EUR 850.00 For Business Accounts Only

Morningstar | Public Storage's Development Pipeline Delivered FFO Growth During the First Quarter

No-moat rated Public Storage reported a decent first quarter as it continues to extract value from its resilient business model. Funds from operations grew 6.3% to $2.52 per share, largely due to external growth from newly developed properties. We think that Public Storage’s focus on developing, rather than acquiring, new properties makes sense given the persistently low cap rate environment. That said, we would have liked to have seen more substantial evidence of internal growth. We are maintaining our $226 per share fair value estimate for the firm.

Same-store net operating income grew at a paltry 0.6% year over year, as below-inflation revenue growth was outpaced by above-inflation expense growth. On the revenue side, same-store occupancy grew 40 basis points year over year, which we see as impressive given the increased self-storage supply, and same-store pricing per occupied square foot increased slightly by 1.2% year over year. Overall, we would have liked to see Public Storage pushing pricing a bit more, though we recognize that increased self-storage supply does limit pricing increases. On the expense side, the big drivers of expense growth were property taxes, marketing, and snow removal. With the exception of marketing, which we think is essential for bringing in new customers, we think that these expenses are outside of management’s control. We continue to think that management has been effective at controlling expenses and point to year-over-year declines in same-store payroll expense and utility expense as examples of effective expense management.

Public Storage’s development pipeline decreased somewhat this quarter, from 1.7 million rentable square feet to 1.2 million rentable square feet, as the company delivered several large chunks of property in Houston. We think that the development pipeline is indicative of how much opportunity management sees in the self-storage market, and we will be watching this figure closely to see if this turns into a trend.