What Are Public Storage’s Future Plans?
Public Storage has been in business for more than 45 years, and Ron Havner has been a key member of the company for 32 of those years. Havner has served as chairman and CEO for 16 years.
Earlier this year, the company announced that Havner will step down as CEO at the end of 2018. Joe Russell, who serves as president, will take the top position at the Glendale, Calif.-based real estate investment trust in January.
Havner passes on a legacy that began with Wayne Hughes and Ken Volk, who founded the company in 1972. Each man ponied up $25,000 in seed money to grow what today is the top owner and operator in the self-storage industry.
Hughes and Volk met in the 1970s during a real estate transaction. During his travels, Volk stopped in Houston to investigate a small storage facility with sold-out units and a waiting list. He saw an opportunity.
According to the Public Storage website, their first location opened in El Cajon, Calif., in 1972, with a fiesta complete with mariachis and bright orange doors to attract the attention of potential customers driving by on the nearby highway.
Its ubiquitous orange signage and doors brand Public Storage as the largest owner and operator of self-storage facilities in the world, employing more than 6,000 people at 2,600 facilities located in 38 states and seven European nations.
From Private To Public
It didn’t take long for Public Storage to become the industry leader; however, the company encountered a few slips and falls along the way as the executive team took calculated risks that sometimes raised eyebrows but usually paid off.
Havner, who joined Public Storage in 1986, delivered a speech titled, “Valuable Lessons Learned,” at New York University in 2012, in which he recounted the winding course the company followed to eventually become successful. He equated this journey to a golfer who hits a bad shot but is able to quickly recover to post a good score.
The first out-of-bounds shot, as he termed it, was naming the company Private Storage Spaces, which seemed to convey the company’s product. However, people got confused, thinking the company did not rent to the public—only to select private customers.
“Being ever nimble, soon after the first couple of facilities were built, we renamed the company Public Storage,” Havner told his NYU audience. “Who knew 40 years later our name would define our industry and be nearly synonymous with our product?”
In the early days, the company’s building strategy was to get a construction loan, build a property, then mortgage and sell it. That allowed Public Storage to make enough profit to do the next deal. This worked until 1975, when the prime lending rate rose to 12 percent; by 1981 it peaked at 21 percent.
The company shifted its focus to raising money with all-cash limited partnerships, which was unusual in the highly leveraged 70s and 80s. The first partnership took nine months to raise $2.7 million. The next partnership took three months to raise $5 million, and the third took about three hours. Over the next 12 years, Public Storage raised over $2 billion in 100-plus private limited partnerships that helped the company grow into the industry leader.
In 1980, Public Storage organized a separate company called Storage Equities through an initial public offering initially listed on NASDAQ and, eventually, on the New York Stock Exchange in 1984. Over the next decade, Storage Equities was leveraged to buy existing self-storage properties built by others, providing the company with an additional avenue of growth. In 1995, Public Storage and its private limited partnerships were rolled into Storage Equities and the name was changed to Public Storage, Inc. The company was added to the S&P 500 Index in 2005.
Over this period, further out-of-bounds shots occurred when Public Storage diversified into boat marinas, pizza restaurants, flower shops, brokerage, and portable storage. “All proved to be very expensive lessons,” Havner says. “Through each of these mistakes, we gained greater appreciation for the wonderful business we stumbled into in 1972—self-storage.”
No matter how high a person rises in an organization, there inevitably have been mentors and other influencers along the way who made a difference in a career. For Havner, an important mentor undoubtedly was Wayne Hughes.
In fact, he likens Hughes in many ways to Warren Buffett, the billionaire investor who serves as the chairman and CEO of Berkshire Hathaway. “The similarities in their thinking is amazing,” Havner notes.
In his NYU speech, Havner outlined four lessons he learned from Hughes and Buffett.
Starting with Lesson One, Havner learned that “Real estate is a very capital-intensive business, and the cost of that capital is highly dependent on the attitude or mood of Wall Street.”
