Public Storage (PSA - Free Report) is one of the largest owners and operators of storage facilities in the United States. The ‘Public Storage’ brand is the most recognized and established name in the self-storage industry, with presence in all major metropolitan markets of the nation. Further, the company has managed to create a significant presence in the European markets as well through the Shurgard Storage Centers’ acquisition.
Moreover, the self-storage industry’s fundamentals are likely to be driven by favorable demographic changes, and events like marriages, shifting, death and even divorce. Also, this REIT has the power to adjust its rents quickly to any rate hike due to shorter leasing periods.
In addition, the company has been capitalizing on growth opportunities. Recently, Public Storage announced the opening of a new self-storage facility in one of Seattle’s popular suburbs. Specifically, The Public Storage located at 16311 Meridian Ave E Puyallup, WA, will accommodate more than 1,200 storage spaces. Notably, Puyallup is witnessing an influx of new residents from Seattle who are looking for more affordable housing in Puyallup. Hence, a new storage facility amid high demand will likely enable the company to enjoy elevated occupancy.
Since January 2016, 127 self-storage facilities have been acquired and developed by the company. Particularly, during 2017, the company acquired 22 self-storage facilities, comprising 1.4 million net rentable square feet, for $149.8 million. Additionally, in first-quarter 2018, Public Storage acquired two self-storage facilities, comprising 0.2 million net rentable square feet of area, for $18 million. Further, as of Mar 31, 2018, the company was under contract to acquire three self-storage facilities, spanning 0.2 million net rentable square feet of space, for $19 million. Such acquisitions and expansions bode well for long-term growth.
Public Storage also delivered a decent performance in the first quarter. The company’s core funds from operations (FFO) per share of $2.48 marked 4.6% growth from the prior-year quarter figure of $2.37. The figure also surpassed the Zacks Consensus Estimate of $2.46. Results highlight improvement in net operating income from same-store and non-same-store facilities. Higher realized annual rent per occupied square foot supported the company’s same-store performance. Additionally, Public Storage benefited from its expansion efforts.
Furthermore, shares of Public Storage have outperformed the industry it belongs to in the past three months. The company’s shares increased 7.6%, while the industry reported growth of 5%. Moreover, the trend in estimate revisions indicates a favorable earnings outlook for the current year.
However, supply has been high in a number of markets and this affects the company’s pricing power. In fact, the company operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. This limits its power to raise rents and turn on more discounting.
The company has a significant development and refurbishment pipeline. In fact, as of Mar 31, 2018, it had several facilities in development (2.7 million net rentable square feet), with an estimated cost of $381 million, as well as expansion projects (2.3 million net rentable square feet), worth roughly $281 million.
Public Storage estimates to incur the remaining $382 million of development costs related to these projects mainly over the next 18 months. Though this is encouraging, the substantial pipeline increases operational risks and exposes the company to rising construction costs, entitlement delays and failure to fulfill government requirements. Further, self-storage spaces are not usually pre-leased and new assets generally take time to generate yields.
Also, hike in interest rate is a concern for the company. Essentially, rising rates imply higher borrowing cost for the company. Moreover, the dividend payout might become less attractive than yields on fixed income and money market accounts.
Public Storage currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
A few better-ranked stocks from the real estate space include Host Hotels & Resorts, Inc. (HST - Free Report) , Lamar Advertising Company (LAMR - Free Report) and Prologis, Inc. (PLD - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy).
Host Hotels’ Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has risen 3% to $1.71 in two months’ time. Its shares have returned 20.2% over the past year.
Lamar’s FFO per share estimates for the current year increased 1.1% in a week’s time to $5.40. Its shares have gained 1.2% in a year’s time.
Prologis’ FFO per share estimates for 2018 have inched up 1% to $2.98 over the past month. Its shares have appreciated 15.4% over the past year.
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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