Is Public Storage A Good Stock To Buy?

Public Storage [NYSE: PSA] operates as a fully integrated, self-administered and self-managed REIT (Real Estate Investment Trust).

The largest operator of self-storage centers in the U.S., PSA engages in acquisition, development, ownership, and operation of self-storage facilities in the country, and across the globe. It operates nearly 2,600 storage facilities under the Public Storage brand comprising over 180 million net rentable square feet of space spread across 39 states.

PSA has over 230 facilities in Europe under the Shurgard brand. In addition to providing self-storage as a service, PSA also offers products such as locks, boxes and packing supplies. As a REIT, it is owned by real estate investors, who receive more than 90 percent of the company’s profits as a return-on-investment.

The firm was founded by Bradley Wayne Hughes, Sr. and Kenneth Q. Volk, Jr. in 1972. Public Storage is headquartered in Glendale, CA.

The Bull Case for Public Storage

Public Storage is one of the most recognizable names in the self-storage industry. The largest operator of self-storage centers in the U.S. with a market capitalization of almost $60 billion, PSA is a real heavyweight with major physical footprints spread across the U.S., as well as overseas.

PSA boasts 1.6 million current customers with more than 2,600 facilities to its name. More importantly, there’s been a trend towards more and more Americans relying on services offered by companies like PSA. Reports reveal that, from 2010 to 2019, annual revenue in the U.S. self-storage industry increased by 50% to $39.5 billion.

Over 1.7 billion square feet of rentable storage space was available, and despite the explosion in construction of new facilities, the occupancy rate has been consistently over 90%. 

American’s demand for extra space has thus far been insatiable, with close to 30 million people using self-storage services compared to only 7.3 million people back in 1987.

The company, in recent years, has been growing at a highly impressive rate, with aggressive acquisition policies playing an important part in the overall growth.

In the last decade and half, the company has acquired 92 million square feet of space, adding 20 million square feet of space in just the past two years.

For the three months ended June 30, 2021, the company acquired 84 self-storage facilities with seven million net rentable square feet for $2.3 billion. During the six months ended June 30, 2021, the company acquired 99 self-storage facilities with 8.1 million net rentable square feet for $2.5 billion.

Growth Through Acquisition

An important point to mark here is that, in the last 10 years, the company has spent $4.4 billion on acquisitions, while spending only $1.7 billion on development and redevelopment activities.

What it reveals is that the company is more interested in buying out its rivals to fuel its growth, rather than compete with them on price. 

Management has made it clear that the company will continue to pursue its growth strategies, planning to spend nearly $2.92 billion on acquisition and development activities this year. This again is incredibly good news for the investors.

Revenues On The Rise

The company’s bottom line totaled $346.25 million, or $1.97 per share. This compares to $246.1 million or $1.41 per common share in 2020, representing an increase of $100.1 million or $0.56 per common share.

For the six months ended June 30, 2021, net income was $732.1 million or $4.18 per share. This compares to $559.3 million or $3.20 per share in 2020, representing an increase of $172.8 million or $0.98 per share.

Analysts had expected the company to earn $1.84 per share. The company’s revenue for the quarter rose 16.3% to $829.32 million from $712.94 million last year.

This year, analysts expect roughly $2.1 billion in funds from operations (FFO), with a jump of 6% expected next year. Also, the company has a very healthy balance sheet and is finally breaking out of a long sideways trend in FFO.

PSA Offer Micro-Fulfillment to E-Commerce Firms

Public Storage is fundamentally very strong, offering long-term investors an opportunity to invest in a very attractive company with bright growth prospects.

Growing population, overcrowded cities and skyrocketing home prices make companies like PSA, offering external, efficient, storage, a necessity in these days.

More importantly, its small self-storage facilities are being used as micro-fulfillment centers for e-commerce companies with a focus on last-mile and same-day deliveries.

