Public Storage – King of Self-Storage (Series 5 of 5)

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As the world’s largest owner and operator of self-storage facilities, Public Storage (NYSE: PSA) is the de-facto leader of the industry. Structured as a REIT, PSA boasts an extensive network of 2,300 facilities across 38 states in the US. This presence has created a very strong and recognized brand. PSA wisely leverages their size to maximize economies of scale and gain access to capital. In a fragmented market where creating a new location is fairly straightforward, these benefits facilitate the company’s continued expansion.

Overall, PSA’s stock has been a solid investment. As a large, well established company, PSA’s growth rate has predictably lagged its smaller cap peers. However, the dividend payout has never been decreased since its IPO in 1996. As a sign of PSA’s strength, the dividend has increased an average of 21 percent per year over the past five years. Investors have also benefited from a lower beta coefficient enabling the stock to weather down markets.

Leaders of their sector and industry earn privileges few companies in the US can boast. In examining PSA’s financials, the company has an impressive debt-to-enterprise ratio of less than one percent. Unlike most REITs, the company chooses to issue preferred shares as a method of financing. Although this comes at a higher cost, PSA justifies the strategy with the following points:

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  1. REITs, by law, must distribute a significant portion of operating income. Subsequently, conventional debt can become difficult to repay with operating income
  2. Refinancing risks do not exist since sinking fund requirements, maturity date and redemption issues are eliminated
  3. PSA retains the option of redeeming preferred shares at a specified future date.
  4. Preferred shares are not subject to covenants
  5. Dividends on the preferred shares can be applied to satisfy our REIT distribution requirements.

The credit ratings on their preferred shares are “A3” by Moody’s, “BBB+” by Standard & Poor’s and “A” by Fitch Ratings.

Regarding valuation, PSA’s has been on par with previous years. Over the past three years, the Price-to-FFO multiple has fluctuated between 20.0 and 23.7. Although historically high, PSA’s current Price-to-FFO multiple is within its historical range. In addition, historical yield has been hovering around 3.0.

Takeaway

PSA can be a solid addition to balance a portfolio.

Summary

2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 3.65 4.40 5.15 5.60 5.60
Q4 Dividend, $ 0.95 1.10 1.40 1.40
Dividend payout ratio, in percent 65 69 72 72
Dividend yield, in percent 2.7 3.0 3.4 3.0
FFO per share, $ 5.67 6.31 7.53 7.98 8.68
FFO per share (Q4 only), $ 1.50 1.86 2.13 2.17
Alternate FFO per share (Core), $ 6.68 7.44 8.09
AFFO per share, $ 5.65 6.41 7.18 7.73
Revenues – Total, in percent 6.5 5.2 7.6 10.8
Revenues – Same Store, in percent 4.6 4.9 5.3 5.4
NOI – Same Store, in percent 6.6 7.9 8.2 6.7
Year-end Occupancy – Same Store, in percent 89.6 91.4 91.8 92.5
Share Price on 31 December, $ 134.46 144.96 150.52 184.85 200.24
P/FFO on 31 December 23.7 23.0 20.0 23.2 23.1
 *2015 Projection

Next week I’ll post the closing remarks for the self-storage REIT sector.


Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​