Self-Storage REITs: Biggest Will Get Bigger

Record-high occupancy rates and returns that outperformed all other REIT sectors in 2021 have the six self-storage REITs engaged in an intense competition for market share that has fueled a binge of acquisitions in the fragmented sector.

The consolidation trend will continue this year, analysts say, with Public Storage, the largest operator, poised to accelerate the expansion of its industry-leading portfolio.

According to an analysis this month by The Motley Fool, Public Storage is flush with cash and industry-highest occupancy rates that put the leading self-storage REIT in a prime position to accelerate its $2.3B expansion strategy.

Motley Fool’s analysis cited a “clean” balance sheet of $940M in cash, $7.4B in debt and a free cash flow at the end of 2021 of nearly $2.3B, which it said will enable Public Storage to continue to expand its portfolio in the fragmented self-storage sector “for years to come.” 

“(Its) financial strength should allow Public Storage to take advantage of future deals. The company has a below-average debt to equity ratio of 76%, giving it both the scale and ability to raise capital where other self-storage bidders may not,” the analysts said.

A significant enhancement to the arsenal of capital Public Storage has amassed for future acquisitions also has come in the form of the recent agreement by PS Business Parks to be bought by Blackstone for $187.50 per share.

Public Storage holds 7.2M shares of PS Business Parks and will receive pre-tax proceeds of $2.7B, which Motley Fool’s analysts noted the REIT will have at its disposal to “fuel opportunistic acquisitions.” 

Public Storage has achieved industry-leading 35%-plus returns on equity, meaning that it earns more profit relative to its assets and liability than its REIT rivals do. Self-storage REITS Extra Space Storage and CubeSmart generate ROEs of 27% and 9%, respectively, the analysis found.

Maximizing Public Storage’s advantage has been its online platform selling storage unit rentals, a one-stop sales vehicle which has catapulted Public Storage into a commanding position in terms of occupancy rates.

Overall, Public Storage’s weighted average occupancy was 96.3% in 2021, compared to 92% for CubeSmart and 88.2% for Life Storage, the analysis reported.

Reviewing the activity of the self-storage properties Public Storage has acquired since 2020, Motley Fool’s analysts said Public Storage had increased the occupancy of properties that had registered less than 65% occupancy in 2020 up to more than 88% by 2021.

Public Storage was an aggressive early mover in the acquisition frenzy involving self-storage portfolios in the past two years, acquiring facilities in leading markets including L.A., San Francisco, NYC and Miami in prime locations that commanded above-average rents.

Public Storage’s acquisitions included a $1.8B purchase of ezStorage and its 4.1M SF of rentable space and a $1.5M acquisition of All Storage’s portfolio of 7.5M SF.

Prior to the pandemic, self-storage vacancies were high and rents were sagging. The rise of remote work accelerated the migration of millennials seeking more affordable locations with a higher quality of life, which in turn created brisk new demand for self-storage space in markets across the US.

The demand for self-storage rentals shows no signs of abating anytime soon. The national average for 10-foot x 10-foot climate-controlled unit rental rates increased by nearly 10% last year, with markets in the Sun Belt reporting YOY increases as high as 15%.