EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Public Storage Posts Strong 2018 and We Are Watching Supply in 2019

No-moat-rated Public Storage reported a decent fourth-quarter and full-year 2018 that was generally in line with our expectations, and we will maintain our $226 per share fair value estimate. Core funds from operations grew 3.2% to $10.56 per share, slightly outpacing our expectations. Self-storage companies generally have three major growth sources: price increases, occupancy expansion, and external growth. In 2018, total revenues grew 3.2% primarily due to price increases and external growth. On a same-store basis, price increases were partially offset by declining occupancy, which fell 60 basis points in 2018. Management cited that same-store revenue growth declined due to diminishing pricing power with new customers, which is partially attributable to continued supply growth. We anticipate that this trend will likely continue because we think self-storage is an undifferentiated product and that new supply encourages price competition. On the expense side, increased property taxes drove same-store expense growth, but we recognize that this is outside of management’s control. We were impressed to see that management shrank supervisory payroll and thought it made sense for the company to invest in marketing, given the recent lack of traction with new customers. The net result was 90 basis points of same-store net operating income growth.

One encouraging factor in Public Storage’s 2018 results was that the average length of stay increased due to lower move-outs. Since price increases are generally passed to customers on an annual basis, growth in the proportion of tenants who are eligible for rent increases is a positive for Public Storage. We will be watching the extent to which Public Storage is able to maintain the gains in the length of tenant stay in light of the increasing self-storage supply in many major metropolitan areas.