Public Storage (PSA Quick QuotePSA - Free Report) 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, weak demand in a soft macroeconomic environment, a rise in move-out activities, a development boom in many markets and elevated interest rates remain concerns.

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. The company 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. From the beginning of 2021 through Sep 30, 2023, the company acquired 459 facilities with 38 million net rentable square feet for $8.3 billion.

Following Sep 30, 2023, the company has either acquired or was under contract to acquire 11 self-storage facilities across eight states with 0.8 million net rentable square feet for $170.3 million. It also has a pipeline of nearly $1 billion of development to be delivered over the next two years. With solid access to capital, the company is well-poised to take advantage of a potential opportunity.

Public Storage maintains a strong financial profile characterized by solid credit metrics, including low leverage relative to its total capitalization and operating cash flows. The net debt and preferred equity to EBITDA was 3.9X in the third quarter of 2023, and the EBITDA to fixed-charge coverage was 8.9 times as of the same date. Its investment-grade credit ratings render it favorable access to the debt market. With solid access to capital, the company is well-poised to take advantage of any potential expansion opportunity.

Public Storage’s current cash flow growth is projected at 96.40% compared with the 8.17% growth projected for the industry. Moreover, this REIT’s trailing 12-month return on equity (ROE) highlights its growth potential. Public Storage’s ROE is 34.76% compared with the industry’s average of 3.08%.

Furthermore, solid dividend payouts are arguably the biggest enticement for investment in REIT stocks. Public Storage has consistently paid its 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. This marked a hike of 50% in its dividend payment. The annualized common dividend payment now equates to $12 per share.

Moreover, backed by healthy operating fundamentals, we anticipate core funds from operations (FFO) to increase 5.5% on a year-over-year basis in 2023. Looking at the company’s core FFO growth projections 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 increased 2% over the past month, outperforming its industry's growth of 0.1%. Analysts seem bullish regarding PSA’s FFO growth prospects. The Zacks Consensus Estimate for the company's 2023 and 2024 FFO per share has been revised marginally upward over the past month.

Image Source: Zacks Investment Research

What’s Hurting PSA?

With tenants reverting to more normal move-out behavior as the pandemic’s impact abates, there is upward pressure on vacate trends. This is likely to limit rental rate growth in many markets. In fact, the demand is likely to remain tempered amid a soft macroeconomic outlook and more limited home-moving activities, with move-out activities and occupancy levels returning to pre-2020 levels.

To lure tenants in such a challenging 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 a 3.1% decline in this metric in the fourth quarter. Also, we project 2023 weighted average square foot occupancy to be 93.1%, down from 94.9% recorded at the end of 2022.

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 Sep 30, 2023, was approximately $9.1 billion. For 2023, we expect a significant year-over-year increase in the company’s interest expenses.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Host Hotels & Resorts, Inc. (HST Quick QuoteHST - Free Report) and STAG Industrial, Inc. (STAG Quick QuoteSTAG - Free Report) . While Host Hotels & Resorts has a Zacks Rank #1 (Strong Buy), STAG Industrial carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Host Hotels & Resorts’ 2023 funds from operations (FFO) per share has moved 4.9% northward over the past week to $1.92.

The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved marginally upward in the past three months to $2.28.

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