Public Storage PSA is well-positioned to grow in the self-storage market with its presence in key cities and high brand recognition. Accretive buyouts, and development and expansion activities bode well for growth. Technological advancements aid higher revenue generation, and a healthy balance sheet provides financial flexibility.
However, the softening of demand and operating trends is a concern for PSA. High interest expenses add to its woes.
Shares of this Zacks Rank #3 (Hold) company have risen 22.2% over the past six months, outperforming the industry's growth of 13.2%.
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What’s Aiding PSA?
The ‘Public Storage’ brand is a much-recognized and established name in the self-storage industry, with a presence in all major metropolitan markets of the country. The self-storage asset category is need-based, with low capital expenditure and high operating margins. Amid these tailwinds, PSA is well-poised for future revenue growth.
Public Storage has been capitalizing on growth opportunities. From the beginning of 2022 through Sept. 30, 2024, it acquired a total of 243 facilities with 17.2 million net rentable square feet (RSF). As of Sept. 30, 2024, it had several facilities in development and expansion spanning around 4 million net RSF. With solid access to capital, the company is well-poised to take advantage of any potential opportunity.
Public Storage is also leveraging technology for revenue optimization and cost efficiencies. Such efforts are likely to bolster the company’s competitive edge. We estimate total revenues to increase 3.9% year over year in 2024.
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 seven 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 public and private capital markets to raise capital at favorable rates.
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.
What’s Hurting PSA?
The self-storage industry experienced a softer demand and lower operating trends through 2023 and the first nine months of 2024. Although demand trends have improved toward the September-October period in some markets, stabilization will take time.
To lure tenants into such an environment, management continues to focus on lowering rental rates to new customers and increasing promotional discounting. Management expects its same-store facilities revenues to decline yearly. We estimate rent per occupied square foot to decrease by 1.3% year over year.
Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Public Storage. The company has a substantial debt burden of $9.15 billion as of Sept. 30, 2024. 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 Welltower WELL and Cousins Properties CUZ, 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 Welltower’s 2024 FFO per share is pegged at $4.26, suggesting year-over-year growth of 17%.
The Zacks Consensus Estimate for Cousins Properties 2024 FFO per share stands at $2.68, indicating an increase of 2.3% from the year-ago reported figure.
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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