EUR 850.00 For Business Accounts Only

Morningstar | Public Storage Continues to Deliver Strong Operating Results Despite Increasing Supply

Public Storage, the largest owner of self-storage facilities, generates revenue through rental income on its 2,300-plus facilities. Tenants sign month-to-month leases on storage units of varying sizes and features. Management increases the top line by increasing one of three key drivers: price, occupancy rate, and rentable square footage. We believe rent increases in supply-restricted markets should continue to drive growth in the next several years.Given the short-term nature of these leases and the growing demand for self-storage space, management has been able to demand material rent increases from new and existing tenants. We see this pricing power decreasing as Public Storage enters markets with less demand. Additionally, supply is entering some of the important markets, such as New York and Florida, which will limit the material price increases Public Storage has posted in recent years. These newly penetrated markets remain lucrative for Public Storage and represent some of the fastest-growing regions in the country, many of which command high rent per square foot.Average occupancy rates have been in the low 90s in recent quarters, and the West Coast portion of the portfolio tends to have higher-than-average occupancy. With an expanding presence in less-desirable areas, where demand and prices are below average, we see this rate falling as the portfolio becomes more balanced and less skewed to the West Coast. Management also estimates a 5%-7% rolling vacancy rate for occupancy to account for tenant turnover. We consider occupancy rate at a peak right now and project that it will gradually near 90% once the overall portfolio becomes more representative of the recent expansion.Public Storage has achieved significant growth over the years, but we do not think management can increase prices indefinitely. The low cost of building and the undifferentiated nature of self-storage facilities allow supply to enter the market and absorb tenants who eventually get priced out of Public Storage units. However, we believe this will be balanced by strong performance in West Coast markets, where zoning laws and high-priced land restrict new supply.