Public Storage's Expansions Aid Growth Amid Rising Supply

Public Storage’s (NYSE:PSA) expansion efforts, along with healthy demand for self-storage spaces, position the company well for long-term growth. However, the rise in supply is likely to limit its pricing power.

The company is one of the largest owners and operators of storage facilities in the United States. It 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.

Public Storage is likely to gain from the self-storage industry's healthy fundamentals. The industry is anticipated to keep witnessing high demand, backed by favorable demographic changes, improving job market and rising income, migration and downsizing trends, and declining home ownership and the resultant increase in the number of people renting homes.

Further, Public Storage is tapping every growth opportunity. The company recently unveiled fresh storage units in Murfreesboro, TN. The facility, Public Storage 863 Fortress Blvd., Murfreesboro, TN 37128, has more than 800 storage units on site, in different sizes, with the majority being climate-controlled self-storage units.

In fact, since the beginning of 2013 through Jun 30, 2019, the company has acquired 318 facilities with 22.1 million net rentable square feet from third parties, for approximately $2.9 billion. Moreover, subsequent to the second quarter's end, the company has acquired or was under contract to acquire 10 self-storage facilities, spanning 0.8 million net rentable square feet of space, for $86.5 million. Such acquisitions and expansions augur well for long-term growth.

Moreover, a strong balance sheet and adequate liquidity make Public Storage’s acquisitions and developments feasible. The company exited second-quarter 2019 with around $360.3 million of cash and cash equivalents. In addition, solid dividend payouts are arguably the biggest enticement for investment in REIT stocks. Also, given the company’s robust financial position and lower debt-to-equity ratio compared to that of the industry, its current dividend payout will likely be sustainable.

Nevertheless, Public Storage operates in a highly fragmented market in the United States, with stiff competition from numerous private, regional and local operators. Additionally, supply has been rising in a number of its markets, of late, which will likely intensify competition, curb the company’s power to raise rents and turn on more discounting.

Furthermore, Public Storage has a significant development pipeline. In fact, as of Jun 30, 2019, the company had several facilities in development (1.1 million net rentable square feet), with an estimated cost of $189 million, as well as expansion projects (2.7 million net rentable square feet) worth roughly $332 million. Public Storage estimates to incur the remaining $329 million of development costs related to these projects, mainly over the next 18 months.

Though this is encouraging, the solid 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.

Shares of Public Storage have gained 3.3% over the past three months compared with the industry’s growth of 0.9%. Currently, the stock carries a Zacks Rank #3 (Hold).



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Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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