Unwilling to stomach lofty valuations for existing storage properties, executives at Public Storage continue to pour the self-storage REIT’s energy — and money — into development, redevelopment and expansion activities.
“We, at the end of the day, really can’t make sense of a lot of the valuations,” Tom Boyle, chief financial officer of Glendale, CA-based Public Storage, told Wall Street analysts during the REIT’s third-quarter earnings call Oct. 31. “When you see stabilized assets in certain markets trading at $300, $400, $500 a square foot, it makes no sense to us.”
As a result, the REIT prefers — at least for now — to earmark money for development, redevelopment and expansion projects.
If you build it, they will store
Boyle said Public Storage can build well-located, Class A facilities for roughly $100 to $120 per square foot. Many of the REIT’s more than 2,400 facilities are “prime candidates” for redevelopment and expansion, added CEO Joe Russell.
During the first nine months of this year, Public Storage has certainly put its money where its philosophy is.
Through Sept. 30, the REIT had completed 16 ground-up facilities and various expansions, totaling 2.4 million net rentable square feet, at a cost of $278 million. Meanwhile, as of Sept. 30, its development, redevelopment and expansion pipeline contained $597 million worth of projects encompassing 5.4 million net rentable square feet.
The acquisitions front
By contrast, Public Storage purchased 16 facilities with 1 million net rentable square feet — for a total price tag of $107.8 million — during the first nine months of this year. As of Oct. 1, the REIT had purchased or put under contract nine facilities with 600,000 net rentable square feet for $79.7 million.
Add that up, and you’ve got nearly $900 million in completed or planned development, redevelopment or expansion projects, versus less than $200 million in completed or planned acquisitions.
Boyle said Public Storage is willing to snag existing facilities for $100 to $110 per square foot. The REIT will continue to be “very disciplined” in the current acquisition environment, he said.
“We’re hopeful that 2019 will bring more opportunities on the acquisition front,” Boyle said, “Maybe cap rates do change at some point and would allow a shift back to acquisitions from a capital allocation standpoint.”
During the third-quarter earnings call, Public Storage executives also reported:
- New-supply activity in 2019 is projected to be pretty much on par with activity in 2018 across the REIT’s top 30 markets.
- Austin, Dallas and Houston, TX; Charlotte, NC; and Denver, CO, which have been oversupplied the past few years, are expected to see fewer new-supply deliveries in 2019.
- Boston, MA; Miami, FL; New York City, NY; Raleigh, NC; and West Palm Beach, FL, are likely to experience “slightly elevated” levels of new-supply deliveries next year.
- 12 facilities have been tapped for the REIT’s third-party management platform.
- Same-store revenue rose 1.2 percent compared with the same period in 2017.
- Same-store NOI increased 0.6 percent compared with the same period in 2017.
- Same-store occupancy declined from 94.6 percent in the third quarter of 2017 to 94 percent in the third quarter of 2018.