Public Storage (NYSE: PSA) has been red-hot over the past year. The self-storage REIT (real estate investment trust) has rallied nearly 60%, pushing its stock price above $300 a share. While that price point makes it seem expensive, a closer look suggests Public Storage's stock is cheaper than it appears. Because of that, investors shouldn't let its triple-digit prices scare them off.
A premium self-storage operator at an attractive valuation
After this year's run-up, Public Storage trades at 24.7 times its 2021 EBITDA estimate. That's a relatively attractive price compared to its publicly traded peers. While it's a bit more expensive than Life Storage (NYSE: LSI) and CubeSmart (NYSE: CUBE), which have EBITDA multiples of 23.5 times and 24.4 times, respectively, it's cheaper than Extra Space Storage (NYSE: EXR) and National Storage Affiliates (NYSE: NSA), trading at 26.2 times and 29.2 times their EBITDA.
On the one hand, Extra Space and National Storage Affiliates each have a case for trading at a premium multiple. Extra Space has been an exceptional value creator over the years, delivering one of the best performances in the REIT sector over the last decade. Meanwhile, National Storage Affiliates' unique PRO ownership structure enables it to benefit from the growth of privately-held self-storage operators with less downside risk than if it owned those portfolios.
However, on the other hand, Public Storage is a premium operator that deserves to trade at a sector-leading valuation. The company owns 2.2 times the number of stores compared to its next-largest competitor (Extra Space) and better brand awareness than any rival. The REIT also holds the No. 1 market position in 14 of its 15 top markets. On top of that, it boasts above-average rental revenue per available square foot, net operating income (NOI) per available square foot, and operating margin for the self-storage sector. If that wasn't enough, it's the only self-storage REIT with a property development platform, and it has the best balance sheet in the entire REIT sector. Because of all those factors, Public Storage should trade at a premium valuation compared to its self-storage REIT peers.
Positioned for strong total returns
Because Public Storage trades at a relatively attractive valuation, the REIT should generate compelling annual total returns for shareholders in the coming years. Public Storage believes it can grow its funds from operations (FFO) per share by 6.7% to 9.2% per year, or about 8% at the midpoint. A range of catalysts drives the REIT's outlook:
- Same-store NOI growth of about 3% per year.
- Operating innovation and efficiency investments driving another 0.5% to 1% of incremental FFO growth.
- Increasing its investment spend to grow its portfolio, which could yield 2.2% to 3.7% of additional FFO per-share growth.
- Complimentary growth to increase the scale of its business could generate another 0.5% to 1% of FFO per share each year.
- Leveraging its strong balance sheet and other factors could boost the bottom line by another 0.5%.
Add that FFO per-share growth to the dividend -- which the REIT aims to increase over time to a yield of around 3% -- and Public Storage could generate annual total returns of 9.7% to 12.2%, or 11% at the midpoint. That's without any valuation bump to a peer-leading EBITDA multiple. It also doesn't assume any large acquisitions using equity. Public Storage can self-fund its growth plan using excess cash flow after paying the dividend and incremental debt while maintaining a top-notch balance sheet. If it made an accretive deal using stock, it could grow FFO at an even faster pace.
A good price to pay for this great REIT
While Public Storage's current share price of more than $300 might seem pricey, it's not. The REIT trades at an attractive valuation compared to its self-storage peers, especially given its premium operations. Because of that, investors should be able to earn above-average total returns from the REIT as it executes its growth strategy. That makes it worth a closer look for those seeking a way to invest in self-storage.