Shares of leading self-storage REIT Public Storage (NYSE: PSA) fell more than 5% after reporting disappointing second-quarter earnings, and dropped below the $200 mark for the first time since 2015. Public Storage has an impressive track record of delivering fantastic long-term performance to shareholders, and pays a 4% dividend yield, so this could be an opportunity to buy this industry leader at a discount.
The headline numbers aren't too impressive
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Public Storage missed analysts' estimates on both the top and bottom lines for the second quarter. While core funds from operations (FFO) of $2.51 per share represented a 4.6% increase from the second quarter of last year, it missed estimates by $0.03. Furthermore, revenue of $664.3 million also failed to meet expectations.
There were a few other causes for concern as well. The company's gross margin dropped by 70 basis points to 73.2%, and same-store occupancy dropped by 90 basis points to 94.5%.
One culprit is higher expenses
Although Public Storage grew its same-store revenue by 3.3% year over year, the company's same-store expenses increased even more, by 5.4%. Repair and maintenance expenses grew by more than 10%, but the most troubling expense growth is Public Storage's advertising and selling expense, which skyrocketed by nearly 42% from last year's second quarter. Combined with the lower occupancy rate, this could be indicative that Public Storage is having difficulty finding tenants.
Look at the big picture
Whenever a company with a track record like Public Storage misses earnings, or produces other concerning numbers like the ones I've discussed, the main question to ask is whether it's a one-time bad quarter, or a sign of trouble ahead.
To be clear, this was not a great quarter for Public Storage, and there are certainly some headwinds going forward. As I've discussed previously, there are some oversupply concerns in key markets for Public Storage. This is the likely explanation for the lower occupancy and surge in advertising expenses I mentioned in the last section. It could also cause Public Storage to need to lower its rental rates to better compete with rivals.
However, this should be a temporary issue, especially for Public Storage. Its market-leading brand name gives it an edge over competitors, and its strong balance sheet and financial flexibility give it more of an ability to price-match and spend money on advertising while remaining profitable.
While acquisitions and development completions have been slow thus far in 2017, the company also has a rather large ($659 million) development/expansion pipeline that should add significantly to Public Storage's earning power in the future.
Finally, the self-storage business, while prone to short-term fluctuations due to its month-to-month lease structure, has significantly lower operational expenses than many other forms of real estate, allowing it to remain profitable during slow times. Since the current quarterly dividend represents less than 80% of Public Storage's core FFO, the company could absorb a significant earnings hit and still maintain the payout, so income-seeking investors need not worry about dividend safety.
Public Storage is a leader in an attractive business, and is now trading at a more attractive price and pays a 4% dividend yield. There could certainly be more volatility in the near term, but this could be an excellent opportunity to add this industry leader (and millionaire-making stock) to your portfolio for the long run.
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