Should You Buy, Hold, or Sell Realty Income (O) and Public Storage (PSA) Ahead of Earnings?

REITs Public Storage (PSA) and Realty Income Corporation (O) are scheduled to report their fourth-quarter results on February 21, 2024. While both companies are expected to report a year-over-year decline in FFO, their revenues are expected to rise in the fourth quarter.

In this article, I have discussed why waiting for a better entry point in PSA and O could be prudent.

For the fourth quarter, PSA’s FFO is expected to decline 0.6% year-over-year to $4.14. On the other hand, its revenue for the same quarter is expected to increase 5.2% year-over-year to $1.15 billion. Meanwhile, O’s FFO for the fourth quarter is expected to decline 1.2% year-over-year to $1.04, while its revenue for the same quarter is expected to increase 12.6% year-over-year to $983.70 million.

REITs ended 2023 on a solid note, with The Dow Jones Equity All REIT Index closing the fourth quarter with a 17.9% return, compared to the S&P 500’s 11.7% return during the quarter. The solid end to the fourth quarter meant that the REIT-focused index delivered an 11.3% return in 2023, underperforming the S&P 500’s 26.3% return last year.

Retail REITs returned 21.3%, and Industrial REITs delivered 17.9% during the fourth quarter. According to a Nareit Research estimate, 168 million Americans lived in 50% of all households that owned REITs in 2023, a 12% increase over 2022. The FTSE Nareit All Equity REITs Index posted a decline of 4.9% in January, with Retail REIT declining 3.9% and Industrial REIT falling 5.2% last month.

Rising interest rates have weighed on the real estate sector’s prospects since 2022 as higher borrowing costs proved to be a headwind. Although REITs underperformed the broader market in 2023, they have outperformed since the 10-year Treasury peaked in October. The outperformance was also aided by the expected end to the Federal Reserve’s cycle of monetary policy tightening.

With the central bank’s expected interest rate cuts this year, REITs may become attractive again. Nareit’s executive VP of research and investor outreach, John Worth, said, “Historically, at the end of that tightening cycle, REITs tend to perform quite well-outperforming both private real estate, as well as equities in general.” Morgan Stanley’s head of global listed real assets, Laurel Durkay, believes that REITs today are cheap compared to broader equities.

She said, “They do screen attractively versus private real estate. They look compelling versus where REITs have historically traded, and they look pretty fairly valued versus fixed income. The macro backdrop is favorable with interest rate stabilization and the increasing likelihood of cuts this year.” Meanwhile, Citi is expecting total returns of between 10% and 15% this year for REITs in the U.S.

Despite the optimism around improvement in the operating environment of REITs, there exists the risk of declining demand for commercial real estate stemming from the shift to remote work. Moreover, the Fed has now expressed interest in seeing more evidence that inflation was continuing to decline before moving to cut rates.

Given the overall uncertainty around the industry’s long-term prospects, let’s examine the fundamentals of the two REITs.

Public Storage (PSA)

PSA is a REIT that primarily acquires, develops, owns, and operates self-storage facilities. On September 30, 2023, the REIT had an interest in 3,028 self-storage facilities located in 40 states with approximately 217 million net rentable square feet in the U.S. and a 35% common equity interest in Shurgard Self Storage Limited, which owned 267 self-storage facilities located in seven Western European nations with nearly 5 million net rentable square feet.

On September 13, 2023, PSA announced the completion of the previously announced acquisition of Simply Self Storage from Blackstone Real Estate Income Trust, Inc. The portfolio comprises 127 wholly-owned properties and 9 million net rentable square feet that are diversified across 18 states and located in markets where population growth has been nearly double that of the national average since 2018.

In terms of the trailing-12-month AFFO Payout Ratio, PSA’s 81.17% is 9.4% higher than the 74.21% industry average. Likewise, its 0.24x trailing-12-month asset turnover ratio is 86.2% higher than the industry average of 0.13x. Furthermore, the stock’s 71.22% trailing-12-month FFO Payout Ratio is 13.9% higher than the industry average of 62.54%.