All in all, we are dealing with a high-quality REIT that is likely to deliver outstanding returns. PSA is a very attractive long-term investment, which has the ability to continue impressive FFO growth with support from acquisitions, and increasing demand for storage spaces.

The Bear Case for Public Storage

First, let’s talk about a few risks associated with self-storage REITs in general, and not particularly Public Storage. Interest rates are important as falling long-term interest rates help REITs, while rising rates tend to negatively impact them. And policymakers’ growing concern about inflation could lead to rate hikes around the world.

Then there’s risk of supply exceeding demand. Self-storage facilities are relatively cheap and easy to construct, which means developers can overdo it at times, building more storage facilities than there is demand in the market. Then there is economic risk, as self-storage industry can suffer during recessions as consumers strapped for money are more likely to vacate them.

Also, it is important to note that REIT is a highly fragmented industry. Building self-storage facilities does not require sophisticated technology or expertise, meaning anyone with space and capital can build them. This can often create oversupply pressure, as well as impact profit margins.

Public Storage is the largest self-storage company in the country, and it has a 9.4% market share.

Non-listed companies have a 79% market share. PSA, of course, knows this and, as such, the company is trying to edge out competition by providing good service and acquiring assets in prime location, rather than building its own.

PSA, in fact, offers excellent service. The company has a website, mobile access, call-center support, a property office, eRental, and kiosks, to name a few services.  Additionally, the company heavily invests in operating efficiencies for the benefit of its customers.

To sum it up, skeptics scoff at a richly-valued company like Public Storage. Apart from its premium valuation, they argue that the company has not increased its dividend for the past four years.

Concerns pertaining to slowing growth and oversupply make this stock a less than appealing investment for investors who could prefer to shun it in favor of a different organization with better growth prospects.

Public Storage Stock Price Forecast

Analysts, offering 12-month price forecasts for Public Storage, have an average price target of $336, with a high estimate of $350 and a low forecast of 321.00.

The median estimate represents an increase of over 5% from the stock’s latest price.

Is Public Storage Stock A Buy?

Self-storage has been an attractive investment option for investors keen on generating good returns in a fast-expanding market over the past decade. And Public Storage, America’s largest stock-listed storage REIT, which serves more than 1.6 million customers in 39 states, has been a really attractive investment option.

It should not come as a surprise though, as this $58.0 billion market cap player, with its size, expertise and incredible reputation, is the 900-pound gorilla in the room.

According to PSA, 9% of the U.S. population uses self-storage, which has been a real blessing as cities expand and home prices continue relentlessly march northwards.

Is Public Storage a REIT?

Yes. For the uninitiated, a REIT is a type of company that primarily invests three-fourths of its assets in real estate, derives three-fourths of its income from its real estate assets, and distributes at least 90% of its taxable income to shareholders.

REITs are exempted from paying corporate tax.

Self-storage has been one of the most resilient industries in the commercial real estate (CRE), though it was not spared the wrath of the pandemic.

Like many other sectors of the economy, commercial real estate, too, suffered in 2020, as the number of non-paying tenants rose, rent fell and demand slid. But PSA has quickly gotten back on its feet, and stock is up by a considerable 11% over the past three months.

For the three months ended June, the company acquired 84 self-storage facilities with 7.0 million net rentable square feet for $2.3 billion. It also had various facilities in development and expansion with 4.3 million net rentable square feet estimated to cost $661.0 million.

The company’s  same-store revenue increased 10.8% compared to the second quarter of 2020. PSA reported core FFO allocable to common shareholders of $3.15 per diluted share, an increase of 28.0% relative to the same period in 2020.

Public Storage has the longest duration balance sheet in the REIT industry with one of the lowest cost profiles, with room to fund significant additional growth. Public Storage’s financial standing, in fact, is hard to compare and compete with amongst all REITs, and not just those operating in the self-storage industry.

