Public Storage's Q2 Earnings: Navigating Growth and Debt in an Expanding World

As Public Storage (NYSE:PSA) prepares to report its second-quarter 2025 earnings on July 30, investors will scrutinize whether the company's relentless expansion into Europe and its growing debt load are sustainable amid a shifting economic landscape. With occupancy rates near historic highs and a dividend track record spanning decades, the question remains: Can the self-storage giant maintain its growth trajectory without compromising its financial flexibility?

A Resilient Core, But Challenges Ahead

Public Storage has long been the gold standard in self-storage, with 3,399 U.S. facilities and a 35% stake in Shurgard Self Storage, which operates 318 European properties. Analysts expect Q2 AFFO of $4.23 per share—flat year-over-year—amid a sector where demand remains steady but inflation pressures weigh on margins. The company's Q1 2025 results showed resilience: revenue rose 2.2% to $1.2 billion, and adjusted FFO beat estimates by 1.5%, thanks to strong occupancy (95.1%).

Yet, the focus now is on two critical factors: the scalability of its European ambitions and the risks of rising debt. Shurgard's expansion in Western Europe has been steady, but Public Storage's recent non-binding offer to acquire a 50% stake in Abacus Storage King (ASK)—a firm with 126 properties in Australia and New Zealand—hints at a broader global push. While this could unlock growth in high-potential markets, it also amplifies foreign currency and regulatory risks.

Debt Dynamics: A Balancing Act

Public Storage's debt load has climbed to $9.5 billion as of March 2025, up from $8.7 billion a year earlier, following an $875 million senior notes offering in Q2. The new debt extended maturities and hedged against rising rates, with a weighted average rate of 4.66%. While this move reduced near-term refinancing risk, the total debt/EBITDA ratio now sits at ~3.5x—near the upper end of its target range.

Investors should watch for signs of strain. The company's unsecured debt covenant requires unencumbered assets to exceed 125% of unsecured debt, a buffer that remains intact. However, if occupancy slips or capital costs rise further, this flexibility could erode. Public Storage's 95%+ occupancy is a moat, but a repeat of Q3 2024's 1.3% dip in same-store revenue—a result of lower realized rents—would test its pricing power.

Dividend Reliability: Steady, But Not Immune

Public Storage's dividend—$3.00 per share quarterly, yielding 2.6% at current prices—has been a pillar of investor confidence. The payout ratio, at ~60% of AFFO, leaves ample room for reinvestment. Yet, with AFFO growth projected to slow to 1.1% in 2025 before rebounding to 4% in 2026, the dividend's sustainability hinges on execution.

A key risk is the dilutive impact of acquisitions. The ASK deal alone would cost ~$586 million, funded via Australian-dollar debt. While this avoids drawing on U.S. liquidity, currency swings could complicate returns.

Investment Takeaway: A Hold with Caveats

Public Storage's stock trades at a 31.4x P/E—above its five-year average—reflecting optimism about its scale and defensive profile. The “Moderate Buy” consensus, with a 15.5% upside to $333.72, suggests analysts see value, but the path to growth is narrowing.

For income investors, the dividend remains reliable, but capital appreciation may require patience. Bulls will point to Europe's underpenetrated self-storage markets and the company's operational excellence. Bears, however, will highlight the debt overhang and slowing U.S. demand.

Final Word: Public Storage's moat is intact, but its European gamble and debt trajectory demand close scrutiny. Investors seeking steady dividends should hold, but those chasing growth might prefer peers with lower leverage. With shares flat over the past year, the Q2 report will be a litmus test for whether the storage giant can keep climbing. Historically, earnings releases have often preceded positive returns, with an average gain of 1.14% and a peak increase of 1.86% post-announcement, according to backtest data.

Disclosure: The analysis is based on publicly available data and does not constitute personalized investment advice.