- 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:
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):
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:
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:
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:
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).