Faced with the economic ripple effects of the COVID-19 pandemic, Public Storage is anticipating reductions in same-store net operating income for the rest of 2020.
“As Public Storage approaches its 50th year, we have clearly weathered significant economic cycles, and this one will likely rank as one of the most extreme,” said CEO Joe Russell during the company’s earnings conference call with analysts last week.
But despite the unprecedented headwinds, Russell maintained that the company was well prepared to survive the turmoil.
“Our teams are battle tested, our product is resilient, and we have intentionally crafted a fortress balance sheet to not only survive, but thrive in times like these,” Russell said.
Demand in the doldrums
A combination of forces are contributing to the company’s lowered expectations and are very likely to push the company’s same-store net operating income into negative territory. The REIT posted a 0.1% gain in same-store NOI during the first quarter of 2020.
Customer demand has been severely weakened by the current crisis, down 17 percent year-over-year during the month of April, according to Tom Boyle, chief financial officer of Public Storage. However, the number of move-ins increased as the month progressed, with the final week’s numbers coming in at 10 percent below the previous year, Boyle said during last week’s earnings call. In an effort to boost volume, the company has discounted rates on average 20 percent, Boyle added.
One reason for the slackened demand can be attributed to a surge of activity in March, which pulled demand from later in the renting season. Move-ins for March were up 20 percent year-over-year with students and customers seeking to get ahead of stay-at-home orders leading the surge, Boyle said.
Move-outs lower, for now
Public Storage has benefited from suppressed move-out activity, but Boyle noted that boon may be short-lived.
“We’re watching this metric closely and anticipate that stay-at-home orders are lifted, we may see an increase in pent-up move-out volume,” Boyle said.
The number of customer move-outs fell about 9 percent in April compared to the previous year.
The operator saw move-outs increase amid widespread unemployment following the financial meltdown of 2008, and they recognize that the same customer behavior could take place once the threat of infection has diminished. That could lead to “rent rolldowns”, which is when an existing customer with higher in-place rents is replaced by a new tenant paying lower rates.
Rate increases on pause
The company has long relied on rent increases on existing customers to boost its position, but the company won’t be increasing rates until after June at the earliest.
Then there is the specter of delinquent storage renters, which so far Public Storage has not seen a considerable rise. The company reported a 2 percent delinquency rate in April, and Boyle said that the company has collected 95 percent of its April rent as of May 1—a rate consistent with the previous year.
“As the duration of this pandemic elongates and we react to where we go from here, it could very likely put more pressure on the consumer and we’ll have to monitor that as we go forward. But at this point collections are very much in line,” Boyle said.
The company has also paused auctions for the time being and has worked with tenants to waive fees and reduce rent in certain cases.
Protecting its people
Public Storage also said it moved quickly to assist its employees during the current crisis by providing childcare coverage, extended paid time off and temporary wage increases. In addition, employees are being provided with masks and gloves.
The moves have helped the operator retain staff and maintain operating hours, however the increased expenses are yet another factor that is poised to impact NOI in the months to come.
Below are some additional highlights from Public Storage’s Q1 2020 earnings:
- FFO for the quarter was $2.61 per diluted share, up 3.6% for the same period in 2019.
- Revenue at the company’s 2,224 same-store facilities reached $609.54 million, an increase of 1.2% over the previous year.
- Marketing spend increased 58% from the same quarter last year with $14.3 million spent in Q1.
- Occupancy as of March 31 was 92.7 percent, six basis points above the same period last year.
- Realized rent per occupied square foot was $17.43, up 0.8 percent from the year ago period.