On the other hand, PSA’s 5.99% trailing-12-month FFO Yield is 24.6% lower than the 7.94% industry average. Its 5.15% trailing-12-month AFFO Yield is 30.5% lower than the 7.41% industry average.

PSA’s revenues for the fiscal third quarter ended September 30, 2023, increased 5.1% year-over-year to $1.14 billion. Its core FFO allocable to common shares rose 4.9% year-over-year to $762.94 million. In addition, its core FFO per share, excluding the impact of PS Business Parks, Inc., came in at $4.33, representing an increase of 5.6% year-over-year.

On the other hand, its net income allocable to common shareholders declined 79.2% over the prior-year quarter to $563.24 million. Its net income per common share came in at $3.20, representing a decline of 79.2% year-over-year. Also, its FFO allocable to common shares declined 1.8% year-over-year to $807.01 million.

Analysts expect PSA’s FFO and revenue for the quarter ending March 31, 2024, to increase 0.8% and 5.9% year-over-year to $4.11 and $1.16 billion, respectively. It surpassed the consensus FFO estimate in each of the trailing four quarters. The stock has gained 8.5% over the past three months and declined 7.7% year-to-date to close the last trading session at $281.52.

PSA’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It is ranked #2 out of 17 stocks in the REITs – Industrial industry. It has a C grade for Growth, Momentum, and Sentiment. Click here to see the additional ratings of PSA for Value, Stability, and Quality.

Realty Income Corporation (O)

O is structured as a real estate investment trust, and its monthly dividends are supported by the cash flow from over 13,250 real estate properties primarily owned under long-term net lease agreements with commercial clients.

On January 23, 2024, O announced the closing of the previously announced merger with Spirit Realty Capital Inc. in an all-stock transaction.

O’s President and CEO, Sumit Roy, said, “We are pleased to announce the completion of our merger with Spirit. The transaction, which is immediately accretive on a leverage neutral basis, is further evidence of how our unique platform and our position as global consolidator in the fragmented net lease space creates meaningful value for stockholders.”

“With the acquisition of this highly complementary portfolio, we believe we are well placed to deliver on our growth objectives in 2024,” he added.

In terms of the trailing-12-month AFFO/Total Revenue, O’s 103.02% is 145.1% higher than the 42.02% industry average. Likewise, its 73.85% trailing-12-month FFO Payout Ratio is 15.6% higher than the industry average of 63.88%. Furthermore, the stock’s 92.18% trailing-12-month gross profit margin is 39.9% higher than the industry average of 65.90%.

On the other hand, O’s 0.08x trailing-12-month asset turnover ratio is 40.3% lower than the 0.13x industry average. Its 7.91% trailing-12-month FFO Yield is 0.4% lower than the 7.94% industry average.

For the fiscal third quarter, which ended September 30, 2023, O’s total revenue increased 24.1% year-over-year to $1.04 billion. Its net income available to common stockholders rose 6.3% over the prior-year quarter to $233.47 million. Its AFFO available to common stockholders increased 19.5% year-over-year to $721.37 million. Also, its AFFO came in at $1.02, representing an increase of 4.1% year-over-year.

On the other hand, its EPS came in at $0.33, representing a decline of 8.3% year-over-year.

Street expects O’s FFO and revenue for the quarter ending March 31, 2024, to increase 2.1% and 21.8% year-over-year to $1.05 and $1.05 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 21.1% to close the last trading session at $52.33.

O’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.

Within the REITs – Retail industry, it is ranked #21 out of 29 stocks. It has a C grade for Growth, Momentum, Stability, Sentiment, and Quality. To see O’s rating for Value, click here.

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PSA shares were trading at $280.98 per share on Tuesday morning, down $0.54 (-0.19%). Year-to-date, PSA has declined -7.88%, versus a 4.41% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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