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On Sep 27, 2013, we reaffirmed our long-term recommendation on Public Storage (PSA - Analyst Report) – a leading real estate investment trust (REIT) operating self-storage facilities – at Neutral. The decision is backed by the company’s improving property operations, acquisition efforts, decent balance sheet and a portfolio mainly comprising unencumbered assets. Yet, the performance of its European business is discouraging and the company’s significant construction pipeline increases operational risks.

Why Neutral?

Aided by improved property operations, Public Storage reported core FFO (funds from operations) of $1.80 per share, beating the Zacks Consensus Estimate of $1.77 per share by 1.7% and the prior-year quarter core FFO of $1.62 per share by 11.1%. In addition, the acquisition of 24 self-storage facilities in 2012 contributed to the rise. Taking into account the impact of a number of non-core items, reported FFO came in at $1.83 per share, representing an uptick of 32.6% from the year-ago figure of $1.38 per share.

The ‘Public Storage’ brand is the most recognized and established name in the self-storage industry with presence in all the major metropolitan markets of the U.S. In addition, the company has been capitalizing on growth opportunities in upscale U.S. markets. It has one of the strongest balance sheets in the sector, with plenty of liquidity to actively pursue acquisitions and developments. Moreover, the company’s portfolio of real estate facilities is substantially unencumbered.

However, Public Storage operates in a highly fragmented market in the U.S., with intense competition from numerous private, regional and local operators, which somewhat limits its power to raise rents. Also, currently, the company’s European business is not performing well. Moreover, a rise in interest rates adversely affects the company’s borrowing expenses. As such we believe that the risk/reward profile is currently balanced and hence we have a Neutral recommendation on the stock.

Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share increased 1.4% to $7.26. Moreover, for 2014 it moved north 1.6% to $7.76 per share. The stock currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other REIT stocks that look promising are CubeSmart (CUBE - Snapshot Report), Sotherly Hotels Inc. (SOHO) and Sovran Self Storage Inc. (SSS - Snapshot Report), all carrying a Zacks Rank #1 (Strong Buy).

Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.
 

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