Shareholders of real estate investment trust Public Storage (PSA, Financial) have experienced a difficult 12 months.
Shares of the REIT are lower by 19% during this period of time, which is in line with the decrease in the real estate sector as a whole. Rising interest rates have acted as a headwind for the sector.
While the short term has been difficult, those looking for a good entry point into the name may have found it as Public Storage is trading at a discount to its intrinsic value and is paying an over 4% dividend yield. This could make the name a strong combination of value and income.
Earnings highlights
Public Storage reported mixed fourth-quarter and full-year 2022 results on Feb. 21. For the quarter, revenue grew 13% to $818.9 million, but this was $250 million shy of what analysts had anticipated. Funds from operations totaled $4.16 per share, compared to $3.54 per share in the previous year. This was also 19 cents above the market’s expectations.
For the year, revenue grew almost 15% to $3.2 billion, while funds from operations of $15.92 was up considerably from $12.93 in 2021. Full-year totals were also ahead of the trust’s own guidance for funds from operations of $15.55.
Public Storage achieved comparable revenue growth of 13% for the quarter and 14.8% for the year. The occupancy rate declined 260 basis points to 93.4% in the quarter and contracted 150 basis points to 94.9% for the full year.
As typical of the trust, Public Storage was active on the acquisition front. It purchased 30 facilities for $228.6 million during the quarter and 74 facilities for $730.5 million in 2022. The company also opened eight newly developed storage facilities during the year.
Public Storage’s guidance for 2023 called for revenue growth of 2.5% to 5%. Funds from operation are forecasted to be in a range of $16.10 to $16.80. Consensus funds from operation estimates were $16.63.
Takeaways
Public Storage added to its recent string of successful years with double-digit revenue and funds from operations growth for 2022. The trust had seen several consecutive years of little to no growth, but the pandemic changed that as demand for storage facilities greatly increased.
The decline in occupancy rates in the most recent quarter does show a hint of weakening demand, but this is likely an industry-wide issue and not just specific to Public Storage. For example, the occupancy rate for peer Extra Space Storage Inc. (EXR, Financial) fell 110 basis points to 94.2%. Smaller self-storage name National Storage Affiliates Trust (NSA, Financial) saw its occupancy rate decrease 420 basis points to 90.5%.
However, rental increases were the primary driver of growth for both the fourth quarter and full year. The improvement in the comparable sales last year showed the vast majority of customers are still willing to spend more to store their possessions. This points to demand remaining elevated at least in the near term.
What helps to separate the trust from the competition is Public Storage’s impressive balance sheet. The debt-to-Ebitda ratio of 2.2 is considerably ahead of the industry average. The trust has long-term debt of $6.87 billion, but this is down from $7.5 billion at the end of 2021. Public Storage is facing no maturities until 2024. Cash on hand stood at $775 million and the trust generated $2.7 billion of free cash flow last year.
This fortress-like balance sheet allows Public Storage to access debt markets or use capital on hand to expand the trust’s portfolio. The company was aggressive in adding properties to its portfolio last year, with Public Storage adding nearly five million net rentable square feet to the portfolio in 2022.
Management guided toward an acquisition budget of $750 million for the current year. Another $350 million has been marked toward new facility openings as well. This capital investment will help to expand Public Storage’s already impressive footprint in the U.S. as well as aid both top- and bottom-line growth.
And unlike many REITs, Public Storage has not had to use the dilutive practice of issuing shares to provide the funding needed to make acquisitions.
In fact, the trust’s outstanding share count has barely moved from 172 million in 2013 to 176 million as of the most recent quarter. This compares extremely well to Extra Space, which has increased its share count by more than 20% during the last decade, and National Storage, which has expanded its share count by a factor of almost six since 2015. The increasing of the share count impacts a trust’s ability to grow funds from operations and dividends.
Because the share count has remained fairly constant, Public Storage is much better positioned to see higher levels of funds from operations growth than its peers.
Public Storage has a solid GF Score of 87 out of 100. This means the stock is likely to provide better returns than Extra Space, which has a GF Score of 85, and National Storage, which has a GF Score of 74.
Total return potential
Shares of Public Storage are trading at 17.4 times the midpoint of forward funds from operations. For context, the trust’s average multiple over the last decade was routinely above 20.
The GF Value chart also shows the stock to be trading at a discount to fair value.
With a GF Value of $338.84, Public Storage has a price-to-GF Value ratio of 0.85, earning the stock a rating of modestly undervalued from GuruFocus. Reaching the GF Value would result in a 18.1% return from current levels.
This would be in addition to the stock’s dividend. Public Storage did hold its dividend constant from late 2016 to 2022. However, the trust issued a $13.15 special dividend last year and raised its quarterly dividend 50% to $3 beginning with the upcoming March 30 payment date. The projected payout ratio for this year is 73%, which is below both of its main competitors.
Currently, Public Storage yields 4.2%, which is 2.5 times the average yield of the S&P 500 Index. Investors buying today could see a total return in the low 20% range.
Final thoughts
Public Storage ended the year on a high note, though the trust is seeing some softening in its occupancy levels. This appears to be an industry-wide issue. Rental revenue and funds from operations are both up a double-digit percentage year over year, demonstrating the trust’s leading market position. Acquisitions have also aided results.
The REIT also has an impressive balance sheet and has not had to increase its share count to grow its business.
Shares are down substantially over the last year, but the stock is trading below its long-term average valuation and at a sizeable discount to its intrinsic value according to GuruFocus. The trust also recently raised its dividend for the first time in years. The payout ratio is reasonable for a REIT, making the dividend likely safe from being cut.
In total, investors buying today could see a return in the low 20% range, making Public Storage a strong combination of growth and income.
