or distribute their personal possessions, then there would be less demand for self-storage units. Also, while companies do rely on robust operational systems to achieve efficiencies, better tech in logistics and operations by a competitor could also hurt the business.
  • Tax Laws: As the company is a REIT, it is subject to government regulations that could impact its structure. This also means that REITs are highly dependent on debt financing, which is tax deductable to an extent. The company also has a few partnerships, which are more complex than the standard setup, and are treated uniquely in the tax code.

In general, PSA is a stable business, which has some risks to it. The greatest concern for the future is the increase in supply and lower pricing power, as a result. Although the company does have a good track record of success, a lot of the future depends on management making the right strategic decisions for their assets.

Understandability Rating

I have given this business an understandability rating of 1 out of 5. The reason for this is the company is in a quite simple industry, with an easy to understand revenue stream. That being said, for all their complexities, it is easy to see what their operations are. They collect money by renting out storage space to customers, and have low operating costs and predictable cash flows. As such, the business itself is very easy to understand for the common person.

Balance Sheet Health Rating

I’m giving Public Storage a balance sheet rating of 4 out of 5. The reason for this is although the company has a significant amount of debt, it is easily serviceable by their existing profits and cash flows. However, the company’s reliance on debt and the possibility of their current acquisitions not panning out as expected means that the balance sheet is not perfect. Therefore, the company is relatively stable in this regard, but also somewhat risky and needs to be monitored.