Due to the overwhelming response to my last "Stickman" article, I'm continuing the series with this latest addition. Actually, the first part of that statement is pure fabrication and the part on the other side of the comma is debatable. Is two in a row of anything a series? I'll tell you what, since I admit guilt to a bit of journalistic embroidery, concede to me the debate. Deal? Thanks.
If you've read the previous Stickman article, you're familiar with the strategy. Keep it simple, real simple. So, here we go.
In the mid-eighties, I invested a small amount of money in a REIT by the name of Shurgard Storage. Employing my laser-like insight, I grasped the Shurgard concept almost immediately. People bought too much stuff and didn't have room for it. Shurgard had the room, and for a fee, would store the stuff! (There's not much that gets by me). Year after year it went on, people with more and more stuff, Shugard with more and more room. Along the way, I dutifully reinvested my dividends. The company grew. So did my investment.
And then in the year 2000, Shurgard was approached by Public Storage (PSA), another self-storage REIT. Much to my relief, Shurgard rebuffed the advances of this suitor. As it turned out, Public Storage was not to be denied. In 2005 it came calling again, and as before, it was sent packing. But the next year, after making an offer too luscious to resist, Shurgard capitulated. I thought of taking the money and moving on, but I didn't. It was a good decision. I make them occasionally.
At the time of this writing, Public Storage is trading at a bit over $155 a share. As far as I'm concerned, it's too expensive to buy. That being said, I must admit that I haven't sold a share of my holdings. I know what you're thinking, "The fool has fallen in love with the stock," a big no-no. You're probably right, but hey, I'm still in love with Marilyn Monroe.
If you're still reading, I'm sure you'll be glad to learn I've finally reached the focus of this article. That focus is Sovran Self Storage (SSS). I want to show you a few comparisons between Public Storage and Sovran. Keep in mind that these numbers are from fiscal year 2011. I wanted to predicate this analysis on a yearly basis so as to iron out any wrinkles in the numbers. I'm reasonably confident that this little snapshot, though a year old, represents a fairly accurate picture of the situation today.
- PSA is trading at around five times tangible book value.
- SSS is at 3 times book.
- PSA is trading at around 23 times Funds from Operations (FFO).
- SSS is going for about 17 times FFO.
- The revenue growth rate of PSA over the last five years has been 2.34%.
- SSS revenues over the same time period have grown 3.67 %.
- PSA has a long-term debt to capital ratio of .04%.
- The SSS ratio is .48%.
An in depth analysis of these two companies creates a jungle of numbers, and if it's your desire to hack through them and explore further, by all means do so. I believe, however, that the few numbers I mentioned above lay the foundation for a theory I have.
Public Storage is the self-storage behemoth. Its portfolio consists of over 2000 units in 38 states and it also owns a 49% stake in Shurgard Europe. The PSA balance sheet is solid. When Public Storage bought out Shurgard, it paid a hefty premium. At the time of the purchase, Shugard was Public's closest competitor.
Sovran is the nation's fifth-largest operator of self-storage properties. There are approximately 450 facilities under the Sovran umbrella. Though not dazzling, their growth rate has been respectable. Management has exhibited expertise in the management of the trust. It's a well-run enterprise.
You know where I'm going with this, don't you?
I really think that the idea of a buyout sometime in the future isn't without weight. Public Storage certainly has the financial brawn to do this deal, and Soveran has many of the same characteristics that made Shurgard so attractive to Public Storage 10 years ago.
Here are a few more things to consider. This particular industry is highly fragmented and consolidation is rife. Add to that the fact that in certain locations across the country, these two outfits are stepping on one another's toes.
And if it never happens, so what? You'll have bought a piece of a well managed company with good growth prospects that pays a 3% dividend to boot.
I realize that there are other self storage trusts out there that could be considered buyout material. One that comes to mind is Extra Space Storage (EXR). I just like the looks of Soveran.
My theory is not entirely rational. A small part of it is supported by this feeling in the pit of my stomach. A little flutter if you will. Nevertheless, do your own research and arrive at your own conclusions because the last time I had that feeling? Indigestion.