On Monday, the multi-strategy investment firm Elliott Management, which manages approximately $41 billion in capital for institutional and individual clients and operates one of the world’s largest activist hedge funds, announced in an open letter to the company that it privately nominated six trustee candidates to the board of publicly listed self-storage REIT Public Storage last week.
Elliott Management says it has been in “private dialogue” with Public Storage for more than a month, and made the decision to go public with its letter in response to what it called “incomplete disclosures regarding its involvement and in order to facilitate a broader discussion regarding the best path forward for PSA.”
Elliott Management claims that Public Storage has “significantly underperformed” its self-storage REIT peers over the last decade, despite numerous structural advantages, including the highest brand awareness, the best (and most) locations, first-mover advantage, regional density, and the most pricing data. Yet, Elliott claims, despite that critical advantage, its total shareholder return has dramatically underperformed its self-storage REIT peers over the last decade.
“Failure to invest”
Elliott claims that for several decades after it was founded, Public Storage did invest heavily in expanding its store base, such that by 2010, it owned more than five times as many self-storage facilities in the United States as its largest competitor. Despite this commanding footprint, the company owned just 5 percent of the industry’s square footage; 90 percent was still owned by regional and local competition, leaving a large opportunity for further expansion.
Failing to act on the opportunity, Elliott claims, Public Storage ceded many of these advantages to increasingly sophisticated peers. After the storage industry demonstrated its resilience to economic turmoil and demand started to outpace stagnant supply in the early 2010s, investors were drawn to the attractive returns on capital and stable financial performance storage businesses were generating, bringing in large amounts of new capital and higher levels of financial and operational sophistication. Amid these changes, incremental returns on capital remained high for listed REITs, with Public Storage at the top of the heap. Yet, Elliott claims, the company failed to capitalize on the opportunity.
Elliott writes that there are three primary reasons that a company would opt against aggressively deploying capital into its business: lack of access to capital, low returns on incremental capital investment, or few opportunities to deploy capital. But over the past decade, they say, none of these reasons have applied to Public Storage.
“Through our time- and resource-intensive diligence process, we have concluded that Public Storage’s underperformance derives from two main issues: (i) a failure to invest more aggressively in its strong asset base and (ii) lagging sales growth. Substandard corporate governance and a lackluster investor relations program have compounded these problems, deepening the underperformance,” Elliott writes. “By underinvesting in new stores, existing stores, store-level employees, innovation and customers, the Company has failed to capitalize on the considerable first-mover advantage, leaving its shareholders to pay the price of that opportunity cost,” they write.
“These steps fall short”
On Sunday, Public Storage announced the appointment of three new members to its Board of Trustees, effective January 2, 2021: Shankh Mitra, CEO, CIO and director of health care REIT Welltower, David Neithercut, former President and CEO and current board member of apartment REIT Equity Residential, and Paul Williams, President of the Chicago chapter of the National Association of Corporate Directors (NACD).
Elliott Management gave partial plaudits to the board appointments in Monday’s release, stating, “The letter [from Elliott Management to Public Storage) noted the Company announcement yesterday of certain limited steps to refresh its Board — steps that validate some of the concerns Elliott has raised privately regarding the current Board’s long tenure and lack of independence.
“However, these steps fall short of the change needed at PSA, which needs to come in consultation with shareholders to have credibility with investors. Otherwise, even steps in the right direction will look like entrenchment and reinforce the perception that the Board is resistant to self-evaluation and course correction.”
Elliott Management has also proposed that PSA form a new board committee to evaluate the company’s performance and plan, focusing specifically on organic growth strategy, capital allocation and balance sheet optimization, noting that “Elliott has worked with many companies on steps to create these kinds of committees to evaluate, design and implement value-creative changes.”
“Extensive due diligence”
According to its open letter, Elliott Management undertook extensive due diligence in investigating Public Storage. Their efforts included engaging a management consulting firm to survey 2,215 self-storage customers over four weeks to examine the customer decision-making path and experience, analyzing the quality of locations, historical growth, margin profile, and online presence at Public Storage and its peers; conversations with “dozens of external experts” (including CEO’s, presidents, regional and district managers) from all parts of the industry value chain, a survey of 125 Public Storage and 125 competing Extra Space locations across the country; a shareholder survey; an analysis of testimonials from online review platforms; and the fund’s own independent, “hands-on diligence,” including renting storage units at Public Storage as well as its peers in leading markets.
Earlier this year, Elliott Management sent a letter to the Board of telecommunications infrastructure company Crown Castle, proposing an immediate operational and strategic review of the Company’s fiber business.
