After building up a huge cash stockpile for much of this year, Public Storage Inc. has become a buyer of new properties in key markets and Wall Street, in turn, is buying its stock.
In October, the Glendale-based self-storage company spent $121.5 million acquiring 25 rental facilities in the Midwest and in Texas. The company also announced around $130 million in properties under contract that it wants to close on before the end of the year.
It's no coincidence that Public Storage shares have been rising too. Since the beginning of October, when its stock hovered around $50, shares have risen to $56.70 apiece on Nov. 16, setting a new 52-week high the day before. That's an increase of about 13 percent in a month and a half.
The purchases make a difference because all the cash sitting on the balance sheet was dragging down earnings, according to Banc of America Securities research analyst Ross Nussbaum.
At the end of the third quarter, Public Storage reported $475.3 million in cash on hand, more than 10 times the amount of cash it had a year earlier.
Much of Public Storage's cash had been raised through preferred stock sales that diluted the holdings of existing shareholders, Nussbaum said. And it wasn't being put to work, where it could earn a return.
"By more aggressively pursuing acquisitions, the company is able to put to work some of the excess cash on its balance sheet," Nussbaum wrote in a recent research report. The problem, he said, is that they waited too long.
With real estate prices still rising nationwide, the amount that Public Storage is paying for properties is higher than it would have been at the beginning of the year. "The average yield on recent acquisitions we consider low for self storage," he wrote in a section of his report titled: "Good progress on the acquisition front, but at a cost."
With its latest purchase, Public Storage is paying a 15 percent premium over replacement cost, and because of the higher prices and mostly flat rental rates company officials estimate that the average yield next year at about 7.5 percent.
"While we don't consider it a bargain at replacement standards, it seems reasonable for growth prospects," company president Harvey Lenkin acknowledged during a conference call with analysts earlier this month.
During the call, Nussbaum asked Public Storage officials where the change in mindset came from and why hadn't the firm begun buying a year ago.
Company officials said better properties have been included in portfolios and sellers are more willing to negotiate on prices than before. But Lenkin said staffing changes were also a reason. "We have had some changes in internal personnel," he said. "The people here are more aggressive about making acquisitions than some previously."
That may be a subtle shot at Marvin M. Lotz, a former senior vice president of development and acquisitions, who resigned earlier this year with a $600,000 severance package.
Lenkin said in an interview last week that the company had brought on Mike McGowan, who "seems to be uncovering more acquisition opportunities."
Acquisitions are also going to be key because developing properties is becoming more costly, he added.
"It's not a secret that the cost of concrete, steel and wood has gone up," Lenkin said. "That impacts our cost structure and labor costs. If this continues, it will put a damper on additional construction."
During the conference call, Lenkin said the company plans to increase advertising this month through December to help boost occupancy. Analysts were pleased that occupancy at Public Storage facilities remained flat at 92 percent, because the company pulled TV advertising due to increased rates during the Olympics and the last stage of the presidential campaign.
Public Storage Inc. is a self-administered and self-managed real estate investment trust that owns a 44 percent interest in another publicly held REIT, PS Business Parks Inc. PS Business Parks manages about 1.3 million square feet of space on behalf of Public Storage, its affiliates and third party owners.
Advertising will play a key role for Public Storage in the coming months, as two self-storage companies issued initial public offerings on the New York Stock Exchange. The companies Cleveland-based U-Store-It Trust and Salt Lake City-based Extra Space Storage Inc. could use the proceeds from the sales for expansion into markets where Public Storage dominates.
Still, Lenkin doesn't see a threat. "It won't increase the competitive nature of the marketplace," he said. "It doesn't enhance their competitive capability unless they do something that we haven't heard about yet."
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