Why Public Storage is the Best Self Storage REIT

Investing in self storage is boring. No cool technology, no high-profile CEOs and no high-flying stocks run by people in their 30s.
But when it comes to investing, “boring” is one of the most underrated words. Self storage is a low risk, reliable business model with consistent returns.
What’s not to like?
Over the past couple days I’ve discussed several major tailwinds for the self storage industry. I’ve also discussed the five publicly traded companies that give you exposure to self storage.
Today I’ll share with you why Public Storage is the best self storage REIT.

public-storageThe Big Four

The self storage industry is fragmented, dominated by mom-and-pop facilities and private companies. Four REITs control 7% of this fragmented industry and are poised to further consolidate the market through acquisitions.
These companies – from largest to smallest – are Public Storage (NYSE: PSA), ExtraSpace (NYSE: EXR), CubeSmart (NYSE: CUBE) and Sovran Self Storage (NYSE: SSS). 
The table below compares the four REITs based on key metrics.

Source: Yahoo Finance and SEC filings


Why Public Storage is the Best Self Storage REIT

Public Storage is by far the biggest of the four major self storage REITs. Bigger doesn’t always mean better but in this case it does.
With 151 million square feet of rentable space, Public Storage has roughly twice the footprint of ExtraSpace, four times the footprint of CubeSmart and six times the footprint of Sovran Self Storage.
Considering that the industry is seeing rising occupancy rates and rising rental prices across the board, Public Storage’s size is a considerable advantage.
Public Storage is also poised to grow internationally. The company owns 49% of Shurguard, which operates 10 million square feet of rentable space in Europe, giving it exposure to international demand for self storage.
REITs have performed well in the current low-rate environment but many investors are concerned about their viability in a high-rate environment. And for good reason.
If treasury and bank yields rise, high-yield assets like REITs become less attractive. Perhaps more importantly, rising rates also make it more expensive for REITs to issue and service debt.
This is a major problem for CubeSmart, which has a debt-to-equity ratio of 103. ExtraSpace and Sovran have a debt-to-equity ratio of 78 and 77.35 respectively.
Though these companies will do better than CubeSmart as interest rates rise, Public Storage is positioned to thrive in a higher-rate environment. By issuing preferred stock instead of debt, Public Storage has managed to keep its debt-to-equity ratio as low as 5.11.
Public Storage also has a 41% stake in PB Business Parks (NYSE: PSB), giving investors diversification into a different segment of commercial real estate.
With a dividend of 3.28%, Public Storage’s yield is right around the industry average of 3.3%.
The only negative things I have to say about Public Storage are that its occupancy rate is the lowest its valuation is the highest among the four major self storage REITs. But with occupancy rates rising across the industry I expect this to work itself out.
The remaining issue then is valuation.
I won’t be buying any shares at this level but on a pullback I would love to add this best-of-breed stock to my portfolio. ExtraSpace and Sovran Self Storage are also quality investments. But in my opinion, Public Storage stands out as the best self storage REIT available. What do you think?

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