Shares of Public Storage PSA have risen 26.8% in the past six months compared with the industry’s growth of 16.3%.
One of the top owners and operators of storage facilities in the United States, Public Storage enjoys a presence in all major metropolitan markets of the country. The ‘Public Storage’ brand is a much-recognized and established name in the self-storage industry.
With this self-storage REIT riding high, individuals may rush to add it to their portfolio. However, before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects and the risks of investing in it. The idea is to help investors make a more insightful decision.
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What’s Aiding Public Storage?
Public Storage has its market share and concentration in major metropolitan centers that have the highest population levels. Apart from benefiting from brand recognition, the company is likely to gain from economies of scale. Moreover, the company remains well-poised to benefit from around 35% stake in Shurgard Self Storage SA, a well-established and valuable European brand. We estimate total revenues to increase 3.9% year over year in 2024.
Public Storage has been capitalizing on growth opportunities. From the beginning of 2022 through Sept. 30, 2024, Public Storage acquired a total of 243 facilities with 17.2 million net rentable square feet for $3.5 billion. During the nine months ended Sept. 30, 2024, these facilities contributed NOI of $118.3 million. The company expects $350 million in acquisitions and $450 million in development openings in 2024. With solid access to capital, the company is well-poised to take advantage of any potential opportunity.
Public Storage has one of the strongest balance sheets in the sector, with adequate liquidity to withstand any challenges and bank on expansion opportunities through acquisitions and developments. The company maintains a strong financial profile characterized by solid credit metrics, including low leverage relative to its total capitalization and operating cash flows.
PSA concluded the third quarter of 2024 with net debt and preferred equity to EBITDA of 3.9X and an EBITDA to fixed charges of 7 times. It also enjoys an “A” credit rating from Standard & Poor’s and an “A2” from Moody’s. The sturdy credit profile and ratings enable PSA to access both public and private capital markets to raise capital at favorable rates. As such, the company seems well-poised to take advantage of any potential opportunity.
Solid dividend payouts are arguably the biggest enticements for investment in REIT stocks. Public Storage has consistently paid its dividends and continued with its payment even during the pandemic. While the company has increased its dividend two times in the past five years, its payout has grown 11.74% over the same period. Looking at PSA’s operating environment and financial position compared to the industry’s average, its current dividend is expected to be sustainable in the upcoming period. Check Public Storage’s dividend history here.
What’s Hurting Public Storage?
Management anticipates industry-wide demand to remain weaker for the rest of 2024 compared to 2023. However, the year-over-year decline in demand is expected to moderate in the final months of 2024 compared to the first nine months of the year.
In such an environment, to lure tenants, management continues to focus on increased marketing expenses, lower rental rates to new customers and increased promotional discounting. As a result, management expects a moderate decline in same-store facility revenues in 2024 as compared to those earned in 2023.
Despite the Federal Reserve’s recent cuts, the interest rate is still high. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt, as of Sept. 30, 2024, was around $9.1 billion. For 2024, we expect a significant year-over-year increase in the company’s interest expenses. Further, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
What Estimate Revisions & Valuation Unveil for Public Storage
The recent estimate revision trends for PSA mark a slight bearish view of analysts for the near term, with the consensus estimate for core funds from operations (FFO) per share being revised marginally downward over the past month for 2024 and 2025.
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Driven by the solid price performance, PSA stock is currently trading at a premium. The stock is trading at a forward 12-month price-to-FFO of 20.12X, ahead of the REIT – Other industry average of 16.80X and close to its one-year high of 21.20X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
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PSA: In a Nutshell
Public Storage is one of the most recognized names in the self-storage industry, with a high brand value and a presence across key metropolitan markets of the United States. The need-based and recession-resilient nature of the self-storage industry shields it from market volatility, assuring stable revenues.
Its efforts to leverage technology for operational efficiencies are encouraging. Accretive buyouts, development and expansion activities, backed by a strong balance sheet, bode well for growth. However, softening demand and operating trends are a concern. Estimate revisions reflect similar views from analysts, and PSA is currently expensive.
Those who already own PSA stock can hold on to it because it is less likely to disappoint over the long term.
At present, Public Storage carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower Inc. WELL and Cousins Properties CUZ, each carrying a Zacks Rank #2 (Buy) at present.
The Zacks Consensus Estimate for Welltower’s 2024 FFO per share has been raised 1.4% over the past month to $4.26.
The Zacks Consensus Estimate for Cousins Properties’ current-year FFO per share has moved marginally north in the past month to $2.68.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.
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