Public Storage Earnings: Growth Starts to Slow After a Postpandemic Boom

No-moat-rated Public Storage PSA reported third-quarter results that were largely in line with our expectations. The firm reported core funds from operations of $4.33 per share, 5.6% higher than the $4.10 per share FFO during the third quarter of 2022. The company has tightened the 2023 full-year core FFO guidance to $16.60-$16.85 per share, representing around 5% growth at the midpoint when compared with the 2022 core FFO of $15.92. The growth in the self-storage sector has started to moderate after two exceptionally strong years of pandemic-driven growth. We are maintaining our $317 per share fair value estimate for Public Storage after incorporating the third-quarter results.

The same-store revenue in the third quarter increased by 2.5% on a year-over-year basis, which was substantially lower than the growth rates achieved in the last few quarters. The same-store expenses increased by 4.9% in the third quarter compared with the previous year driven by higher marketing, and property taxes. This resulted in same-store direct NOI growth of 2.4% in the current quarter. Management has updated its 2023 guidance to same-store revenue growth of 4.00%-4.75%, same-store expense growth of 5.0%-6.5%, and same-store NOI growth of 3.2%-4.7%. The same store occupancy rate decreased by 30 basis points sequentially and was down 110 basis points on a year-over-year basis as it was recorded at 93.4% for the third quarter.

In terms of valuation, the stock is trading at $238 per share after releasing the third-quarter results, which is around 25% lower than our fair value estimate. The current share price of the company implies a 2023 FFO multiple of around 14 times ($238/$16.70) which is lower than historical levels. The company paid a quarterly dividend of $3 per share amounting to an annualized dividend yield of around 5% ($12 per share/$238).