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Healthy self-storage industry’s fundamentals, driven by favorable market demographics, continue to drive Public Storage’s PSA growth. Further, the company has been undertaking acquisitions to derive maximum return from this positive market trend. However, there is a development boom of self-storage units in many markets. This is likely to heighten 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 has been capitalizing on growth opportunities, through series of acquisitions and developments. In fact, since the beginning of 2013 through Jun 30, 2018, the company acquired 276 facilities with 19.4 million net rentable square feet of space from third parties for around $2.5 billion. Further, the company opened newly developed and expanded self-storage space for a total cost of $1.1 billion, adding approximately 10.0 million net rentable square feet over this period. Further, since Jun 30, 2018, the company has acquired or is under contract to acquire four self-storage facilities, spanning 0.8 million net rentable square feet of space, for $95.2 million.
Public Storage’s strong balance sheet is the key factor which allows it to actively pursue acquisitions and developments. It also puts the company in a solid position to provide lucrative returns to its shareholders through increased dividend payouts. Notably, the company raised its quarterly dividend rate twice in 2016 and has maintained the dividend rate since then. With $338.4 million of cash and cash equivalents as of Jun 30, 2018, and a debt-to-equity ratio lower than the industry, the company’s dividend payout is expected to be sustainable.
Nonetheless, 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, which results in intense competition from numerous private, regional and local operators. This limits its power to raise rents and turn on more discounting.
Also, Public Storage has a significant development and refurbishment pipeline. Though this is encouraging, it results in operational risks and exposes the company to rising construction costs, entitlement delays and failure to fulfill government requirements. As of Jun 30, 2018, the company had several facilities in development (2.2 million net rentable square feet), with an estimated cost of $315 million, as well as expansion projects (3.9 million net rentable square feet) worth roughly $364 million. This is further aggravated by the fact that self-storage spaces are not usually pre-leased and new assets generally take time to generate yields.
Moreover, rate hikes expose the company to elevated financing costs, which makes it difficult to purchase or develop real estate. This may affect the company’s results.
This Zacks Rank #3 (Hold) stock has gained 5.9% in the past six months compared to the industry’s rally of 7.7%.
Stocks to Consider
Some better-ranked stocks in the real estate industry include Corrections Corp of America CXW, Life Storage, Inc. LSI and Clipper Realty Inc. CLPR. While Corrections Corp of America flaunts a Zacks Rank of 1 (Strong Buy), Life Storage and Clipper Realty carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Corrections Corp of America’s Zacks Consensus Estimate for current-year FFO per share moved 2.2% north in 60 days’ time. The stock has climbed 20.2% over the past three months.
Life Storage’s Zacks Consensus Estimate for 2018 funds from operations (FFO) per share inched up 1.5% over the last 60 days. Also, its shares have gained 4.1% in the past three months.
Clipper Realty’s Zacks Consensus Estimate for 2018 FFO per share moved 7% north over the last 60 days. The company’s shares have rallied nearly 34% in three months’ time.
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