Public Storage(NYSE: PSA) is one of the top companies in the real estate investment trust (REIT) space. It's the industry leader in the self-storage sector, with 3,369 properties comprising 243 million square feet of rentable space across 40 states.
Like most REITs, Public Storage is known more for using its free cash flow to pay dividends (it currently yields 4%, well above the S&P 500's 1.3% average). However, the top self-storage REIT believes its shares trade at such an attractive value right now that it recently used some of its financial flexibility to buy back $200 million of its stock. Here's why the REIT thinks it's a great investment right now.
More growth ahead
Public Storage has grown briskly over the years. The REIT's same-store net operating income (NOI) has increased at a 4.9% compound annual rate since 2004, much faster than the core commercial real estate sector's average of 3%. The company has benefited from durable, steadily rising demand for self-storage space, which has kept its occupancy levels high while enabling the REIT to raise rental rates steadily. It has also benefited from its growing scale and operating efficiency gains, which have helped it to deliver sector-leading NOI margins.
The REIT has supplemented its solid organic growth rate by delivering accelerated external growth over the last five years. Since 2019, it has invested $11 billion in acquisitions, development projects, and redevelopments, adding 56 million square feet to its portfolio (a 35% increase). For example, it acquired Simply Storage for $2.2 billion last year, adding 127 owned and operated properties and another 25 to its third-party management platform.
The company has continued to invest in expanding its portfolio this year. In the first half, it bought two self-storage facilities for $22 million and recently agreed to buy three more for $24.2 million.
Public Storage has also continued to develop new properties. It completed three development projects and several expansions in the first half, investing about $120 million. Meanwhile, it's investing nearly $740 million into various development and redevelopment projects it should complete over the next two years.
Public Storage's decision to buy back $200 million of its stock "reflects [its] strong confidence in the company's near, medium, and long-term outlooks," commented CEO Joe Russell in the second-quarter earnings report.
An attractive value
Another factor driving the REIT's decision to repurchase its stock is its attractive valuation:
Image source: Public Storage. FFO = funds from operations.
As that slide showcases, Public Storage trades at a discounted valuation compared to rival Extra Space Storage(NYSE: EXR). The company believes it should trade at a premium to its peers, which it has historically done. Several factors drive that view, including its higher margins (77.2% same-store NOI margin compared to 74% for second-place Extra Space), stronger portfolio, healthier balance sheet, and better growth profile.
Public Storage stands out in the self-storage sector because of its development platform. Investing in developments is riskier, so rivals like Extra Space prefer to provide financing to other developers instead of building projects themselves. However, development projects can earn higher returns. Having an in-house development team enables the REIT to unlock more value from acquisitions since it can redevelop or expand recently purchased properties.
The company also has a stronger financial profile. Its leverage ratio is around 3.9 times, putting it below the low end of its 4.0 times-5.0 times long-term target range. It's also well below the 4.9 times leverage of its chief rival, Extra Space Storage.
A compelling investment opportunity
Public Storage pays an attractive dividend. However, that's only part of its investment appeal. The REIT expects to continue growing at an above-average rate. Meanwhile, it offers that growth (and a higher-quality portfolio and balance sheet) at a discounted valuation compared to its rivals. The REIT believes that those features make its stock a very attractive investment opportunity these days, which is why it recently bought back $200 million of its stock.
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Matt DiLallo has positions in Public Storage. The Motley Fool recommends Extra Space Storage. The Motley Fool has a disclosure policy.