Havner says, “We have sought to immunize our company from the vicissitudes in the capital markets. When the mood changes on Wall Street, it is usually fast and dramatic, so you have to be prepared.”
Lesson Two: “Wall Street is there to serve you, not to guide you, so think differently.”
In 1992, Storage Equities issued the first public preferred stock by a REIT, despite warnings no one would buy a REIT’s preferred stock. It took six weeks, but the REIT raised $45 million. In 2011, Public Storage issued 15 percent of all the preferred securities sold in the U.S.
In 2006, Public Storage acquired its next-largest competitor, Shurgard, in an all-stock, taxable transaction, something that had never been done before. “The $5.5 billion transaction was transformational for us and the self-storage industry,” Havner says.
“Wall Street is very fickle, its mood changes from week to week, month to month” Havner observes. “We don’t run the business around what Wall Street is thinking week to week. We are long-term owners. Our time horizon is much different than Wall Street’s.”
Lesson Three: “Business is simple. There is the cash-in drawer and the cash out of drawer. Open the cash-in drawer and close the cash out drawer.”
“Business is about free cash flow, not FFO, not net income, not EBITDA,” Havner says. “What matters is how much cash you generate to either re-invest or distribute to owners.”
Lesson Four: “Hire people smarter than you. It is impossible to build an ‘A’ company with ‘C’ talent.”
Says Havner, “You can’t be the industry leader for 45 years, have the best brand, integrate large mergers, or generate strong growth without great people.”
These lessons have paid off for shareholders. Public Storage has delivered an 18 percent average annual total return to shareholders since 1995, doubling the nine percent return delivered by the broader S&P 500 Index over the same period.
Adherence to the lessons helped to build Public Storage into the largest self-storage company in the world, with more than one million customers and record 2017 revenues of $3.4 billion. The company owns more than twice as many properties as its next-largest competitor.
But Public Storage—along with most self-storage operators—is facing challenges following years of above-average growth from new competition as a result of aggressive development.
This robust development wave is at least partly responsible for slowing growth. According to Public Storage’s 2017 Annual Report, the REIT’s revenue growth rate slowed from 6.6 percent in 2015 to three percent in 2017, resulting in a lower net operating income (NOI) growth rate of 8.5 percent in 2015 to 2.8 percent in 2017.
Public Storage is the only self-storage REIT with its own development platform, a major competitive advantage. In 2017, the company invested $312 million in 16 newly constructed properties and expansions of existing sites. Meanwhile, the REIT acquired a modest 22 existing facilities for $150 million. That compares with 55 facilities acquired in 2016 for approximately $429 million.
The company plans to deliver even more development and expansions over the next 18 months. At mid-year, Public Storage held a $680 million development pipeline expected to add 6.1 million net rentable square feet. The pipeline comprises approximately 45 percent newly constructed properties and 55 percent expansions of existing properties.
Self-storage development is not much different from other types of real estate building. Where there is financing and a healthy return, there is robust development.
“It’s a normal real estate cycle. When people start building, they get money, they hire a development team, and go about their ways until they can’t get any more money,” Havner says.
“The world has been awash in liquidity, and there has been money for development. What we are doing is building to an eight or nine percent cash-on-cash return. If you can do that and sell it to investors or a third party on a proforma five cap rate, that’s a 60 percent development margin.” Returns available on the acquisition of existing properties are less attractive following a dramatic increase in property values.
Institutional investors have bought into self-storage in recent years, especially following the sector’s strong showing coming out of the Great Recession. While self-storage was not considered an institutional quality asset 20 years ago, the asset class has gained a somewhat lofty status.
“Today it’s not only considered an institutional quality asset, it’s considered a core institutional quality asset and, therefore, institutional capital wants into this business,” Havner says.
Another reason for aggressive building is the emergence of third-party management programs, such as those instituted by some of Public Storage’s competitors.
“The third-party management business of Extra Space, CubeSmart, and Life Storage has taken one of the barriers to entry to this business out of play because people can now build and have a REIT manage their property for a fee,” Havner says. “It used to be, you had to have a platform and operating ability. It limited how much was going to get built because you had to be able to operate. Now when you hand off to a third-party manager and just focus on building, you will build more.”
