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Public Storage’s PSA expansion efforts, along with healthy demand for self-storage spaces, position it well for long-term growth. However, the rise in supply is likely to limit its pricing power.
This self-storage REIT is one of the largest owner and operator of storage facilities in the United States with an extensive presence in all major metropolitan cities. Additionally, the Public Storage brand provides a competitive edge to the company over other industry competitors.
Moreover, the self-storage industry’s fundamentals are likely to be aided by high demand on favorable demographic changes, healthy job market and rising incomes, migration and downsizing trend, and declining home ownership and the resultant increase in the number of people renting homes. Also, this asset category is likely to be least affected by the coronavirus pandemic.
Last month, Public Storage reported fourth-quarter 2019 results. Though the company’s funds from operations (FFO) per share and revenues improved year over year, the estimate miss for both is disappointing. Expenses have been flaring up due to elevated marketing expenses and property taxes.
Nevertheless, higher realized annual rent per occupied square foot and uptick in occupancy supported its same-store revenues. Additionally, Public Storage benefited from its expansion efforts during the reported period.
In fact, since the beginning of 2013 through Dec 31, 2019, the company has acquired 340 facilities with 23.8 million net rentable square feet from third parties for $3.1 billion. Following Dec 31, 2019, the company acquired or was under contract to acquire 14 self-storage facilities, spanning 1.1 million net rentable square feet of space, for $245.3 million. Such acquisitions and expansions augur well for long-term growth, while its solid balance sheet and adequate liquidity make buyouts and developments feasible.
Public Storage operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. In addition, supply has been increasing in a number of markets, which is likely to fuel competition for the company, curb its power to raise rents and turn on more discounting. Also, increased expenses are likely to strain its earnings.
Moreover, the company has a significant development and refurbishment pipeline. As of Dec 31, 2019, it had several facilities in development (1.3 million net rentable square feet), with an estimated cost of $209 million, as well as expansion projects (3.1 million net rentable square feet) worth roughly $410 million. Public Storage estimates to incur the remaining $477.3 million of development costs related to these projects, mainly over the next 18 months.
Though this is encouraging, the substantial pipeline increases the operational risks and exposes the company to rising construction costs. Also, self-storage spaces are not usually pre-leased and new assets take time to generate yields.
Shares of Public Storage have depreciated 10.8% compared with the industry's decline of 29.1% 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.
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