Company Reports

The REIT sector in the US offers many companies that should see relatively stable cashflow growth over the next several years. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years with many reaching historical levels of net operating income growth, the REIT sector underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that is due to the sector’s negative correlation with interest rates, as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. Still, we still view many of companies in the US REIT sector as being undervalued as the companies should continue to produce solid long-term growth.

Despite a rally over the past two months, we still view the US REIT sector as being undervalued. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors led combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years, with many reaching historical levels of net operating income growth, the REIT sector has underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that the cause has been due to the sector's negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. We believe that US REITs will continue to see share price movements that are inverse of interest rate movements.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

No-moat-rated Public Storage reported second-quarter results that reflected continued pressure on the self-storage sector after the sector performed exceptionally well in 2021 and 2022. The firm reported core funds from operations of $4.23 per share, 1.2% lower than the $4.28 per share FFO during the second quarter of 2023. The company revised its 2024 full-year core FFO guidance downward to $16.50-$16.85 per share, representing a 1.3% decline at the midpoint when compared with the full-year 2023 core FFO of $16.89. We have not been surprised by the current slowdown in the self-storage sector demand and have been predicting it for many quarters. We are maintaining our $310 per share fair value estimate for Public Storage after incorporating the second-quarter results.

The US REIT sector remains significantly undervalued, in our perspective. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past two years, with many REITs reaching historical levels of net operating income growth, the sector has underperformed the broader equity markets over the past two years. We believe that the cause has been the sector’s negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, we don’t believe that higher rates significantly change our fair value estimates for the sector. Additionally, interest rates are down from the October 2023 highs, and REIT share prices have generally inversely followed the movements of the US 10-year Treasury.

No-moat-rated Public Storage reported first-quarter results that were largely in line with our expectations as muted demand for self-storage units weighed on rental rates in many markets. The firm reported core funds from operations of $4.03 per share, 1.2% lower than the $4.08 per share FFO during the first quarter of 2023. The company maintained its 2024 full-year core FFO guidance of $16.60-$17.20 per share, representing flattish growth at the midpoint when compared with the full-year 2023 core FFO of $16.89. We have been predicting the slowdown in self-storage demand for many quarters. On a somewhat encouraging note, the current demand slowdown is relatively mild, and management commentary points to a slow recovery in the coming months. We are maintaining our $310 per share fair value estimate for Public Storage after incorporating the first-quarter results.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

No-moat-rated Public Storage reported fourth-quarter results that were largely in line with our expectations. The firm reported core funds from operations, or FFO, of $4.20 per share, 1.0% higher than the $4.16 per share FFO during the fourth quarter of 2022. The company has guided for the full-year 2024 core FFO guidance range to $16.60-$17.20 per share, representing flattish growth at the midpoint when compared with the full-year 2023 core FFO of $16.89. The $16.90 per share midpoint of the full-year 2024 FFO guidance is also in line with our $16.96 estimate for the year. As we have pointed out previously, the growth in the self-storage sector was largely expected to slow down in 2024 after exceptionally strong years of pandemic-driven growth. We are maintaining our $317 per share fair value estimate for Public Storage after incorporating the fourth-quarter results.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

No-moat-rated Public Storage 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 share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

No-moat-rated Public Storage achieved decent results in the second quarter as the firm reported core funds from operations, or FFO, of $4.28 per share, 7.3% higher than the $3.99 per share FFO during the second quarter of 2022. If we exclude the contribution from the company’s equity investment in PS Business Parks, which was sold in July 2022, then core FFO grew by 11.5% in the second quarter. The company has increased the bottom end of its 2023 full-year core FFO guidance to $16.40-$16.80 per share, representing around 4.25% growth at the midpoint when compared with the 2022 core FFO of $15.92. The fundamental performance of the company held up relatively well during the second quarter. However, we think that the growth in the self-storage sector will moderate in the upcoming quarters after two exceptionally strong years of growth. We are reducing our fair value estimate for Public Storage to $317 per share from $326 as we slightly moderate our long-term expectations for the sector.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

No-moat-rated Public Storage achieved strong same-store NOI growth in the first quarter, but the growth should moderate in the upcoming quarters. The firm reported core funds from operations, or FFO, of $4.08 per share, 11.8% higher than the $3.65 per share FFO during the first quarter of 2022. If we exclude the contribution from the company’s equity investment in PS Business Parks, which was sold in July 2022, then core FFO grew by 16.2% in the first quarter. The company largely maintained its 2023 full-year core FFO guidance of $16.15 to $16.80 per share, representing around 3.5% growth at the midpoint when compared with the 2022 core FFO of $15.92. We are maintaining our $326 fair value estimate for the company after incorporating first-quarter results.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.

No-moat-rated Public Storage’s fourth-quarter results were largely in line with our expectations as the firm reported core funds from operations of $4.16 per share, 18% higher than the $3.54 during the fourth quarter of 2021. Core FFO increased approximately 22% after removing the contribution of the company’s equity investment in PS Business Parks, which was sold in July 2022. The self-storage sector has started to moderate after two strong years of growth. The company gave 2023 core FFO guidance of $16.10-$16.80 per share, representing growth of 3.3% at the midpoint when compared with 2022. We are maintaining our $326 fair value estimate as we incorporate fourth-quarter results.

No-moat Public Storage submitted an all-stock transaction proposal for its smaller rival Life Storage. The company proposed an exchange ratio of 0.4192 Public Storage shares for each Life Storage share, representing a 19% premium based on the 20-day trailing share prices for the two companies. The shares of Life Storage are trading about 12% higher after the disclosure of the acquisition proposal. We think that the deal can be a win-win for both companies if it gets executed at the current price. It will be a positive for Life Storage shareholders because of the acquisition premium associated with the deal. In our opinion, the deal will also be mildly positive for Public Storage shareholders given the possible synergies and the relative valuation of the two companies.

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities.