A Glimpse at The Journey So Far

The upcoming release of fourth-quarter 2023 results by Public Storage (PSA) on Feb 20 after the market closes has garnered significant investor attention. Expectations are high, with anticipated year-over-year growth in quarterly revenues, even as a potential display of declining core funds from operations (FFO) per share looms large.

Key Factors Affecting Q4 Earnings

Public Storage’s bullish expectations for the fourth quarter are underpinned by its solid presence in major urban centers, a well-established brand, and technological edge. Additionally, the company’s robust financial position is expected to remain intact. Public Storage boasts one of the sector’s strongest balance sheets, which has allowed it to exploit expansion opportunities via acquisitions and developments.

One of the most significant activities was the acquisition of 459 facilities with 38 million net rentable square feet for $8.3 billion from the beginning of 2021 through Sep 30, 2023. Particularly, in September 2023, it purchased Simply Self Storage from BREIT for $2.2 billion. These strategic moves are anticipated to have fueled the company’s growth during the period under consideration.

Revenue growth remains a focal point, with the Zacks Consensus Estimate predicting a 4.53% year-over-year increase in quarterly revenues to $1.14 billion. However, factors such as a soft macroeconomic environment and limited home-moving activities might temper the revenue growth trajectory.

Challenges and Roadblocks

Despite the optimism, the aftermath of the pandemic is expected to put a damper on rental rate growth. With tenants reverting to normal move-out behavior, there is an upward pressure on vacate trends, likely limiting rental rate growth in many markets. Additionally, weaker industry-wide demand in a soft macroeconomic environment and more limited home-moving activities are expected to act as deterrents. These factors are likely to impact same-store revenues, with an estimated 3.1% decline in this metric in the fourth quarter.

Furthermore, an increase in interest expenses due to high interest rates poses an additional challenge for Public Storage. The fourth-quarter core FFO per share estimate has been revised a cent south to $4.15, marking a 0.24% year-over-year decline. For the full year 2023, the company projects FFO per share in the range of $16.60-$16.85, driven by anticipated same-store revenue growth of 4-4.75%, and same-store expense increase of 5-6.5%.

The Future Outlook

With challenges on the horizon, Public Storage remains resolute, with the Zacks Consensus Estimate for 2023 revenues pegged at $4.50 billion, a 7.51% increase from the year-ago reported figure. Despite the headwinds, the overall sentiment is rather hopeful, as reflected by the upward revision in the Zacks Consensus Estimate for core FFO per share to $16.83, indicating a 5.72% increase from the year-ago reported figure.

Quantitative Model Predictions

However, our proven model does not conclusively predict a surprise in terms of FFO per share for Public Storage this season, with a Zacks Rank of 3 and an Earnings ESP of -0.93%. At the same time, stocks like Extra Space Storage Inc. (EXR) and American Homes 4 Rent (AMH) are showing promise, with the right combination of elements to report a surprise this quarter.

Extra Space Storage, scheduled to report quarterly numbers on Feb 27, has an Earnings ESP of +1.08%, while American Homes 4 Rent, slated to release quarterly numbers on Feb 22, has an Earnings ESP of +1.68%. These might be worth keeping an eye on in the near future.

Parting Thoughts

Public Storage’s Q4 earnings are eagerly awaited, with both prospects and challenges under scrutiny. Despite these challenges, the company’s resilience and strategic acquisitions provide reasons for cautious optimism. Investors will be keeping an eye on the upcoming earnings release and subsequent guidance as they chart their course in the dynamic real estate investment trust (REIT) landscape.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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For a more detailed study of Public Storage’s performance, do check out the full report on Zacks.com.