U.S. REITs: Like Father Like Son

 

chart01PS Business Parks (NYSE:PSB) is a mixed office and industrial REIT that has distributed same or growing dividends over the past eighteen years. PSB boasts a track record of a successful REIT and is part of our first tier group of REIT stocks, which is a handful that hasn’t cut dividends over long periods of time. It is the only investment grade ‘industrial’ REIT of the first tier group.

Forty two per cent of PSB’s shares are owned by Public Storage (NYSE:PSA). Both companies have a long history dating back to 1980s. PSB was formed in 1984 under the name Public Storage Properties XI, with PSA as its general partner. In a 1998 merger, the name was changed to PS Business Parks.

chart02Although PSB and PSA have a lot in common, both companies differ when it comes to REIT size. The former is a mid-sized company with a $2.7 billion market cap that invests in flex office/warehouse spaces, while the latter is one of the largest U.S. equity REITs that owns thousands of self storage stores across the country. However, despite the difference, PSB certainly capitalizes from its large REIT peer.

A recent example is that Standard & Poor’s granted PSB a corporate credit close to its major shareholder. Last year, the company was also upgraded from BBB to A- bringing it even closer to PSA’s ‘A’ credit rating.

PSB’s Portfolio Strength

chart03PSB is a fully integrated, self-advised and self-managed. The company has diverse tenant base, which consists of more than 5,000 customers. The top ten tenants account for 12% of the total annualized income, 6% of which is the U.S. Government. This is an excellent figure.

Half of the company’s rentable square footage is targeted at peculiar types of properties called flex. This type of investment is a combination of warehouse and office space, and has a variety of uses. Among them is the capacity for companies to have management and operations in the same physical space.

chart04The flexibility of this type of investment appeals to small and medium sized business tenants, which encompasses more than a third of rental income. Due to the tenant profile, PSB doesn’t usually compete with institutional buyers in acquisitions.

Geographically, although PSB is limited to six states, investments are well distributed within those states. Moreover, the company took advantage of high demand (and valuation) for flex, industrial and office assets and exited Portland, Phoenix, and Sacramento markets. The high demand explains why the company wasn’t active in terms of acquisition in 2015.

Valuation

Like PSA, PSB doesn’t come cheap compared to the broad REIT market. Since the share price has risen 23% over the past 12 months, it comes as no surprise that dividend yield is below equity REIT average and multiples are high. Yield is around 3% and stock is trading at 26 times AFFO.

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Source:PS Business Parks Inc.(NYSE:PSB), Public Storage(NYSE:PSA),Fast Graphs, Standard and Poor’s

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.

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