Make Room for Public Storage Shares

Ever feel like you need more space? You�re not alone.� Let’s take a quick look at one of the companies that has held its own this year satisfying customers’ need for just a little more room.

Public Storage�(NYSE:PSA), which specializes in self-storage facilities in the U.S. and Europe,�is one of the largest REITs in the country with a market capitalization of $19.6 billion. It pays a relatively low dividend yield of 3.1%, and Wednesday’s closing price of $113.02 was 11.4% higher than where it started the year.

Moreover, PSA shares are about 50% higher than where they were on Oct. 10, 2007, when the recent bear market began. That’s around 75 percentage points better than the broad market — a huge differential.

So how has this company been able to excel in these trying times?

Like any good business, Public Storage lowered its debt and expenses while raising its prices. Over the last year, Public Storage has seen a 6.2% increase in net operating income due to a 4% increase in revenue and .3% decrease in expenses. To cut debt, Public Storage has begun to finance all operations and acquisitions with preferred equity and retained earnings.

This year’s success can also be attributed to the 1.4% increase in the U.S. occupancy rates at its facilities that resulted in 92.3% occupancy. Public Storage has also raised realized annual rent per occupied square foot by 2.2%. This has helped the company log earnings large enough to cover fixed charges 23 times over.

Public Storage’s prospects look even better because of its diversification across the landscape of the U.S. While the overall economic conditions of the country obviously have an effect on the company’s growth, it is mostly much immune to the local economic conditions of the areas in which it operates because it takes advantage of two opposing conditions: People who lose their homes and need places to store their stuff, and people who own homes and need extra room for their stuff.

In a recent report, Morningstar analyst Jason Ren praised the company for its ”fortress-like balance sheet,” ”positive apartment fundamentals” and ”negligible debt holdings.” However, there are still a few items to be worried about. The self-storage market is highly competitive and the costs of entry are so low that the top five self-storage providers in the nation only have a combined 10% of the overall market share.

The business model also runs on short-term leases with little variation in product, which leads to decreased bargaining power over customers. Ren explains that the advantages of Public Storage are the size, which allows it to decrease its cost structure, and its substantial earnings, which gives it an opportunity to market more effectively. However, with the unemployment rate high and rising, customers’ disposable incomes have fallen and occupancy growth has narrowed a bit.

In summary, PSA has been a solid holding during a treacherous stretch. Keep holding it at least through the end of October.