Public Storage is relying on development — rather than acquisitions — to expand its portfolio this year.
The publicly traded self-storage REIT says it has a pipeline of 25 development projects that will deliver 3 million rentable square feet. The estimated construction cost: $351 million.
“As we moved through 2014, [acquisition] pricing continued to get more and more aggressive,” Ron Havner, chairman, president and CEO of Glendale, CA-based Public Storage, said during a Feb. 20 conference call with Wall Street analysts.
Cap rates spur development
Havner said Public Storage has seen some facility acquisitions with cap rates well below 5 percent cap rates. An investor uses the cap rate to calculate the potential return on an investment; the lower the percentage, the lower the ROI.
The great thing about our development pipeline is that we are building to replacement cost, building brand-new product and getting into submarkets where there is little competition.
— Ron Havner, chairman, president and CEO of Public Storage
As a result of that cap-rate environment, “we accelerated our development pipeline,” Havner said. “I think you will see us accelerate that form of expansion as we head into the year.”
Havner said Public Storage has another 25 projects that it’s working on fitting into the development pipeline. To fill the pipeline more quickly, the REIT is adding people to its development team, Havner said.
In 2014, the company spent $431 million to buy 44 facilities. Those deals added 3.4 million square feet to the REIT’s portfolio, at a cost of nearly $127 a square foot. That’s above the $117 per square foot it’s costing to build facilities.
In some markets, the gap between acquisition and development costs is substantial. Havner said one portfolio sold recently in the Austin, TX, market for $200 per square foot, while the company is developing facilities in the same market for $80 to $90 per square foot.
“The great thing about our development pipeline is that we are building to replacement cost, building brand-new product and getting into submarkets where there is little competition,” Havner said.
In 2014, the company finished six development projects at a cost of $48 million. Three of those were completed during the fourth quarter.
More than meets the eye
There’s more self-storage development activity happening across the U.S. “than people realize,” Havner said Feb. 20. “We had a real estate meeting yesterday and were surprised at the number of markets where we are starting to see development.”
Busy markets for development include New York City, NY; Texas; and the Southeast, he said.
Despite the flurry of development activity, Havner said Public Storage said isn’t passing up acquisition opportunities. The company spent $134 million to buy 13 facilities during the fourth quarter, and so far this year has purchased four facilities for $32 million.
2014 revenue up 11 percent
Public Storage is ramping up development activity as it looks back on a strong financial performance in 2014. The company posted $2.2 billion in revenue last year, up 11 percent from 2013. Profit grew 8 percent, to $1.15 billion.
In the fourth quarter, the REIT racked up revenue of $529 million, an increase of 10 percent compared with the same period a year earlier. Fourth-quarter profit climbed 17 percent, to $348.4 million.
Revenue at the company’s same-store locations jumped 5.5 percent in 2014 compared with 2013, while same-store profit rose 6.7 percent.
Betting on discounts, rent increases
John Reyes, chief financial officer, said the company ratcheted up its discounting in the fourth quarter to pump up occupancy. The company ended 2014 with occupancy at its same-store facilities of 92.5 percent, compared with 91.8 percent at the end of 2013.
Meanwhile, the company hiked rental rates. Realized rents per occupied square foot averaged $15.20 during the fourth quarter, compared with $14.45 during the same time a year earlier.
“It was a great quarter, and we accomplished what we wanted to accomplish,” Reyes said.