Seeking Alpha
Debt, CFA, Portfolio manager, preferred stocks
Profile| Send Message|
( followers)  

Summary

  • Highly rated REIT Public Storage issued a new Series Z cumulative perpetual preferred stock with a 6% rate.
  • While 6% is attractive, there are higher yielding choices within the Public Storage preferred complex.
  • Higher rate Series P and Y offer better yield and more interest rate change protection.

Public Storage (NYSE:PSA) issued with a new Series Z perpetual preferred stock today. The details are:

The press release can be found here, the prospectus can be found here and the term sheet can be found here.

Public Storage is the world's largest owner and operator of self-storage facilities, operating over 2,200 unique and diverse company-owned locations in the United States and Europe, totaling more than 142 million net rentable square feet of real estate.

Following the traditional valuation flow I have used, the first step is evaluating the new issue versus other preferred stocks in the company's capital structure (PSA is one of the more prolific issuers, making this a more robust step):

(click to enlarge)

As the table above shows, the new issue, while appealing, is not the highest yielding preferred in the complex. From a yield perspective, I would look at the Series P or Series Y as alternative investments. The rationale for this is that an investor can obtain a higher stripped yield by investing in these as well as buying a higher dividend rate (and therefore a lower duration).

I have also recently started adding the basis points per unit of duration (stripped yield divided by duration) as a relative measure of rate exposure. For the PSA complex, the measure is as follows (the new issue is in orange):

As the above chart shows, the new issue does not offer the most basis points per unit of duration and therefore does not offer the best relative value from a rate risk perspective.

The next step is to look at the new issue versus the REIT's peer group. The peer group used for this consists of PS Business Parks (NYSE:PSB), CubeSmart (NYSE:CUBE), Realty Income (NYSE:O), Kimco Realty (NYSE:KIM) and Ventas (NYSE:VTR). The following table shows how the issue compares to the peer group:

(click to enlarge)

As the table shows, the new issue is one of the lower yielding issues, partially as a result of its higher rating and rock solid financials. PS Business Parks offers interesting value as a "sister company" of PSA's - albeit lower rated and less solid financials.

We can also view the new issue and its peers on a basis points per unit of duration basis:

From the above chart, we can see that the CubeSmart and PSB issues offer the most compelling value from an interest rate risk perspective.

Next we can look at a financial snapshot of the storage industry to see how PSA compares to its specific industry:

(click to enlarge)

As the table shows, PSA is afforded a premium valuation due to its sheer 800lb gorilla size and its bullet proof financials.

Finally, a look at the equity performance (call it a cross market check) versus the peer group:

PSA Chart

PSA data by YCharts

The equity market seems to like PSA, and with good reason - it is a performer that can make, grow and protect FFO. This does not, however, mean a specific preferred stock series is compelling.

Bottom Line: While I like Public Storage, I am not overly excited about their new preferred as it is not the most compelling preferred in their complex. I have been a buyer of dividend rate in preferreds, paying premiums to mitigate interest rate risk at the expense of call risk and in the PSA complex, that points me to the Series P and Y (maybe the Os).

Source: Public Storage - 6% Is Nice, But Not Quite Nice Enough