PSA also benefits from strong brand recognition. The company has low debt levels and strong cash flow and this, coupled with their stable dividend payout of $2.00 per quarter and payout ratio of 77%, means the company can easily maintain its debt and shareholder obligations.

Is PSA Stock A Buy?

Public Storage is the world’s largest owner and operator of public storage facilities. One of the most trusted names in the industry, PSA offers a rock-solid balance sheet and a steady, reliable dividend.

The company also enjoys a very high average occupancy rate, which attests to its strong focus on maintaining a high level of profitability.

To sum it up, PSA’s historical performance, strong brand recognition, stellar balance sheet, consistent dividend, sagacious acquisitions, and potential for continued expansion and growth, makes it a great buy.

Public Storage Investment Thesis Conclusion

PSA is America’s largest stock-listed storage REIT, with more than 2,600 facilities in 39 states. The company serves more than 1.6 million customers and operates double the number of stores as its largest competitor. In fact, PSA is bigger than its next three rivals combined.

The company operates in a segment, which requires little by way of maintenance. Once the storage facility is built, there’s no need for furniture, equipment, gadgets, or a lot of electricity. It is, as the name suggests, just a space for storing things. Because of this, a storage facility in a good location with a decent occupancy ration can be a high-margin/profitable operation.

PSA, as such, seems to be a high-value investment because of the ever-expanding need for different types of storage. Most of the company’s portfolio is found in A-list locations; it uses debt and preferred equity to fund new acquisitions, pays a fairly consistent dividend, and operates in a secure segment.

Strong Quarterly Earnings Results

The company’s quarterly revenues of $829.3 million exceeded 16.3% year on year, as the business benefitted from enhanced realized annual rent per available square foot, and weighted average square foot occupancy in the reported quarter.

Weighted-average square foot occupancy of 97% expanded 3% year over year. PSA second-quarter 2021 core funds from operations (FFO) per share of $3.15 also increased 28% year on year. Public Storage’s same-store revenues increased 10.8% year over year to $680.8 million during the quarter.

During the June-end quarter, Public Storage acquired 84 self-storage facilities, comprising 7.0 million net rentable square feet of area, for $2.3 billion.

In April, the company completed the acquisition of the ezStorage portfolio, comprising 48 properties, for $1.8 billion. Following Jun 30, 2021, the company acquired, or was under contract to acquire, 36 self-storage facilities, spanning 3.0 million net rentable square feet of space across 15 states, for $466.6 million.

Public Storage exited second-quarter 2021 with $480.8 million of cash and equivalents, up from the $257.6 million recorded at the end of 2020. For 2021, the company raised the core FFO per share outlook to $11.90-$12.30 from the prior guidance of $11.35-$11.75.

PSA Operates In A Reliable Industry

It is a simple fact that storage space where people can store their belongings will always be in demand. And it certainly helps that PSA is the most trusted name in the self-storage space.

The company enjoys a dominant market position in areas of the country like California, where extant zoning and property laws raise entry barriers for competitors.

Also, not to be missed is the fact that many self-storage tenants generally do not bother with the trouble of moving out once they sign a lease which, in turn, means consistent revenue for PSA.

With a consistent dividend, low volatility, and a rock-strong balance sheet, it’s evident that Public Storage could be a great addition to your portfolio.

Is Public Storage Stock A Good Buy: Final Thoughts

PSA operates in an industry that could be a direct beneficiary of fast-growing need for storage. The company is doing extremely well, and the recent improvements in FFO point towards a renewed long-term uptrend. 

PSA is acquiring existing assets rather than building its own, while placing exceeding emphasis on location. A couple of areas of concern could be its high-valuation and zero dividend growth since 2017. 

All in all, PSA is one of the best REITs on the market with a phenomenal balance sheet, high credit rating, strong brand recognition, low debt, and proven management.

It is a company in a fast-growth mode with bright future prospects, which indicates its capability to generate handsome ROI for investors. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.