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Thursday, Mar 28, 2024

Space Glut Could Hurt Public Storage Shares

Analysts following Public Storage have raised concerns about the increasing supply of rental storage space. At least two analysts of the Glendale real estate investment trust that owns and manages self-storage units across the U.S. have commented on the amount of storage space available. In a research report put out after the first quarter earnings were released in April, Green Street Advisors, a real estate research firm in Newport Beach, said that Public Storage’s operating performance showed steadying revenue growth after several quarters of slowing growth. “However, management conceded that meaningful rental rate growth will be difficult to achieve going forward with broad supply pressure,” the report said. In August, Andrew Rosivach, a managing director at Goldman Sachs in New York, expressed “concerns about slowing same-store growth and increased storage space supply” which will make it difficult for Public Storage to improve occupancy or raise rents. Rosivach cut his 12-month price target to $198 from $210. In response to the stock being downgraded by Rosivach to “sell” from “neutral,” shares in Public Storage fell more than 4 percent. The share price has since made incremental gains, closing on Aug. 29 at $212.68. In the Aug. 21 research report, Rosivach noted that the storage supply for next year will remain at elevated levels. Additionally, the relationship between storage space rental activity and employment has broken down, which Rosivach attributed to “elevated supply limiting occupancy improvement and rental increases.” Employment tends to be a strong forward indicator of revenue growth for storage REITS, the report said. “Based on recent move in/out trends, our estimates now assume PSA same store (net operating income) growth will turn negative by 2019,” the report said. “We have found a strong relationship between same store revenue growth acceleration (and deceleration) and PSA share price performance.” In the second quarter, Public Storage reported funds from operations of nearly $463 million, or $2.65 per share, on revenue of $686 million for the period ending June 30. That compares with funds from operations of $402 million ($2.31) on revenue of $664 million in the same period a year earlier. Analysts on average expected funds from operations per share of $2.61, according to Zacks Investment Research. In a conference call with analysts on the second quarter results, company executives were asked about the supply of storage space available and what it means for the business. Chief Financial Officer Tom Boyle responded that there is a “healthy development community” that continues to see good returns when they are able to develop storage space properties. “If they can build into eight or nine and they can flip them full or unoccupied at a rent level that would yield off of full occupancy or close to it … they’re going to keep doing it,” Boyle said during the call. Public Storage currently has a pipeline of $679 million in development and expansion projects. Chief Executive Joe Russell, when asked where geographically the company has found redevelopment opportunities, said they were in areas where the company can build on a property without competing with existing inventory. “In many markets, say with some of our legacy assets, we might have extra land and/or a parking area that’s pretty simple to expand and convert,” Russell said during the conference call.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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