There are few businesses less exciting than self-storage real estate. After all, you're talking about a bunch of mostly pre-fabricated buildings that customers store things in and rarely go to.
Sometimes, however, boring businesses are the best businesses, and early investors in self-storage leader Public Storage (PSA -1.07%) know this very well. Over the past 30 years, Public Storage has generated a 5,870% total return for investors -- more than five times what the S&P 500 produced in the same period.
What does Public Storage do?
Public Storage is a real estate investment trust, or REIT (pronounced "reet"), specializing in self-storage properties. It owns just under 3,300 properties in 40 states with a total of 238 million rentable square feet.
Key advantages and growth potential
The company has some major advantages over its peers. As the largest self-storage owner in the U.S., it has scale advantages and the most recognizable brand name in the business. And the economics of the self-storage business are fantastic.
In a previous annual report, Public Storage said it could break even with just 35% of its space rented (it's typically over 90% occupied). The company has higher net operating income (NOI) margins than all of its publicly traded competitors and grows through a combination of acquisitions and development.
The company has an industry-leading technology platform that provides customer service, property access, and even rental agreements completely through the app, improving efficiency, as well as the customer experience. It also has unmatched financial flexibility to pursue growth opportunities as they arise. Public Storage has extremely low debt, A-rated credit, and $630 million in cash on its balance sheet.
One particularly interesting competitive advantage is that Public Storage's management has a long history of avoiding dilution and excessive debt. It's common practice for REITs to fund their growth with a combination of debt and equity (issuing new stock), but Public Storage doesn't.
On the equity side, fellow large-cap REITs Prologis and Digital Realty Trust have increased their outstanding share counts by 85% and 136%, respectively, over the past decade. Public Storage has 2% more shares than it did 10 years ago.
PSA Shares Outstanding data by YCharts.
On the debt side, the company spent years avoiding debt altogether, but finally decided to take some on during the extreme low-interest-rate environment in 2019-2021. Even so, $9.1 billion in debt (at an average 2.9% interest rate) is remarkably low for a REIT with a $48 billion market cap.
Instead, Public Storage prefers to fund its growth the old-fashioned way -- by paying what it has to in dividends and reinvesting the rest of its earnings into the business. This lack of dilution and interest expense has proven to be a winning combination for investors and is a particularly big advantage in the high-cost-of-capital environment we're currently in.
Finally, and perhaps most significant for long-term investors, only 18% of self-storage properties are owned by public REITs. Some are owned by private REITs, but a staggering 73% of self-storage properties are still owned by small operators. This should provide a steady stream of acquisition opportunities over the coming years.
The bottom line
One of the most important lessons long-term investors should learn is that an exciting product doesn't always make a great business (look at Peloton as an example). Conversely, a dull or boring product doesn't necessarily make a bad business. Many of the richest people I know got that way by owning and operating laundromats, vending machines, and various rental properties.
Public Storage is an excellent publicly traded example of a boring business that has certainly made some of its long-term investors millionaires. It could continue to deliver market-beating performance for decades to come.
