Public Storage: A Premium Play in Self-Storage Facilities

04/24/2019 5:00 am EST

Focus: REAL ESTATE

Jacob Kilstein

Associate Analyst, Argus Research Company

We are maintaining our "buy" rating on Public Storage (PSA); the company posted positive results in 2018 despite challenging economic conditions, notes Jacob Kilstein, an analyst with Argus Research.

Public Storage, based in California, is a REIT that operates self-storage facilities. The company has 2,429 self-storage facilities in the U.S., with 162 million square feet of rentable space, and a 35% equity ownership in Europe, with 228 facilities and 12 million square feet of rentable space.

Lastly, the company owns a 42% interest in PS Business Parks (PSB), a public REIT that invests in office and industrial real estate, which owns 28 million square feet of rentable commercial space.

Although same-store sales growth has slowed over the last few years, we expect the company to benefit from acquisitions and development projects amid sector consolidation, and to raise rental rates for existing customers. We also expect demand for storage to increase as millennials start families and buy homes.

The company benefits from economies of scale (it is by far the largest storage company), brand recognition, and locations with high barriers to entry. It also acquires properties owned by other operators, and benefits from their presence in and knowledge of most major U.S. markets.

Although PSA shares trade at a premium to peers, we believe the premium is justified by the company’s consistent performance and long-term growth prospects. PSA also has the financial flexibility to fund both organic development and acquisitions.

In addition, the company has a record of steady dividend growth. Its annualized payout of $8.00 per share yields about 3.7%. The shares should also benefit from the recent pause in Federal Reserve interest rate hikes.

Our financial strength rating on PSA is High, the highest point on our five-point scale. The company has little debt and a solid balance sheet. The company tends to fund its developments through private equity rather than debt to keep its leverage low.

We are lowering our 2019 core FFO estimate to $10.76 per share from $10.83 due to a slowdown in NOI and higher supply nationally. We are also setting a 2020 FFO estimate of $11.01 per share. We project revenue of $2.82 billion in 2019 and $2.88 billion in 2020.

PSA pays a quarterly dividend of $2.00 per share, or $8.00 annually, for a yield of about 3.7%. Over the past five years, PSA has raised the dividend at a compound annual rate of 8.6%. Our dividend estimates are $8.00 for both 2019 and 2020.

Our revised target price of $240 implies a multiple of 21.8-times our 2019 FFO estimate, still below the midpoint of the five-year range, and justified, in our view, by the company’s strong operating metrics and growth prospects.

Overall, Public Storage appears on track to continue its strong performance through rent increases, a solid development and redevelopment pipeline, and accretive acquisitions. We are maintaining our long-term earnings growth rate projection of 5%.

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