Public Storage PSA is well-positioned to expand in the self-storage market with its presence in key cities and high brand recognition. Moreover, PSA’s technological advancements and healthy balance sheet are commendable. Its sustainable dividend payouts make it an attractive investment option.

However, softening in demand and operating trends is a key concern. The development boom of self-storage units in many markets is likely to intensify competition and curb pricing power. High interest rates add to its woes.

What’s Aiding PSA?

Public Storage is one of the top owners and operators of storage facilities. The brand stands out as one of the most recognized and established names in the self-storage industry. With a significant market presence in major metropolitan centers, the company is poised to capitalize on the economies of scale apart from benefiting from its brand recognition. PSA is leveraging technology for revenue optimization and cost efficiencies and, as such, has invested in technologies over the past few years.

In addition, Public Storage has been capitalizing on growth opportunities. In September 2023, it acquired Simply Self Storage from BREIT for $2.2 billion. The 127 wholly owned facilities are geographically diversified across 18 states and located in submarkets with strong demand drivers and other desirable characteristics. This portfolio generated self-storage revenues of $37.8 million, NOI of $24.9 million (including direct NOI of $26.2 million) and average square footage occupancy of 86.3% for the first quarter of 2024.

From the beginning of 2022 through Mar 31, 2024, Public Storage acquired a total of 238 facilities with 16.8 million net rentable square feet for $3.4 billion. During the first quarter of 2024, these facilities contributed NOI of $37.2 million. Following Mar 31, 2024, the company acquired or was under contract to acquire four self-storage facilities across four states with 0.3 million net rentable square feet for $34.6 million.

As of Mar 31, 2024, Public Storage had several facilities in development and expansion, which are expected to add 3.7 million net rentable square feet at an estimated cost of $783.0 million. The company expects $500 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 a potential opportunity.

PSA maintains a strong financial profile characterized by solid credit metrics, including low leverage relative to its total capitalization and operating cash flows. The company concluded the first quarter of 2024 with net debt and preferred equity to EBITDA of 3.9X in 2023 and an EBITDA to fixed charges of 7.8 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 the company to access both public and private capital markets to raise capital at favorable rates. As such, Public Storage seems well-poised to take advantage of any potential opportunity.

Furthermore, solid dividend payouts are arguably the biggest enticement for investment in REIT stocks. Public Storage has consistently paid its dividends. While the company has increased its dividend two times in the past five years, encouragingly, its payout has grown 9.58% over the same time period. Looking at PSA’s operating environment and financial position compared to that of the industry’s average, its current dividend is expected to be sustainable in the upcoming period.

Shares of this Zacks Rank #3 (Hold) company have risen 0.4% over the past six months against its industry's decline of 2.5%.

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What’s Hurting PSA?

The self-storage industry is continuing to experience softening in demand and operating trends through 2023 and the first quarter of 2024. This trend is expected to continue and stabilize in the second half of 2024.

Particularly, the industry-wide demand from new customers for storage space as of Mar 31, 2024 was below the level of Mar 31, 2023. To lure tenants into such an environment, management continues to focus on lowering rental rates to new customers and increasing promotional discounting. Consequently, same-store revenues are likely to be affected, and we estimate only a 0.9% increase in this metric in 2024.

A high interest rate is a concern for Public Storage. 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 Mar 31, 2024 was approximately $9.1 billion. For 2024, we expect a significant year-over-year increase in the company’s interest expenses.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are American Tower AMT and Lamar Advertising LAMR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for American Tower’s 2024 FFO per share is pegged at $10.39, which suggests 5.27% year-over-year growth.

The Zacks Consensus Estimate for Lamar Advertising’s 2024 FFO per share of $8.03 indicates a 7.5% increase year over year.    

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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