Public Storage Set to Send Its Troubles Packing : Services: Returns have been cut, but the industry’s pioneer says it is poised for a new growth spurt.
Wayne Hughes is not a household name, but his trademark is commonplace: Those bright orange signs denoting Public Storage self-storage warehouses, where people rent garage-size rooms for $60 or $80 a month to store furniture, clothes and who knows what.
Since co-founding the Glendale-based company in 1972, B. Wayne Hughes Sr. has built Public Storage Inc. into the nation’s biggest chain of self-storage facilities, with 1,000 locations in 38 states and Canada and 456,000 tenants who spend $350 million a year in rental fees. Public Storage, which also manages 51 business parks, has developed 63 million square feet of storage and office space, making it one of the biggest U.S. developers.
Hughes also is a major real estate syndicator, having persuaded investors to pony up most of the $3 billion that has been spent to build or buy Public Storage’s sites. The company earns fees on each new deal and gets a cut of up to 26% of the sites’ rental fees. As the 75% owner of the company, Hughes, 56, is worth at least $50 million on paper.
Because of that success, Hughes and Kenneth Q. Volk Jr., co-founder, chairman and 25% owner of the company, spawned a self-storage industry in which thousands of small-time operators opened “mini-warehouses” in the 1980s. The industry now has 20,000 buildings nationwide and more than $3 billion in annual revenue.
But Hughes is finding the business less friendly lately. Public Storage has struggled to attract investors to recent projects, owing to the sagging real estate investment market, lower yields on Public Storage’s deals and investor nervousness about Public Storage’s issuance three years ago of $135 million of junk bonds. The surge in competition has also made it harder for Public Storage to find new sites and to raise rental prices.
“I’m not saying all the yields are equal and everything is working perfect, because it’s not,” Hughes said. Indeed, yields on Public Storage’s partnerships and other investment products have always varied. Generally the yields were 20% a year or higher on funds going back several years, and they have dropped on more recent deals.
Robert Stanger & Co., a partnership research firm in Shrewsbury, N.J., said it found that among the 14 Public Storage public partnerships where appraised values for the underlying properties were available, the average annual yield was 12.7% at year-end 1988. Stanger noted that while the highest yield in the group was 33%, the lowest performer had a meager yield of 1.9%.
Hughes explained the lower yields on recent deals by saying the properties backing those investments are newer and have not had time to generate the cash flow to provide higher returns. “They don’t all start off as a roaring success,” he said, adding that it usually takes a year to build a small warehouse, then three years for it to reach full occupancy.
However, Stanger noted that the lowest-yielding partnership it found, the one with the 1.9% yield, dated back to 1983.
Hughes also discounted Public Storage’s junk bond exposure. A Public Storage subsidiary issued the bonds and has had sufficient cash flow to meet the payments, he said, adding that Public Storage has also bought back $43 million of the bonds.
Hughes said Public Storage is poised to expand sharply and “to really dominate the market.”
How? Thanks to the savings and loan debacle. At least 70 self-storage facilities are among the properties that the federal government seized from insolvent S&Ls; and is preparing to sell through its Resolution Trust Corp. Public Storage plans to raise $100 million, which should buy about half of the properties, Hughes said. (A newly built small warehouse can cost up to $5 million, including land. At that price, 35 new properties would cost $175 million.)
Overall, Public Storage plans to expand by about 40% over the next two years, with most of the additional 400 properties being bought from competitors, Hughes said.
He thinks it’s a buyer’s market because most existing self-storage warehouses were built by small operators who borrowed the needed cash from S&Ls.; Because of the S&L; mess, thrifts seldom make such loans today, industry officials said. That will limit the number of new competitors Public Storage must face.
The S&Ls;’ problems “took the fuel away from the independent operators,” agreed Tim Riley, marketing director for Shurgard Storage Centers, a Seattle-based concern that, with 200 outlets, is the nation’s third-largest self-storage operator behind Public Storage and U-Haul International, which has about 600 sites.
Now that the competition has ebbed, Hughes hopes to raise prices at Public Storage’s existing sites. “Since they’re not building any more, I’m going back to those rate increases,” he said.
Until the mid-1980s, Public Storage raised rates an average 8% a year, but last year it managed just a 1.6% average increase because of the added competition.
Public Storage sidestepped the S&L; fiasco because it obtains nearly all of its cash from the capital markets. The company has sponsored 160 various funds, including public and private partnerships, and real estate investment trusts (REITs) such as Storage Equities Inc., whose shares trade on the New York Stock Exchange.
Some of the private partnerships are solely for institutional investors, such as pension funds; some are earmarked only for foreign investors (Queen Elizabeth has money in one, Hughes said), and others are aimed at individual investors.
“They are better at raising money than anybody in the industry,” said Hardy Good, who publishes Mini Storage Messenger, a trade magazine in Phoenix.
Or at least they used to be. Eight months ago, Public Storage began seeking investors to raise at least $75 million to start another REIT, but “it looks like we’re probably going to get $35 million,” Hughes admitted.
Real estate investments, notably partnerships, have fallen into disfavor with individual investors in recent years because of tax law changes and financial problems at other big partnership syndicators. But institutional investors--pension funds, insurance companies and the like--have also been less enamored with Public Storage lately.
For instance, Hughes acknowledged that Public Storage’s most recent institutional fund garnered just $80 million of the $100 million the company hoped to raise.
But the Los Angeles Fire and Police Pension System, with $3.6 billion in assets, was among those investing in the project, placing $10 million in the fund. “We are familiar with the product, and it’s worked in the past,” said Gary Mattingly, general manager of the city’s Department of Pensions.
Hughes, an Oklahoma native who earned a bachelor’s degree in business from USC, did not invent the self-storage business. There were scattered storage facilities in the 1960s, mainly in Texas, and it was not until 1972 that Hughes and Volk first saw one next to a freeway in Houston.
But they quickly determined that a self-storage warehouse, if only partly occupied, could pay for itself and the surrounding acreage. “I saw a method of holding prime land with income,” he said.
Today, Public Storage needs only to have 25% occupancy for a warehouse to break even, yet the company’s actual average occupancy rate is 83%. Overhead costs are low. The warehouses--unlike apartments or offices--have no carpets, drapes, furniture or ventilating equipment that need cleaning or replacing.
The warehouses are built next to freeways and in other high-visibility areas so that people remember their location when they need storage. Storage operators depend on major jolts in peoples’ lives--such as an unexpected move, a divorce or birth--to generate business, and the average tenant stays about nine months, he said.
Hughes said Public Storage’s staying power is improving because the self-storage business has added less new space each year since 1985, its peak building year.