Third-Party Management Advantage
Considering a slower growth trend along with the challenges of new development, it makes sense for Public Storage to throw its hat into the third-party management ring, which it did earlier this year.
Peter Panos, a 20-year veteran at the company, was appointed to head up the new division called Public Storage Advantage. Panos served as regional vice president in Texas and COO for Shurgard Europe.
When Havner approached him to head the new division, the company had no third-party team, nor a dedicated website or collateral material. “I built an economic offer, and then I built a team,” Panos says. During his first six months at the helm, Panos and his team have come up to speed quickly. The Public Storage brand didn’t hurt at all.
“I’m very encouraged but also surprised at how brisk the demand has been,” Panos says. “The amount of inbound interest we’re seeing has been unbelievable. They have come to us because of the name Public Storage. I don’t have to explain who Public Storage is.”
In addition to the name, Panos believes Public Storage Advantage has developed an attractive economic package that meets or beats the competition. Public Storage says Advantage offers the lowest management fee structure in the industry, the lowest setup cost compared to the competition, and the highest insurance compensation paid to owners.
Public Storage’s sheer size allows the Advantage program to pass along buying power and economies of scale to member facilities.
So how aggressive will Advantage be going forward? “Very aggressive!” Panos responds, adding his own exclamation point. The third-party management division has made good progress, but Panos declined to predict how many new facilities will be added over the next 12 months.
Because inbound inquiries have been strong, Panos has yet to target specific markets for outbound inquiries to candidates, but there are some obvious choices. “We love metro markets because of the economies of scale where we have a lot of properties and district managers already in place,” he says.
“In the markets where we operate, we have the largest market share,” Panos says. “It brings more eyeballs to your website and, subsequently, more foot traffic to your store because when anyone types ‘storage’ in a market, the likelihood of Public Storage coming up number one in the search results is phenomenal because we have that scale and market share. Our brand is the most relevant and visible online.”
Fresh Faces At The Top
In January, Public Storage will have a new CEO for the first time in 16 years as Joe Russell succeeds Havner. In addition, Tom Boyle will replace John Reyes as CFO at the same time. Reyes has been CFO since 1996 and joined the company in 1991.
“I’ve worked with Joe nearly 17 years,” Havner says. “We’ve had him spend a lot of time with management and field operations learning the business from the ground up. Most importantly, Joe has the right attitude and cultural fit to lead Public Storage.”
Havner notes that his time as CEO is about four times the average CEO’s tenure. “It’s time for fresh faces and fresh ideas,” Havner says. “I think Joe and Tom will bring a new fresh perspective to the company. I will remain very engaged in the Public Storage organization, but it’s time for me to step away from the day to day.”
Havner will continue to be involved in Public Storage as chairman of the board, chairman of PS Business Parks, and chairman of the company’s European affiliation Shurgard Self-Storage.
Havner leaves a lasting legacy at Public Storage and has served as a role model for others in the organization.
“When I first started to report to him 16 years ago, he made it very clear he wanted you to think for yourself and that was very refreshing,” Panos says. “He taught us to think like an owner; and when you think like an owner, then you get into thinking about: Is this profitable? Is it right for customers and the bottom line? Is it sustainable?”
In a series of You Tube videos on leadership, Havner emphasizes the value of Integrity. “I can’t think of anything more important in being a leader as having integrity,” Havner relates. “You tell the truth. You do what you say you’re going to do. You do the right thing.”
Protecting a person’s reputation as well as the company’s is an important component of Havner’s leadership style. “It takes 20 years to build a reputation and five minutes to destroy one,” he likes to say.
As Public Storage’s management passes into new hands, the new executive team will assume the task of carrying on Havner’s, Hughes’ and Volk’s work ethic and protecting a business reputation that spans more than 45 years.
David Lucas is a freelance writer based in Phoenix, Arizona. He is a regular contributor to MiniCo’s publications.