Storage A Safe Store Of Value?

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About: Public Storage (PSA), Includes: CUBE, EXR, LSI, UHAL
by: Christopher VanWert
Summary

Self-Storage companies have been rising in popularity.

Real estate was hit hard last recession so it could be safe this next recession.

We look at past performance durring economic downturns and find the safest investment.

Thesis

Self-storage companies have been growing in popularity. In an effort to find safe investments for the next recession, we looked into the self-storage industry. The idea to look at this industry started from a simple concept. I think that as the unemployment rate increases in the future, an increase in moving activity should follow. Self-storage facilities theoretically should see an increase in business as the newly unemployed have less space for their material possessions (which they will probably sell). As with all investment-related ideas, the data determined the outcome.

In this article, we’re looking at U-Haul ($UHAL), Public Storage Inc. ($PSA), Extra Space Storage, Inc. ($EXR), Cubesmart ($CUBE) and Life Storage, Inc. ($LSI). We look for differences between them. How the stocks performed in the last economic recession and the dot com bubble (where possible). The current state of the companies’ financials and where they’re headed.

What makes a customer’s selection?

While U-Haul hopes that storage site rental is determined by convenience during the moving process, I don’t believe this is true. As a storage renter myself, I took a simple approach. First was location convenience and second was the price point. I wound up using a U-Haul location due to both factors, weeks after I had returned the moving truck. While some customers will have to make the decision during the truck rental time period, most will still look at these two factors before renting through google maps.

Although my decision-making process is anecdotal, I believe the logic lays a solid groundwork for what customers are looking at in a storage rental facility. This gives us two factors to focus on from a business standpoint. The number of locations and price point.

Comparing the fundamentals

Created by Author Using 10-K data

Created by Author Using 10-K data

Created from PublicStorage.com and extraspace.com

Created from lifestorage.com Cubesmart.com and uhaul.com

Looking at the occupancy percentages tells us that Public Storage and Extra Space Storage lead the way on filling their facilities. It shows in their revenue for Square Footage. Life Storage manages to beat out Extra Space Storage in Revenue per square foot despite having a lower occupancy rate. This could be explained by a pricing strategy difference. U-Haul comes in second to Public Storage in revenue per square foot. Cube is at the bottom of most rankings, but this is in part due to their choice in the area. They’re not as heavy in the metropolitan areas that would boost revenue per square foot and revenue per facility. While U-Haul is low on the revenue per facility, they also run the moving trucks and supplies out of the same facilities. U-Haul also gets a pass on it’s lower occupancy rates due to the same reason.

These rates are taken from a major metropolitan area in the South East. It can give us an example of what their pricing strategies in action look like. They’re homogeneous for the most part with a couple of small exceptions. Public Storage offers drive up access and Life Storage offers much smaller spaces for the lowest rate offered for any storage space in the local area.

These same style offerings do highlight a major issue with self-storage companies. There’s no moat being creating by any of them. There’s not much to distinguish between one another.

**Supply has been steadily increasing for a while in the self-storage industry. This trend is

However, given the current data, I whittled down the choices to UHAL, PSA and LSI. The reasoning behind U-Haul is that it’s the only one that has a synergistic business attached to the self-storage rental segment. Life Storage is due to their unique pricing aspect which appears to be reflected in their superior revenue per square foot despite their lower occupancy rate. Public Storage is the leader in revenue per square foot, revenue per facility, total revenue and second highest in occupancy.

Next, let’s get an overall summary of the three companies we’re comparing.

U-Haul Company Summary

Amerco is the holding company of U-Haul. U-Haul is known for its do it yourself moving products, supplies and services. This includes moving trucks, trailers and storage units. It also includes related products such as boxes, tape and locks. Amerco has three reportable operating segments. Moving and Storage, Insurance for property and causality and finally life insurance. More than 90% of their consolidated revenue comes from Moving and Storage. This has been true for the past five years. Because of the large amount of revenue that comes from this segment, this is the segment we will focus on.

Created by author using data from 10-K

Unlike the other storage companies we are examining, U-Haul is new to this line of business. It is leveraging its existing large-scale moving truck and equipment rental services. This is an advantage in growth and synergy it has over its competition.

Public Storage Summary

Established as a REIT in 1980, Public Storage is mainly a self-storage facility operator/developer. They are the largest owner and operator of self-storage in the United States. They also reinsure policies against losses for goods stored by customers. Public Storage has two large investments in the form of PS Business Parks (42% equity) and Shurgard Europe (35% equity). Shurgard Europe is another self-storage company that is the largest owner and operator in Western Europe. Their other investment in PS Business Parks is a little different. PS Business Parks is a public REIT that operates and develops commercial properties. This is only a slight branch off Public Storage’s main business and makes sense as most of their operators are real estate related.

