Public Storage’s PSA expansion efforts, along with healthy balance-sheet strength, position it well for long-term growth. However, the company is not immune to the coronavirus pandemic’s adverse impact on its business.
This self-storage REIT 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 United States. As such, apart from benefiting from brand recognition, the company is likely to gain from economies of scale.
In addition, the company has been capitalizing on growth opportunities. From the beginning of 2013 through Mar 31, 2020, the company has acquired 349 facilities, with 24.5 million net rentable square feet from third parties for $3.3 billion. In addition, it opened the newly-developed and expanded self-storage space for a total cost of $1.6 billion, adding 15.3 million net rentable square feet. While the company expects a decline in its scale of acquisitions in the short term due to economic uncertainty resulting from the pandemic, the company seems well poised to capitalize on market dislocations.
Last month, Public Storage reported first-quarter 2020 results. The quarterly core FFO per share of $2.58 improved 2% year over year and met the Zacks Consensus Estimate. The company’s performance reflected the favorable impact of higher revenues for its same-store facilities, resulting from higher realized annual rent per occupied square foot. Nevertheless, this was offset by the inflated cost of operations from its same-store facilities, comprising elevated marketing costs and property tax expenses.
Moreover, Public Storage has one of the strongest balance sheets in the sector, with adequate liquidity to withstand the current challenging times and capitalize on expansion opportunities through acquisitions and developments. The company exited first-quarter 2020 with $718.4 million of cash and cash equivalents, up from the $409.7 million recorded at the end of 2019. It also has 484.1 million of available borrowing capacity on its revolving line of credit, and has low leverage and high coverage. The company’s debt/EBITDA is 1.0x and fixed coverage ratio stands at 8.0x. As such, it seems well poised to take advantage of potential opportunity.
In addition, solid dividend payouts are arguably the biggest enticement for investment in REIT stocks. Given the company’s financial position and strength in operating platform compared with the industry’s, its current dividend payout is expected to be sustainable.
However, amid the coronavirus pandemic, there is a substantial reduction in demand for self-storage space. This is resulting in decline in move-in volumes, despite lower move-in rental rates. The company has also temporarily curtailed its existing tenant rate-increase program. Furthermore, stress on customers’ financial capacity will likely result in rent-collection issues.
As such, the company expects reduction in year-over-year same-store rental income and net operating income the rest of the year. Operating expenses will likely flare up, while advertising expenditure might remain elevated for maintaining a high occupancy level.
Also, the pandemic will likely delay the estimated timing of completion of the company’s current pipeline of development and expansion projects. This is because a number of jurisdictions have shut down or deferred entitlement activities, while “stay at home” orders might delay construction activities. Apart from these, the timeframe for a newly-developed facility to achieve stabilized occupancies and cash flows will likely extend amid the pandemic.
Moreover, Public Storage operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. In addition, in recent years, supply has been increasing in a number of markets. This is likely to fuel competition for the company, curb its power to raise rents and turn on more discounting.
Shares of Public Storage have depreciated 14.1%, narrower than the 16.6% decline of its industry in the year-to-date period.
Currently, the stock 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
Farmland Partners Inc.’s FPI Zacks Consensus Estimate for 2020 FFO per share has been unchanged at 24 cents over the past week. The stock currently flaunts a Zacks Rank of 1.
One Liberty Properties, Inc.’s OLP Zacks Consensus Estimate for the current-year FFO per share moved 2.2% north to $1.89 over the past two months. The stock sports a Zacks Rank of 1, at present.
Gladstone Land Corporation’s LAND FFO per share estimate for 2020 moved 9.7% north to 68 cents over the past month. Further, it currently carries a Zacks Rank of 2 (Buy).
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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