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Expansion Efforts to Aid Public Storage (PSA) Amid High Rates

Public Storage PSA is well positioned to expand in the self-storage market, with its presence in key cities and a 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, a development boom, a rise in move-out rates and elevated interest rates are major concerns.

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. The company is also in a good spot to benefit from its 35% stake in Shurgard Self Storage SA.

The self-storage asset category is need-based and recession-resilient in nature. This asset class has low capital expenditure requirements and generates high operating margins. Demand for self-storage spaces has shot up amid remote and hybrid work modes, elevated home sales, and remodeling and the migration in and out of metropolitan markets. Amid these tailwinds, we estimate total revenues to increase 7.3% year over year in 2023.

In addition, Public Storage has been capitalizing on growth opportunities. In September 2023, it acquired Simply Self Storage from Blackstone Real Estate Income Trust, Inc. (”BREIT”) for $2.2 billion. From the beginning of 2021 through Jun 30, 2023, the company acquired 322 facilities, with 28 million net rentable square feet, for $6 billion. Following Jun 30, 2023, the company acquired or was under contract to buy 11 self-storage facilities spanning 0.8 million net rentable square feet of space across six states for $118.2 million.

Management expects $2.6 billion in acquisitions and $375 million in development openings in 2023. It also has a pipeline of more than $1 billion of development to be delivered over the next two years.

Public Storage maintains a strong financial profile characterized by solid credit metrics, including low leverage relative to its total capitalization and operating cash flows. Its investment-grade credit ratings render it favorable access to the debt market. Moreover, Public Storage projects current cash flow growth of 96.40%, which is significantly higher than the industry’s 8.17%. With a strong balance sheet position, PSA is well positioned to take advantage of future growth prospects.

Solid dividend payouts are arguably the biggest enticement for REIT shareholders and Public Storage remains committed to that. PSA has consistently paid dividends and continued with its payments even during the pandemic.

In February 2023, it announced an increase in its regular quarterly dividend from $2 per share to $3. Backed by robust operating fundamentals and industry tailwinds, we anticipate core funds from operations (FFO) to improve 5.1%, 4.1% and 6.5% in 2023, 2024 and 2025, respectively. Looking at the company’s core FFO growth projections, financial position and a lower debt-to-equity ratio compared to that of the industry’s average, its current dividend is expected to be sustainable.

However, Public Storage is operating in a highly competitive environment in the United States, with a number of private, regional and local operators. This is expected to increase competition for PSA, impacting occupancies, limiting its ability to increase rents and triggering further discounting.

With the abatement of the pandemic's impact, tenants are returning to their normal move-out patterns, leading to a rise in the number of people vacating Public Storage’s properties. This is likely to limit rental rate growth in many markets. For the rest of 2023, management expects to see a slight seasonal decline in occupancy levels. We estimate weighted average square foot occupancy to be 93.1% for 2023.

Public Storage is affected by a high interest rate environment. The higher the interest rate, the higher the borrowing costs for the company, leading to an adverse impact on its ability to acquire or develop real estate. We expect interest expenses to increase 46.7% in 2023 on year-over-year basis.

Analysts seem bearish regarding PSA’s FFO growth prospects. The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised marginally downward over the past seven days. The company currently carries a Zacks Rank #3 (Hold).

Over the past six months, shares of PSA have declined 6.4%, wider than its industry's fall of 1.6%.

Zacks Investment Research
Zacks Investment Research

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Stocks to Consider

Some better-ranked stocks from the REIT sector are Welltower WELL, SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.54.

The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past week to $12.91.

The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 1.6% over the past month to $1.26.

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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