$Public Storage(PSA-N)$ PSA is one of the most recognized names in the self-storage industry with a high brand value. Its efforts to leverage technology, accretive buyouts and a strong balance sheet are encouraging. However, softer industry-wide demand and high interest espenses are concerns.

Last month, PSA reported its fourth-quarter 2024 core funds from operations (FFO) per share of $4.21, missing the Zacks Consensus Estimate of $4.23. The figure increased marginally year over year.

Results reflected lower same-store revenues year over year, owing to a decline in occupancy. However, a decent increase in realized annual rent per occupied square foot positively impacted the performance to some extent.

What’s Aiding PSA?

Public Storage is one of the top owners and operators of storage facilities in the United States. The ‘Public Storage’ brand is a much-recognized and established name in the self-storage industry, with a presence in all major metropolitan markets of the country. The self-storage asset category is need-based, with low capital expenditure and high operating margins. Amid these tailwinds, PSA is well-poised for future revenue growth. For 2025 and 2026, we estimate total revenues to grow 2% and 3.2%, respectively, year over year.

Public Storage is also leveraging technology for revenue optimization and cost efficiencies and, as such, has invested in technologies over the past few years. Such efforts are likely to bolster the company’s competitive edge.

Public Storage has been capitalizing on growth opportunities. From the beginning of 2022 through Dec. 31, 2024, Public Storage acquired a total of 260 facilities with 18.5 million net rentable square feet (RSF) for $3.7 billion. During 2024, these facilities contributed a net operating income (NOI) of $159.7 million. As of Dec. 31, 2024, Public Storage had 26 self-storage facilities in development and expansion, which are expected to add 4 million net RSF at an estimated cost of $741.6 million. With solid access to capital, the company is well-poised to take advantage of any potential opportunity.

PSA concluded the fourth quarter of 2024 with net debt and preferred equity to EBITDA of 3.9X and an EBITDA to fixed charges of 6.9 times. It also enjoys an “A” credit rating from Standard & Poor’s and an “A2” from Moody’s. The sturdy credit profile and ratings enable the company to access public and private capital markets to raise capital at favorable rates.

Furthermore, robust dividend payouts are arguably the biggest enticement for investment in REIT stocks. While the company has increased its dividend two times in the past five years, its payout has grown 12.42% over the same period. Looking at the company’s operating environment and financial position compared to that of the industry’s average, its current dividend is expected to be sustainable in the upcoming period.

What’s Hurting PSA?

The self-storage industry experienced softer demand and lower operating trends in 2024. Although demand trends in the self-storage industry improved in some markets, stabilization will take time. To lure tenants into such an environment, management continues to focus on lowering rental rates for new customers and increasing promotional discounting. Management expects its same-store facility revenues at the midpoint to decline yearly.

Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Public Storage. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt as of Dec. 31, 2024, was around $9.4 billion. The company’s fourth-quarter 2024 interest expenses increased 5.1% year over year.

Also, shares of this Zacks Rank #3 (Hold) company have declined 3.2% over the past three months against the industry's growth of 2.4%. Analysts seem bearish on this REIT, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share moving southward marginally to $16.88 over the past week.

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Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Welltower WELL and Cousins Properties CUZ, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Welltower’s 2025 FFO per share is pegged at $4.90, suggesting year-over-year growth of 13.4%.

The Zacks Consensus Estimate for Cousins Properties’ 2025 FFO per share stands at $2.79, indicating an increase of 3.7% from the year-ago reported figure.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.

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This article originally published on Zacks Investment Research (zacks.com).

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