Elliott takes on Public Storage, real estate investment laggard
Signage is written on the building of a public warehouse in San Francisco, California, the United States, on Friday, April 21, 2017.
David Paul Morris | Bloomberg | Getty Images
Seeing a runway under public warehousing, Elliott Associates is pushing the self-storage company to boost investment and catch up with peer-to-peer growth.
The company is one of the best-known and best-positioned companies in the self-storage space, but has not built its asset base enough to stave off competition and, according to algorithms, is leaving too much money on the table to the activist firm with variable pricing and poor customer experience. The stock has outperformed storage peers by more than 300% over the past decade.
Elliott has appointed six directors to the Public Storage Board to oversee a more aggressive growth strategy.
Company: Public Storage (PSA)
Business: Real Estate Investment Trust (REIT). The main business activities of the company include the ownership and operation of self-storage facilities, which rent storage space usually monthly for personal and business use as well as for ancillary activities such as sales of goods and tenant reinsurance to the tenants in their self-storage -Facilities as well as the acquisition and development of additional self-storage space. The company’s segments include self-storage operations, ancillary operations, investments in PS Business Parks, Inc. and investments in Shurgard Europe. As of December 31, 2019, the company had direct and indirect interests in 2,483 self-storage facilities that it consolidates (totaling 169 million square feet of net space for rent) that are operated under public storage in 38 US states become “brand name.
Market value: $ 40.3 billion ($ 228.93 per share)
Activist: Elliott Associates
Percentage ownership: n / A
Average cost: n / A
Activist Comment: Although Elliott is known for their activism in the technology sector, they have been successful activists in many sectors. Elliott is a over $ 40 billion hedge fund with tremendous resources to analyze potential investments. Her team consists of analysts from leading tech private equity firms, engineers and business partners – former technology CEOs and COOs. When evaluating an investment, they also hire specialist and general management consultants, experts in cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board members.
On December 14, 2020, Elliott sent a letter to the company announcing that it has nominated the following six directors for election to the Company’s Board of Directors: (i) Benjamin C. Duster, IV, CEO of Cormorant IV Corporation , LLC, a financial firm and strategic advisory / interim management firm, (ii) Craig Macnab, director of VICI Properties Inc., a casino real estate investment trust, American Tower Corporation, a REIT and owner and operator of wireless and broadcast communication infrastructure; and Cadillac Fairview Corporation Limited, a privately held company that invests, owns and manages commercial real estate. (iii) Adam S. Metz, non-executive director of Hammerson PLC, a real estate development and investment company, and the former managing director and head of international real estate at The Carlyle Group Inc., a private equity, alternative asset management and financial services company; (iv) Michelle Millstone-Shroff, Senior Advisor at McKinsey & Co.mpany, a management consultancy, (v) Mahbod Nia, a private investor and former CEO and President of NorthStar Realty Europe Corp., a publicly traded European-focused commercial REIT, and (vi ) Rebecca L. Owen, founder and chairman of the board of directors of Battery Reef, LLC, a commercial real estate investment and management company.
Elliott proposed a plan for the company that would include a major board renewal, the formation of a new board committee to evaluate the company’s performance and plan, and re-establishing relationships with shareholders from an investor day in the first half of 2021. (On the same day in Elliott’s letter, the company announced it would hold an Investors Day on May 3, 2021.
Behind the scenes
Elliott has made a significant investment in the company, making it one of its largest shareholders. He was already in contact with the company. The only reason they brought this letter public is because the press and the company were covering their involvement and Elliott wanted to make sure the market had complete information. In relation to this investment, the company has hired a leading management consultant, conducted various customer and shareholder surveys, spoken to executives and industry experts, and conducted its own hands-on exam, including renting storage units from Public Storage and its peers.
Elliott sees public storage as a first-mover company in this $ 40 billion industry that has given him a ditch of irreplaceable assets. Additionally, the company has the best assets and platforms in the industry and has all sorts of structural advantages – the highest brand awareness, the best and most locations, and regional density. Despite all of this, the company has outstripped both its storage colleagues and the S&P 500 every year over the past ten years and cumulatively by -317% and -55% respectively.
Elliott points to two main problems that are fueling the company’s underperformance – a failure to invest more aggressively in its strong asset base and subsequent store sales growth, both of which Elliott believes were compounded by poor corporate governance and poor investor relations. The company’s failure to invest more aggressively was the main driver. For several decades after its inception, Public Storage invested heavily in expanding its branch base, so by 2010 it owned more than five times as many self-storage facilities in the US as its largest competitor and still only owned 5%. the square footage of the industry. With a pristine balance sheet, access to capital, high incremental ROI, an operational competitive advantage, and a highly fragmented industry with undemanding competition to acquire or evolve, Public Storage was prepared to dominate the next decade, but it couldn’t. Since then, however, the company has been overinvested by its competitors, who increased their branch counts by 150%, while PSA’s market share decreased from 2.5x to 1.4x compared to its closest competitor. In addition, the company lags far behind its competitors when it comes to entering third-party management, which offers competitors minimal upfront capital and incremental “effective scaling” through regional market shares and better decision-making opportunities. The company finally got into this business, but far too late and too slow for Elliott’s liking. However, the company still has an industry-leading platform and base of real estate that enables high-yield development. Elliott therefore believes that increasing investment to levels in line with their relative magnitudes should result in accelerated growth.
Delayed revenue growth in the same business is the second reason Elliott believes the company has outperformed its competitors. Elliott’s research and experience shows that the company lags behind its competitors in terms of customer experience and that the company’s pricing optimization algorithm is too sensitive to changes in occupancy, preventing it from maximizing revenue. Elliott believes that targeted spending increases across the store base will result in stronger sales growth and enable public warehousing to thrive and compete. By investing in its people, Public Storage can improve the customer experience and drive growth to match and ultimately outperform its competitors.
While the company has taken some encouraging steps including increasing its capital outlay, launching new initiatives, taking on unsecured debt, hiring an IR director, and most recently and after Elliott’s private engagement to replace three trustees, Elliott still wants more Changes. Put simply, Elliott doesn’t believe that the board of directors who ran the company while following his peers and stepping up market share is the right board of directors to lead the company to long-term success. In consultation with shareholders, Elliott would like to see new perspectives and leadership changes. Elliott’s six nominees certainly offer that.
While the six nominees offer a variety of relevant experiences, an Elliott director or executive is excluded from the list. When an activist investor appoints one of their own to the board, it clearly signals long-term commitment and contribution. While the lack of capital on the list does not mean a lack of commitment or continued contribution, it certainly gives the activist more flexibility in managing their investment. This is in no way intended to imply that this type of activism is bad activism. In fact, it can be very value-adding activism that creates tremendous value for shareholders. However, from an activist campaign perspective, this could lead to Activism-Lite, where an activist does almost all of their activist work in advance, setting up an independent body, and then just monitoring it as a passive investment. With limited resources and such a time-consuming strategy, this type of activism is necessary from time to time – not every campaign can be a “Citrix” that Elliott partner Jesse Cohn served on the board of directors for five years, resulting in a return on investment of 102, 52% for shareholders leads versus 49.54% for the S&P 500. That doesn’t mean Elliott won’t take its duty of representing the board of directors here any less seriously. We expect them to do everything possible to get the company back on track.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.