Public StoragePSA

Public Storage reported earnings of $2.55 per share, slightly ahead of what analysts expected. The company is leaning heavily on acquisitions to grow, as it just agreed to buy Public Storage Canada for $1.2 billion. This deal adds 68 properties and 5.3 million square feet to its portfolio.

The core business is currently in a lull, with Core FFO, a key profit measure for real estate companies that excludes one-time gains, falling about 3 percent from last year. With existing locations seeing flat growth, the company's ability to keep buying new properties at good prices is the main thing keeping its growth story alive.

See the full quarter, and how our tracked metrics did

Source: 8-K filing

Public Storage officially closed its deal to buy National Storage Affiliates. This is a significant expansion that brings the company's total footprint to 327 million square feet across the United States.

By folding these properties into its automated platform, Public Storage expects to run them more efficiently than the previous owners could. This scale is the company's primary defense against a cooling storage market, as it allows them to spread their technology and marketing costs over a much larger number of units.

Source: 8-K filing

Key highlights

• Profit outlook raised: Management raised the full year target for core funds from operations, a key profit measure for real estate companies, to a range of $16.75 to $17.05 per share. This is an increase of $0.22 at the midpoint from the prior goal as the company expects better performance in the back half of the year.
• Massive portfolio expansion: The company finished its merger with National Storage Affiliates in July, adding over 4,500 locations and 327 million square feet to its footprint. This deal is expected to create between $110 million and $130 million in annual savings and extra income within four years by moving those properties onto the more efficient Public Storage tech platform.
• International growth push: Public Storage agreed to pay $1.2 billion for Public Storage Canada, a portfolio of 68 properties covering 5.3 million square feet. The deal is mostly funded by issuing $889 million in partnership units, allowing the company to expand in major Canadian markets without using much cash.
• Core revenue dip: Revenue from properties owned for at least a year fell 0.6% to $1.01 billion, as rental income per occupied square foot dropped 0.8%. While the company is attracting more customers, it is having to offer slightly lower rates to keep its buildings full.
• Operating costs rising: The cost to run existing locations rose 4.3% this quarter, driven largely by property taxes which jumped 5.9% to $111.4 million. These rising bills squeezed the profit margin for those established properties down to 74.2%, compared to 75.4% a year ago.

Our take: This was a strong quarter that signaled a turning point for the business. While the small dip in rental rates shows the market is still competitive, the massive acquisitions and raised profit outlook prove management can grow through even a flat environment. It reinforces the case for owning a scale leader.