Elliott takes on Public Storage, actual property funding laggard

Elliott Associates sees a runway beneath Public Storage, and is pushing the self-storage firm to spice up funding and catch as much as {industry} friends’ development.

The corporate is among the finest identified and higher positioned within the self-storage area however hasn’t constructed up its asset base sufficient to stave off competitors and is leaving an excessive amount of cash on the desk with variable pricing algorithms and poor buyer expertise, based on the activist agency. The inventory has underperformed storage friends by greater than 300% within the final decade.

Elliott has nominated six administrators to the Public Storage board to supervise a extra aggressive development technique.

Enterprise: Actual property funding belief (REIT). The corporate’s principal enterprise actions embody the possession and operation of self-storage amenities, which provide storage areas for lease, typically on a month-to-month foundation, for private and enterprise use, ancillary actions, comparable to merchandise gross sales and tenant reinsurance to the tenants at its self-storage amenities, in addition to the acquisition and growth of extra self-storage area. The corporate’s segments embody Self-Storage Operations, Ancillary Operations, Funding in PS Enterprise Parks, Inc. and Funding in Shurgard Europe. As of December 31, 2019, the corporate had direct and oblique fairness pursuits in 2,483 self-storage amenities that it consolidates (an mixture of 169 million web rentable sq. toes of area) situated in 38 states inside the U.S. working below the “Public Storage” model identify.

Inventory Market Worth: $40.Three billion ($228.93 per share)

Share Possession:  n/a

Common Price: n/a

Activist Commentary: Though Elliott is understood for his or her activism within the expertise sector, they’ve been profitable activists in lots of sectors. Elliott is a $40+ billion hedge fund with great assets to investigate potential investments. Their group contains analysts from main tech personal fairness companies, engineers, working companions – former expertise CEOs and COOs. When evaluating an funding additionally they rent specialty and common administration consultants, professional price analysts and {industry} specialists. They typically watch corporations for a few years earlier than investing and have an intensive steady of spectacular board candidates.

On December 14, 2020, Elliott despatched a letter to the corporate asserting that it has nominated the next six administrators for election to the corporate’s Board: (i) Benjamin C. Duster, IV, CEO of Cormorant IV Company, LLC, a finance operations and strategic advisory/interim administration agency, (ii) Craig Macnab, Board member at VICI Properties Inc., an actual property funding belief specializing in on line casino properties, American Tower Company, an REIT and an proprietor and operator of wi-fi and broadcast communications infrastructure, and Cadillac Fairview Company Restricted, a non-public firm that invests in, owns and manages business actual property, (iii) Adam S. Metz, a non-executive director of Hammerson PLC, a property growth and funding firm and former Managing Director and Head of Worldwide Actual Property at The Carlyle Group Inc., a non-public fairness, various asset administration and monetary providers firm, (iv) Michelle Millstone-Shroff, a Senior Advisor to McKinsey & Firm, a administration consulting agency, (v) Mahbod Nia, a non-public investor and former CEO and President of NorthStar Realty Europe Corp., a publicly traded European targeted business REIT and (vi) Rebecca L. Owen, founder and chair of the board of administrators of Battery Reef, LLC, a business actual property funding and administration firm.

Elliott proposed a plan for the corporate that features substantial board refreshment, formation of a brand new Board committee to guage the corporate’s efficiency and plan, and restoring its relationship with shareholders beginning with an investor Day within the first half of 2021. (On the identical date as Elliott’s letter the corporate introduced that will probably be holding an investor day on Could 3, 2021). 

Elliott has made a considerable funding within the firm, making it one of many largest shareholders, and has already been in communication with the corporate. The one cause that they went public with this letter is as a result of their involvement has been reported on by the press and the corporate, and Elliott needed to verify the market had full info. With respect to this funding, it has engaged a number one administration guide, performed numerous surveys of shoppers and shareholders, talked with {industry} executives and specialists, and led its personal hands-on diligence together with renting storage models at Public Storage and its peer corporations.

