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WIKI ANALYSIS
Public Storage, Inc(NYSE:PSA) is a self-administered and self-managed equity REIT that is the leading company in acquisition, development, ownership and management of self-storage properties. PSA has an ownership interest in 2,010 US self-storage facilities (roughly 135 million rentable square feet), 160 European storage facilities under the newly acquired Shurgard nameplate, and an additional 20 million rentable square feet of commercial space in the U.S. operated under the PS Business Parks and Public Storage, Inc. brands. The company's 2009 revenue was $1.73 billion, which makes PSA larger than its next four competitors combined. And PSA's size works to its advantage--economies of scale in the self-storage industry gives PSA large net operating income margins.
Despite its lead, PSA faces significant competition from both large and small private companies in self-storage. Even combined, PSA and its next 10 competitors only make up 12% of the self-storage market. But this relatively low penetration of the market also means that PSA has plenty of room to expand, and indeed the company has been very active in gaining market share through mergers, acquisitions, and further development of its own properties. In 2006, a merger with European self-storage leader Shurgard strained the company with a 31% loss in net income due to integration costs, but the benefits of the merger may make up the difference quickly: PSA's new presence in the developing European market has high potential for growth.
History and Business Overview
Established in 1972, Public Storage is now the largest owner and operator of self-storage space in the United States. In 2009, PSA maintained an ownership interest in 2,010 self-storage facilities. It also held 160 storage facilities in 7 European countries, an additional 8.4 million rentable square feet. After the merger with Shurgard, PSA strengthened its portfolio and increased its revenue. But integration costs caused temporary declines in net income.
Chairman of the Board Wayne Hughes and his family own approximately 26.7% of PSA's stock, giving the family a significant amount of control in matters submitted to a vote of the shareholders (e.g. director elections, organizational document amendments, and other transactions including takeover attempts). There are certain restrictions in the company's documents that may limit future change; currently no shareholder may acquire more than 25% of the outstanding share in the common stock.
Business Segments
Self-Storage Facilities
Rental income from self-storage facilities for personal and business use accounted for the majority of PSA's profits in 2009, as $1.6 billion of its 2009 total $1.63 billion in revenues came from rental income.[1] All the self-storage facilities in the United States operate under the Public Storage brand name, while PSA's facilities in Europe operate under the Shurgard brand name.
PSA's domestic self-storage operations represent 93% of total 2009 revenue.[2] PSA's European self-storage operations represented only 7% of its total 2009 revenues. Its European self storage facilities are largely from the 160 acquired Shurgard facilities. PSA is planning to continue expanding in Europe.
Ancillary Operations
Ancillary operations generated 108 million in 2009 revenue.[2] Ancillary operations include:
- Tenant reinsurance operations: PSA reinsures policies against losses to goods stored by tenants in the self-storage facilities through a non-affiliated insurance broker.
- Sale of merchandise at self-storage facilities: Through its subsidiaries, PSA sells locks, boxes, and packing supplies to customers and to the public.
- Containerized storage operations: PSA has 13 facilities located in eight states and three industrial facilities with an aggregate of 244,000 net rentable square feet used by the continuing containerized storage operations.
- Truck rentals: In selected locations, PSA provides trucks on-site for local, short-term rentals to customers and the general public. PSA also acts as an agent for long-distance rentals from national truck companies.
- Commercial property operations: PSA owns six commercial facilities with 520,000 net rentable square feet, and has just over 1 million net rentable square feet of commercial space located at certain self-storage facilities.
- Property management: PSA also manages facilities owned by third-party owners and by affiliates for a fee.
Interest and other Income
Interest and other income generated about 30 million in 2009, compared to $36 million in 2008.[3] The slowdown comes from lower interest rates on invested cash balances, as well as from a smaller average invested cash balances.
Trends, Risks, and Forces
Exposure to property tax
As a real estate operator, Public Storage is sensitive to fluctuations in property tax. If PSA's properties are assessed or reassessed unfavorably by tax authorities, PSA may have to cope with a significant increase in property tax--an event that could have serious consequences on PSA's profitability.
Economy of scale advantage
High profit margins from relatively low administrative and maintenance costs mean that the bigger PSA gets, the more it benefits--larger profits can be reinvested into expansion (either through mergers or acquisitions) and redevelopment, yielding more rentable property and even larger profits.
PSA is the largest provider of self-storage space in the industry, bigger than its largest four competitors combined. The size and scope of PSA operations have given the company a strong position in the cycle of growth that economies of scale yield.
Effects from real estate slowdown
Self-storage facilities tend to have greater occupancy rate when residential moves are high. When the real estate market cools down, decreased rates of residential moving often reduces self-storage use, slowing down Shurgard's profits as well.
REIT re-qualification risk
PSA and Shurgard have both qualified as a Real Estate Investment Trust in the past, enabling the company to benefit from little to no corporate income tax in return for distributing 90% of its REIT taxable income to its shareholders. In the event that either PSA or Shurgard fail to qualify as a REIT, its income will be subject to federal income tax at the regular corporate rates, causing a blow to profits. In addition, PSA would be forced to wait five years to regain REIT status.
If Shurgard fails to qualify as a REIT, PSA would be subject to corporate tax liabilities that are required in the event of a sale of assets like that of the Shurgard merger. Should the company continue to exhibit disqualifying activities after the merger, it may even lose its REIT status. REIT qualifications are dependent on a range of complex organizational and operational requirements and are worth considering before investing.
Exposure to California slowdown
By itself, California makes up a full one-fifth of PSA's total US properties, so slow operations in California can signficantly hurt the company's profits. The state's budget problems have resulted in rising property taxes on both commercial and private properties, hurting PSA both by making the company pay more taxes on its real estate, and by cooling the real estate market and thus the amount of demand for self-storage.
California legislation mandating the provision of medical insurance for the employees and families by all California businesses could also adversely affect PSA's bottom line.
Competition
Despite its current role as the clear industry leader in net size, market capitalization, income, and market share, PSA faces significant (if scattered) competition from many small private facilities. Fellow large self-storage companies also are not without their threats.
Public Storage's fellow REIT companies Sovran Self Storage (SSS) and U-Store-It Trust (YSI) have a relatively small US presence, but focus on slightly different markets than Public Storage (which covers 38 states but is somewhat concentrated in California and the West Coast). By contrast, Sovran Self Storage is only present in 22 states, but has a greater concentration on the East Coast, Texas, and Florida; meanwhile U-Store-It Trust covers 27 states and focuses on Illinois and New Jersey. U-Store-It also has a high concentration of locations in California, where it competes more directly with Public Storage.
Amerco subsidiary U-haul is also a main competitor of Public Storage, but unlike Public, U-Haul only derives a small percentage of its revenue from self-storage facilities. Over half of U-Haul revenue comes from rentals of its moving equipment and products--a segment which only accounts for 8% of Public Storage's total revenue. Still, despite their small number, U-Haul's storage facilities have high occupancy rates, unlike smaller competitors like Sovran Self Storage (SSS).
Public Storage's market share of the total self-storage market is unusually small for an industry leader--instead, the self-storage market is dominated by small private companies. The self-storage industry contains about 43,000 facilities in the United States and the ten largest operators only make up 12% of the industry.
References
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