Expansion Efforts Aid Public Storage (PSA): Should You Hold?

Healthy self-storage industry’s fundamentals, driven by favorable market demographics, continue to drive Public Storage’s (NYSE:PSA) growth. Further, the company has been undertaking acquisitions to generate maximum returns from this upbeat market trend. However, there is a development boom of self-storage units in many markets, at present. This is likely to intensify competition for the company.

One of the largest owner and operator of storage facilities in the United States, Public Storage has an extensive presence in all major metropolitan cities. In addition, the Public Storage brand provides a competitive edge to the company over other industry competitors.

Moreover, the company remains well poised to benefit from the European markets’ robust fundamentals through its 35.2% stake in Shurgard Self Storage SA. In fact, the “Shurgard” brand, used by Shurgard Europe, is a well-established and valuable brand in the continent.

In addition, the company has been capitalizing on growth opportunities. In fact, since the beginning of 2013 through Dec 31, 2018, the company acquired 296 facilities, with 20.6 million net rentable square feet, from third parties for around $2.7 billion. Additionally, the company opened newly-developed and expanded self-storage space for a total cost of $1.2 billion, adding approximately 11.3 million net rentable square feet over this period.

Following Dec 31, 2018, the company acquired or was under contract to acquire 14 self-storage facilities, spanning 0.9 million net rentable square feet of space, for $102.4 million. Such acquisitions and expansions bode well for long-term growth.

Moreover, Public Storage has one of the strongest balance sheets in the sector, with adequate liquidity to actively pursue acquisitions and developments. The company exited 2018 with around $361.2 million of cash and cash equivalents. In addition, solid dividend payouts are arguably the biggest enticement for investment in REIT stocks and given the company’s financial position and lower debt-to-equity ratio compared to that of the industry, its current dividend payout is expected to be sustainable.

However, in recent years, supply has been high in a number of markets. Further, deliveries are expected to remain elevated in 2019 as well. This is a concern as high supply affects the company’s pricing power. In fact, it operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. This limits the company’s power to raise rents and turn on more discounting.

The company has a significant development and refurbishment pipeline. In fact, as of Dec 31, 2018, the company had several facilities in development (1.7 million net rentable square feet), with an estimated cost of $253 million, as well as expansion projects (3.5 million net rentable square feet) worth roughly $354 million. Public Storage estimates to incur the remaining $322 million of development costs related to these projects 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. In addition, self-storage spaces are not usually pre-leased and new assets generally take time to generate yields.

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

Some better-ranked stocks in the real estate industry include Alexandria Real Estate Equities, Inc. (NYSE:ARE) , Boston Properties, Inc. (NYSE:BXP) and PS Business Parks, Inc. (NYSE:PSB) . Each of these stocks carries a Zacks Rank #2 (Buy), at present.

Alexandria Real Estate Equities’ Zacks Consensus Estimate for current-year funds from operations (FFO) per share moved up a cent to $6.96 in a month’s time.

Boston Properties’ Zacks Consensus Estimate for 2019 FFO per share inched up 0.4% over the last 30 days to $6.92.

PS Business Parks’ Zacks Consensus Estimate for the ongoing year’s FFO per share moved 0.3% north over the last 30 days to $6.60.

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