Elliott sees Public Storage as an organization with first mover benefit on this $40 billion {industry}, which has given it a moat of irreplaceable property. Additional, the corporate has the most effective property and platform within the {industry} and has each structural benefit potential — the best model consciousness, the most effective and most places, and regional density. Nonetheless, regardless of all of this, the corporate has underperformed each its storage friends and the S&P 500 each single 12 months over the past decade, and cumulatively by -317% and -55%, respectively.

Elliott factors to 2 most important points which are driving the corporate’s underperformance — a failure to take a position extra aggressively within the robust asset base and lagging identical retailer gross sales development, each of which Elliott believes have been compounded by poor company governance and lackluster investor relations. The corporate’s failure to take a position extra aggressively has been the first driver. For a number of a long time following its inception, Public Storage did make investments closely in increasing its retailer base, such that by 2010, it owned greater than 5 instances as many self-storage amenities in the USA than its largest competitor, and nonetheless solely owned 5% of the {industry}’s sq. footage. With a pristine steadiness sheet, entry to capital, excessive incremental returns on capital, an operational edge on competitors and a extremely fragmented {industry} of unsophisticated competitors to amass or out-develop, Public Storage was primed to dominate the subsequent decade, however failed to take action. Nonetheless, since then, the corporate has been out-invested by its friends who elevated their retailer counts by 150% whereas PSA’s market share relative to its closest peer declined from 2.5x to 1.4x. Moreover, the corporate is nicely behind its friends on coming into the third-party administration area, which supplies friends with minimal upfront capital and incremental “efficient scale” via regional market share and alternatives for higher decision-making. The corporate has lastly entered this enterprise however approach too late and too gradual for Elliott’s liking. Nonetheless, the corporate nonetheless has an industry-leading platform and a base of properties that may yield high-return growth, so Elliott believes that growing funding to a degree commensurate with its relative scale ought to drive accelerated development.

Lagging same-store gross sales development is the second cause Elliott believes the corporate has underperformed its friends. Elliott’s analysis and expertise reveals that the corporate lags its friends in buyer expertise and the corporate’s price-occupancy optimization algorithm is just too extremely delicate to adjustments in occupancy, holding it again from maximizing income. Elliott believes that focused spending will increase all through the shop base will drive stronger income development and place Public Storage to thrive and compete; and by investing in its workers, Public Storage can enhance its clients’ expertise and enhance its development trajectory to match and finally exceed its friends.

Whereas the corporate has taken sure encouraging steps, together with growing capital deployment, launching new initiatives, elevating unsecured debt, hiring a head of IR and most not too long ago and following Elliott’s personal outreach, changing three Trustees, Elliott nonetheless desires to see extra adjustments. Merely put, Elliott doesn’t imagine that the Board that presided over firm whereas it trailed friends and ceded market share is the precise board to guide the Firm towards long run success. Elliott wish to see contemporary views and management adjustments in session with shareholders. Elliott’s six nominees definitely provide that.

Whereas the six nominees provide a various quantity of related expertise, what shouldn’t be included in its slate is an Elliott principal or govt. When an activist investor places one in every of its personal on the Board, it strongly indicators long run dedication and contribution. Whereas not including a principal to the slate doesn’t imply lack of dedication or continued contribution, it definitely provides the activist extra flexibility within the administration of its funding. That is on no account meant to say one of these activism is unhealthy activism. In reality, it may be very value-added activism that creates great worth for shareholders. However from an activist marketing campaign perspective it might result in activism-lite, the place an activist does virtually all of their activist work up entrance, places in an unbiased board after which simply screens it as considerably of a passive funding. With restricted assets and such a time-consuming technique, one of these activism is critical sometimes – not each marketing campaign is usually a “Citrix” the place Elliott companion Jesse Cohn spent 5 years on the Board leading to a 102.52% return for shareholders versus 49.54% for the S&P 500. Nonetheless, this doesn’t imply that Elliott will take its job of getting board illustration right here any much less critically. We count on them to do what it takes to place the corporate again heading in the right direction.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.