On Jan 7, 2014, we reaffirmed our long-term recommendation on real estate investment trust (REIT) operating self-storage facilities – Public Storage (PSA) – at Neutral. The decision reflects the company’s strategic acquisitions of storage facilities, solid third-quarter results and dividend hike. However, the weak performance of its European business restrains us from becoming extremely positive on the stock.
Why Neutral?
The ‘Public Storage’ brand is widely recognized in the self-storage industry. The company reported core FFO of $1.92 per share and after taking into account the impact of a number of non-core items, FFO came in at $2.00 per share, representing an uptick of 15.6% from the year-ago quarter. Results also came in ahead of the Zacks Consensus Estimate of $1.90 per share.
Results were aided by improved property operations leading to a surge in net operating income (NOI) and acquisition of 56 self-storage facilities since Jan 2012. In addition, the company announced a 12% hike in its quarterly dividend rate.
Public Storage’s acquisition initiatives helped it carve a niche in the U.S and the European market. The company also made concerted efforts to extend its portfolio base with 88 facilities in the recent period. These 88 facilities are located in California, Colorado, Florida, Georgia, North Carolina, South Carolina, Texas and Virginia.
In addition, it has one of the strongest balance sheets in the sector with adequate liquidity and a major part of its portfolio comprises unencumbered assets. Public Storage also owns a 43% common equity interest in PS Business Parks Inc. (PSB), which owns and operates commercial space, primarily flex, multi-tenant office and industrial space.
Yet, the performance of the company’s European business is currently discouraging. During the third quarter, same-store NOI in Shurgard Europe fell 3.5% year over year owing to a fall in weighted average square foot occupancy and a smaller decline in realized annual rent per occupied square foot.
Considering the current macroeconomic environment, we do not expect a robust turnaround in this unit’s performance in the near to medium term. Also, its significant construction pipeline increases operational risks.
Over the last 30 days, the Zacks Consensus Estimate for 2013 moved up a cent to $7.41 while that for 2014 moved north by 3 cents to $7.97 per share. Public Storage now carries a Zacks Rank #2 (Buy).
Other Stock to Consider
Investors interested in the REIT industry may consider stocks like Getty Realty Corp. (GTY) and National Health Investors Inc. (NHI). Both these stocks carry a Zacks Rank #1 (Strong Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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