Life Storage Summary

Formed in 1985 from a predecessor but began operations in 1995 in the form of a UPREIT or umbrella partnership real estate investment trust. It recently rebranded as Life Storage from Uncle Bob’s Self Storage in 2017 with a major acquisition in California. In 2019 the company expanded into managing properties inside Canadian market through Bluebird Self Storage (an unrelated brand).

Comparing the financials

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Life Storage had a large dip in funds from operation in 2016 while Public Storage had a small dip in 2017. Life Storage spent $29.5 million in acquisition costs. They also incurred high onetime expenses to re-brand from Uncle Bob’s Self Storage during 2017. Public Storage suffered a larger than normal foreign currency loss of $50 million due to the exchange rate change and their investment in Shurgard Europe. U-haul seemed to have the worst of both worlds having negative earnings growth in 2016 and 2017. This was due to depreciation and operating expenses increasing.

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

U-haul has the highest debt-to-asset ratio but is lower year over year. Life storage has a low-interest coverage ratio but is improving year over year. It’s also above the 1.5 level which is the standard level of concern over whether or not the company can continue to meet its interest payments. Public Storage provides a strong level of confidence with a high-interest coverage ratio and low debt to asset ratio.

Stock performance during recessions

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

Created by Author using data from ValueLine, MacroTrends.net and Sec.gov/edgar

None of these three companies came out unscathed during the recession of 2008. Life Storage declined in revenue per share over the four years from 2006 to 2010. FFO per share declined from 2006 to 2008 till it started to turn around. U-Haul’s revenue stayed mostly consistent with a slight upturn in 2010. However, their earnings per share dropped to near zero in 2008 but recovered over 2009 and 2010. Public storage’s revenue stayed mostly flat as well. Their funds from operation increased steadily from 2006 to 2007 before facing headwind in 2008 and 2009. Due to depreciation being the driver for the earnings changes in Life Storage and Public Storage, their funds from operations were still positive during this time. This means that their earnings were not as bad during the recession as it looks, but their assets were hit hard.

This answers our initial question; self-storage facilities do not perform better during recessions. They do hold up well compared to other industries.

Created by Author using Finance.Yahoo.com

Created by Author using Finance.Yahoo.com

During the financial crisis of 2008, real estate assets were hit hard. It’s not surprising that many self-storage companies stock performed badly compared to the rest of the market. Surprisingly Public Storage managed to come out on top, even beating the market from 1/1/2006 to 1/1/2010.

Both Life Storage and Public Storage performed extremely well over the dot-com bubble bursting, from 1/1/2000 to 1/1/2004.

U-Haul however underperformed the market in the financial crisis and was much more volatile during the dot com bubble.

After looking at the stock price action during the recession and dot com bubble, the financial performance during the recession and the overall company’s debt and summary a pick becomes clear. Public Storage appears to be the strongest. Despite Life Storage being a better value pick, Public Storage has lower debt, more coverage and a better track record historically.

A word on leverage

Some other authors have mentioned that Public Storage is underusing their available debt. That they’re not taking advantage of the cheap debt of the last few years like their competitors. In the face of a probable recession, this business decision makes a lot more sense. It also helps me as an investor sleep better at night. Waiting for interest rates to drop again and waiting for credit to become cheaper again seems like a smart move. This could also correlate with cheaper real estate prices making acquisition timing that much better.

Valuation using DDM

Given Public Storages recent growth rates, a perpetual growth of 2.5% doesn’t seem out of line. Analysts covering Public Storage are estimating 3.4% growth next year and 17% for the next 5 years (per annum) (Source:Finance.yahoo.com). However, the industry is facing headwinds when it comes to supply and demand this year. This comes from an oversaturation of supply with demand staying consistent. This could cause some short-term pain for all self-storage companies this year.

Conclusion

Of all the options in self-storage companies, Public storage is the one that will help you sleep best at night going into a recession. Its growth rate will be smaller than its competitors due to its lack of use of leverage and large size. However, there’s still room for it to grow through acquisitions and internationally. Given our dividend discount model’s value of $234.38, which is below the current price, we see some small upside in Public Storage. However, the industry is facing some headwinds currently that could lead to a short-term drop-in stock price. In the face of this, we will be waiting to purchase after a drop from its current level after earnings for Q2 or Q3 this year. We look for our entry point to be around $207 to $223.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.