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Why You Should Retain Public Storage (PSA) Stock for Now
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Public Storage (PSA - Free Report) is well poised to gain from its high brand value, strategic acquisitions, presence in key cities and healthy balance sheet amid favorable self-storage industry fundamentals. However, the development boom in many markets and a high interest rate scenario are major concerns.
Public Storage is among the largest owners and operators of storage facilities in the United States. The brand stands out as one of the preeminent and well-established names in the self-storage sector. With significant market share in major metropolitan centers, the company is poised to capitalize on the economies of scale, apart from leveraging on its brand recognition.
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. Moreover, 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% year over year in 2023.
In addition, Public Storage has been capitalizing on growth opportunities. From the beginning of 2021 through Mar 31, 2023, the company acquired 311 facilities, with 27 million net rentable square feet, for $5.9 billion. Following Mar 31, 2023, the company acquired or was under contract to buy 12 self-storage facilities spanning 0.9 million net rentable square feet of space across five states for $139 million.
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. Additionally, Public Storage’s current cash flow growth is projected at 96.40% compared with the 10.63% growth projected for the industry. With solid balance-sheet strength, the company is well-poised to capitalize on future growth opportunities.
Moreover, Public Storage has consistently paid dividends and continued with its payment even during the pandemic. In February 2023, it announced an increase in its regular quarterly dividend from $2 per common share to $3. Backed by robust operating fundamentals and industry tailwinds, we anticipate core FFO to improve 5% in 2023, 4.4% in 2024 and 6% in 2025. 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.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 2.7% against the industry’s fall of 3%.
Image Source: Zacks Investment Research
However, Public Storage operates in a highly fragmented market in the United States, with intense competition from several private, regional and local operators. This is expected to fuel competition for the company, affecting occupancies, curbing its power to raise rents and turn on more discounting.
Furthermore, with the abatement of the pandemic's impact, tenants are returning to their usual move-out patterns, leading to a rise in the number of people vacating their properties. This is also likely to limit rental rate growth in many markets. For 2023, we estimate weighted average square foot occupancy to be 92.6%.
Also, 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. For 2023, we expect interest expenses to increase 29.9% year over year.
The Zacks Consensus Estimate for Ventas’ current-year funds from operations (FFO) has been revised marginally upward over the last 60 days. In the past three months, VTR shares have rallied 9.8%.
The Zacks Consensus Estimate for EastGroup Properties’ current-year FFO has been revised marginally upward over the last 60 days. In the past six months, EGP shares have rallied 16.9%.
Note: Anything related to earnings presented in this write-up represent FFO — a widely used metric to gauge the performance of REITs.
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Why You Should Retain Public Storage (PSA) Stock for Now
Public Storage (PSA - Free Report) is well poised to gain from its high brand value, strategic acquisitions, presence in key cities and healthy balance sheet amid favorable self-storage industry fundamentals. However, the development boom in many markets and a high interest rate scenario are major concerns.
Public Storage is among the largest owners and operators of storage facilities in the United States. The brand stands out as one of the preeminent and well-established names in the self-storage sector. With significant market share in major metropolitan centers, the company is poised to capitalize on the economies of scale, apart from leveraging on its brand recognition.
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. Moreover, 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% year over year in 2023.
In addition, Public Storage has been capitalizing on growth opportunities. From the beginning of 2021 through Mar 31, 2023, the company acquired 311 facilities, with 27 million net rentable square feet, for $5.9 billion. Following Mar 31, 2023, the company acquired or was under contract to buy 12 self-storage facilities spanning 0.9 million net rentable square feet of space across five states for $139 million.
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. Additionally, Public Storage’s current cash flow growth is projected at 96.40% compared with the 10.63% growth projected for the industry. With solid balance-sheet strength, the company is well-poised to capitalize on future growth opportunities.
Moreover, Public Storage has consistently paid dividends and continued with its payment even during the pandemic. In February 2023, it announced an increase in its regular quarterly dividend from $2 per common share to $3. Backed by robust operating fundamentals and industry tailwinds, we anticipate core FFO to improve 5% in 2023, 4.4% in 2024 and 6% in 2025. 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.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 2.7% against the industry’s fall of 3%.
Image Source: Zacks Investment Research
However, Public Storage operates in a highly fragmented market in the United States, with intense competition from several private, regional and local operators. This is expected to fuel competition for the company, affecting occupancies, curbing its power to raise rents and turn on more discounting.
Furthermore, with the abatement of the pandemic's impact, tenants are returning to their usual move-out patterns, leading to a rise in the number of people vacating their properties. This is also likely to limit rental rate growth in many markets. For 2023, we estimate weighted average square foot occupancy to be 92.6%.
Also, 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. For 2023, we expect interest expenses to increase 29.9% year over year.
Stocks to Consider
A couple of better-ranked stocks worth considering are Ventas (VTR - Free Report) and EastGroup Properties (EGP - Free Report) , 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 Ventas’ current-year funds from operations (FFO) has been revised marginally upward over the last 60 days. In the past three months, VTR shares have rallied 9.8%.
The Zacks Consensus Estimate for EastGroup Properties’ current-year FFO has been revised marginally upward over the last 60 days. In the past six months, EGP shares have rallied 16.9%.
Note: Anything related to earnings presented in this write-up represent FFO — a widely used metric to gauge the performance of REITs.