Public Storage Is Not Priced to Buy

| About: Public Storage (PSA)

Public Storage (NYSE:PSA) operates as a REIT; their business activities mainly include the acquisition, development, ownership and operation of self-storage facilities in the U.S. and in Europe. These facilities offer storage spaces for lease, generally on a month-to-month basis, for personal and business use. The self-storage facility is highly fragmented and is considered to be owned more privately than publicly, as the biggest 10 players own only about 10% of the rented facilities.

At September 30, 2011, PSA had direct and indirect equity interests in 2,056 self-storage facilities (with approximately 130.5 million net rentable square feet) located in 38 states in the U.S.. In Europe, PSA owns one facility in London, England and a 49% interest in Shurgard Europe, which owns 188 self-storage facilities (with approximately 10.1 million net rentable square feet) located in seven Western European countries.

PSA also owns direct and indirect equity interests in approximately 23.5 million net rentable square feet of commercial space located in 11 states in the U.S.

Additionally, as complementing products, PSA offers merchandising of locks, boxes and packing supplies as well as reinsurance of insurance policies issued to self-storage customers. However, the activity of these is immaterial to the main activities described above.

PSA expects the existing trend of private assets sold to public firms in the industry to continue and intends to be there to further expand its asset portfolio.

PSA's declared strategy is to achieve occupancy rates between 89% - 90%. Several marketing channels and pricing strategies have been and will be used to achieve that. Occupancy rate during 2011 was between 89.8% to 92.3%, however management expects a somewhat weaker 4th quarter.

The table below shows the performance of storage facilities purchased since 2010 in terms of occupancy and cap rate:

9 Facilities Purchased in 2011

42 Facilities Purchased in 2010

Occupancy rate in 2011



Cap rate in 2011



Considering that it can take some time to get a newly purchased facility to operate the way management wants it – PSA can expect a nice upside in these facilities.

PSA currently yields a 3% dividend with a payout ratio of 115%. Since 2000, PSA has increased the dividend per share from $0.88 to $3.8 – that makes almost 13% annually, although in some years the dividend did not increase. During the last 5 years Dividend has increased on average by 9.93%. While these numbers are impressive, I am not sure such dividend growth rate is sustainable.

Some more facts & figures about PSA:

PSA has a current market cap of about $21 billion as it trades just 6.6% below its all-time high price.

As of September 30, 2011 net debt was just $258 million and real estate book value before depreciation was approximately $10.75 billion. There were additionally $3.2 billion preferred stocks. These numbers reflect management's attitude and ability to maintain a solid balance sheet as they finance their activity by:

  1. Cash from operations. During the first 9 months of 2011, free cash from operations was $207 million.
  2. Proceeds from issuance of equity securities as market conditions allow.
  3. Assumption of existing debt in newly purchased facilities.

The following table compares PSA's FFO per share between 2010 and 2011:

3 months that ended September 30

9 months that ended September 30







% Change



FFO for the 3rd quarter of 2011 was badly impacted by losses incurred from foreign currency exchange and from the redemption of preferred stocks. Excluding these items, FFO per share for the 3rd quarter of 2011 was up 15.5% from 2010. However, I see them as an integral part of business and feel they should be taken into account.

The FFO per share figure in 2011 implies price to FFO ratio just over 22. FFO is the ratio to use for REITs instead of P/E. In REITs, FFO of 22 is too high for what I want.

According to, during the last 2 years insiders mainly sold the stock as it went higher. There were only 2 purchases by 2 directors at prices about 15% lower than the current stock price.

The table below compares some metrics between PSA and other REITs:

Public Storage (PSA)

CubeSmart (CUBE)

Senior Housing Properties Trust (NYSE:SNH)

Government Properties Income Trust (NYSE:GOV)

Realty Income Corp. (NYSE:O)

Market Cap

$21 billion

$1.15 billion

$3.5 billion

995 million

4.45 billion

Dividend Yield






Dividend Payout Ratio






FFO per Share (Annualized)






Price to FFO







Public storage is the largest operator of self-storage facilities in the U.S with additional activities in the U.S and Europe. PSA showed impressive growth in the past while keeping a solid balance sheet and increasing cash flows.

In their 3rd quarter of 2011, management said it plans to continue to purchase more attractively priced assets in the future. Until now they used the market very well raising cash against ordinary or preferred stocks, I assume it may be harder to do if the credit crunch tightens although these tougher times mean more opportunities to purchase cheap assets.

The self-storage industry is highly affected by spending habits of consumers and by their moving trends. During 2008-2009 due to economic conditions PSA saw declining demand and rent prices. This trend changed positively in 2010-2011. Considering their generally short term leases together with the clouds in the economic horizon – I believe PSA may experience more difficulties of this kind in the future.

I think PSA is not currently attractively valued. I also think that they will see revenues decline as their operations are recession sensitive. I will keep them on my radar and will consider buying when their stock will price that.

Disclosure: I am long GOV. I may initiate long positions in SNH and O, depending on their price movement.

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