PSA: Pricing Power Will Improve With Reduced Supply In The Self Storage Sector

Key Takeaways

• Analysts expect Public Storage to continue using its scale, digital operating model, and recent portfolio additions to support occupancy, cash flow stability, and margin resilience over time.
• The main factor that has to go right is successful execution on large acquisitions and PS Next initiatives so that expected synergies, ancillary income growth, and efficiency gains appear in sustained NOI and FFO per share performance, despite pockets of softer markets.
• The current valuation, when considered alongside this narrative’s view that Public Storage is undervalued and bullish, suggests the share price may not fully reflect the potential effects of consolidation, digital operating leverage, and expanding ancillary income streams.

What Public Storage Does

Public Storage acquires, develops, owns, and operates self storage facilities for individuals and businesses. It primarily generates revenue by renting storage space across a large portfolio of properties in the United States and through its equity interest in Shurgard Self Storage Limited in Western Europe.

Catalysts

What are the underlying business or industry changes driving this perspective?

• Urban densification and shrinking residential living space in major metro markets continue to support demand for self storage, which can help Public Storage sustain occupancy and support future revenue growth as constrained housing markets persist.
• An ongoing shift in consumer and business behavior toward e commerce, small businesses, and side projects continues to support flexible storage needs, which can help Public Storage maintain relatively steady cash flows and net operating income over time.
• Large portfolio additions, including the US$10.5b acquisition of National Storage Affiliates and the US$1.2b purchase of Public Storage Canada, are expected to provide scale benefits, targeted synergies, and new market exposure that can support future NOI and FFO per share.
• Expansion of PS Next and PS4.0 initiatives, such as high digital adoption, AI assisted customer service, and machine learning based staffing that has reduced field labor hours and payroll expense, is expected to support operating efficiency and margin resilience as the platform matures.
• Growth in ancillary income, non same store NOI, and related initiatives like third party management, lending, and rooftop solar projects is expanding additional revenue sources that can supplement same store trends and support overall earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Public Storage's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.6% today to 36.9% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $11.46) by about September 2029, up from $1.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.5 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 35.0x on those 2029 earnings, up from 30.0x today. This future PE is greater than the current PE for the US Specialized REITs industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in Sunbelt markets such as Tampa, Atlanta, and certain Texas and Florida metros, where same store revenue is still in decline due to prior new supply and difficult comparisons, could limit Public Storage’s pricing power and keep overall revenue and net operating income under pressure for longer than expected. This would weigh on earnings.
• The recent US$3.00 per share total dividend that resulted in a payout ratio of 1.17 raises the risk that cash distributions are not fully supported by current cash flow, and any need to fund dividends with additional debt or equity could strain the balance sheet and dilute earnings per share.
• Execution risk around integrating the US$10.5b National Storage Affiliates and US$1.2b Public Storage Canada acquisitions, including achieving the targeted US$110 million to US$130 million of synergies and maintaining 65% NOI margins in new markets, could lead to lower than expected net operating income and FFO per share if cost savings or revenue plans fall short.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $337.11 for Public Storage based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $374.0, and the most bearish reporting a price target of just $285.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $5.7 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $296.31, the analyst price target of $337.11 is 12.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.