EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Public Storage Delivers an Above-Expectations Third Quarter

Public Storage reported a reasonable quarter that was slightly ahead of our expectations and offset the disappointing second quarter. We don’t plan on making large changes to the $226 per share fair value estimate or our no-moat rating for the company. Revenue came in ahead of expectations, largely due to strong incremental revenue from recent property developments. The revenue beat was partially offset by higher costs of operations, mainly higher property taxes and marketing expense, which we don’t think investors should be concerned about. We were impressed at the company’s continued ability to maintain cost controls on supervisory payroll given the strong labor market. Same-store NOI grew slightly at 0.6%, due to slower-than-anticipated price increases coupled with occupancy declines. We think the occupancy shift is largely due to the long-term competitive dynamic of the self-storage facility industry, as storage facilities are a commoditized and low barrier to entry business. We think the best thing for Public Storage to focus on would be price increases in its supply restricted markets, such as the West Coast, to drive growth. Despite the struggles with occupancy, the net result was a successful quarter, as the company reported funds from operations that beat our estimates by a healthy 3.8%.

We are looking forward to seeing more detailed information on the third-party management platform when the full-year’s results come out. We think that the third-party management program has the potential to be both a capital-light source of income for Public Storage and can help build out the company’s acquisition pipeline. The company signed up an additional 12 properties for the program during the quarter, which we see as encouraging, but is also well behind the 36 that its competitor, Extra Space Storage, signed during the quarter.