General Storage Stocks: Strong FFO Growth, Low Payout Ratio and 4.4% Yield (NYSE:PSA)

General Storage Company (New York Stock Exchange: BSA) It is a promising storage enterprise that passive income investors may want to consider now that the stock price is down a bit.

Public Storage is a well-managed and rapidly growing storage real estate investment Trust with a national leasing platform and flair for acquisitions. I believe Public Storage offers a compelling value proposition, despite its premium multiple, to passive income investors given its highly leveraged cash from operations growth, its success in acquisitions and its low dividend payout ratio that significantly enhances the risk/reward relationship.

Although passive income investors pay a healthy premium for credit funds from the growth of operations, I think the premium is worth it, as are the potential gains that come with owning Public Storage stock.

National storage-focused leasing platform with turbocharged FFO growth prospects

Public storage It is a unique real estate investment trust in the sense that the company focuses exclusively on providing warehouse space to retail and corporate clients. Public Storage owns more than 3,000 self-storage properties as of March 31, 2024, representing a total rental area of ​​218 million square feet. The fund’s portfolio is distributed throughout most of the continental United States, and has a presence in 40 of the 50 states.

In addition, Public Storage owns a 35% stake in Shurgard Self Storage Limited. Shurgard had 279 self-storage facilities, representing 15 million square feet, in seven Western European countries at the end of the first quarter. Over the past year, the number of public storage facilities has increased by 6% year over year, partly due to acquisitions.

The key value proposition of public warehousing is that the REIT grows its money from operations faster than other trusts in non-warehousing spaces, such as retail.

For example, Public Storage grew its funds from operations, which are often used to evaluate REIT growth, by high single digits in the first quarter of 2024, by 7.8% year over year. This growth is due to increasing demand for storage solutions in a highly fragmented market as well as the previous acquisition of Public Storage. The fund has been very active in terms of acquisitions in order to enter new markets and add properties to its national rental platform.

Due to previous property acquisitions and strong leasing economics, Public Storage is seeing strong portfolio growth and acquisitions will remain a central growth component for the storage fund moving forward. In 2023, for example, Public Storage acquired BREIT Simply Storage LLC, a storage company that owns 127 facilities and operates 25 more.

Acquisitions are key to a trust’s FFO boom because they provide two ways for public storage to stimulate growth:

1. With the integration of the new facilities into PSA’s national rental platform, the organization has the opportunity to improve its rental (occupancy) rate;
2. Public Storage is increasing its sales and cash flow by increasing rental rates.

These two engines are responsible for the overall storage of producing high single-digit FFO growth which in turn translates into an attractive value proposition for passive income investors.

Low dividend payout ratio

One advantage of investing in a storage REIT is that the money generated from operations grows quickly, as do the profits. Another advantage is that public storage provides passive income investors with a very moderate funds from operations payout ratio leaving room for both investment in storage-oriented real estate portfolio expansion and dividend growth.

In the first quarter of 2024, the general storage division’s payout ratio was just 74%. In the last twelve months, the storage fund paid out 71% of its core funds from operations, so the dividend offered by PSA has a very high margin of safety. This in turn means that the fund has the option to grow its dividend at faster rates than other trusts that may operate in more mature, saturated markets that do not achieve high single-digit FFO growth. Last year, PSA raised its dividend by a whopping 50% making the trust’s shares very attractive.

Multiple FFO premium

Public Storage expects to see $16.60-17.20 per share in basic FFO in 2024 which translates to an FFO multiple of 16.1x. At the beginning of the year, the fund’s shares were sold for 18.3 times the money from operations. I believe we can get back to 18x FFO if General Storage continues to outperform in terms of funds generated from operations growth.

With an 18x FFO multiple, general storage stock can be worth as much as $305. However, the main reason to buy PSA relates to the very safe dividend yield of 4.4%, in my view.

Public storage has a number of sector-specific peers including Extra Space Storage Company (EXR) And Cube Smart Company (CUBE). The first trust, Extra Space Storage, on its updated 2024 guidance, expects $7.85-8.15 per share in core FFO, while the last, CubeSmart, expects $2.59-2.69 in core FFO.

Based on that trust’s current stock prices, Extra Space Storage is selling for an estimated 17.8x FFO, while CubeSmart has a 16.0x FFO multiple.

Why might your investment thesis disappoint passive income investors?

Public Storage’s appeal as a cash-rich dividend investment comes from the operational growth the company is achieving through its nationwide storage-focused real estate platform.

However, despite this, at some point, public storage funds are expected to slow growth in operations as returns on capital diminish, which may then translate into slower earnings growth for passive income investors as well.

deductive

There’s an important trade-off for passive income investors when buying into storage-based real estate business models: They’re betting that higher-than-average cash from operations growth will translate into equally strong earnings growth.

If growth in the storage industry slows and public storage no longer generates high single-digit FFO growth rates, passive income investors may get the short end of the stick.

However, the current dividend of $3.00 per share per quarter is well covered by funds from operations, and the dividend is in the low 70s.

However, passive income investors pay big for the privilege of investing in a fast-growing REIT like Public Storage.