Morningstar | Public Storage Reports Disappointing 2Q; Maintaining FVE
No-moat Public Storage reported a slightly worse-than-anticipated results this quarter and we remain concerned about the impacts of new supply entering Public Storage's markets, but we believe that current results are not material enough to have an impact on our current $226 per share fair value estimate for the firm. Core funds from operations grew 2.4% from the second quarter in 2017, less than we anticipated, to $2.57 because of slow same-store growth. The slow same-store growth figure was the result of lower occupancy, which was expected, but the soft occupancy was coupled with lower-than- anticipated price increases. The result was a revenue miss from renting self-storage facilities and declining revenue from ancillary operations. As we predicted, new supply has entered the company’s East Coast and Midwest portfolio, causing the company to lose pricing power on its existing tenants in these markets. We were pleased to see that the slower revenue growth was partially offset by 2% lower than expected costs of operations, mainly due to the company cutting supervisory payroll in a generally rising minimum wage environment. Looking forward, we are watching the extent to which new supply prevents Public Storage from increasing prices on its existing tenants, as we see this as a crucial part of revenue growth.The company's new third-party property management program appears to be off to a strong start. Public Storage is following Extra Storage Space's property management program and signed 48 properties into its management year to date. Although this is just over half of Extra Storage Space's 83 property signings year to date, we still see this growth as an encouraging sign given that Public Storage is the new entrant. Management believes that Public Storage will be able to use its brand to create a competitive advantage for the properties it manages, but we are skeptical of this because storage space is a relatively undifferentiated product. We will continue to watch this new market develop and examine the extent to which this new program can drive growth for both companies.
Public Storage is a real estate investment trust. The company's business activities include: Self-storage Operations, which acquires, develops, owns and operates self-storage facilities that provide storage spaces for lease on a month-to-month basis, for personal and business use; Ancillary Operations, which reinsures policies against losses to goods stored by customers in the company's self-storage facilities and sells merchandise, mainly locks and cardboard boxes, at its self-storage facilities; and Investment in PS Business Parks Inc. (PSB), in which the company has an equity interest in PSB that owns, operates, acquires and develops commercial properties, mainly multi-tenant flex, office, and industrial parks.
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