If you'd be so kind as to indulge me, I'd like to begin this article with some pathos. You can help me by using that fertile brain of yours to cue up some violin music; the more maudlin the better. Ah, that sounds great, thank you. With that, let's begin.
Many years ago, there was a plot of land for sale near my home. I knew the asking price, I had the money and I knew what I wanted to do with the acreage. For the next few months, I drove by the land, glanced at the FOR SALE sign piercing its center and promised myself to call the realtor that very day; and yes, you're right, I never did make that call. A short time later the sign was gone and soon after that construction began. Construction of what, you ask? Why construction of a self-storage facility. What's that? Why yes, you're right again; that's what I had planned to erect on the land. Someone had either read my mind and stole my idea, or simply acted with ambition and foresight on their own concept. I'll leave it to you to decide. Over the next year, I was treated to the sight an ever growing number of units marching across the ground, phalanx after phalanx of storage space being filled with the detritus of consumerism, or in purely technical terms, people's stuff. It was painful to pass by and see the opportunity I'd missed. But with the building of a big, fine house not far from my humble dwelling by the enterprising individual who had not missed the opportunity, my pain became acute.
All right, that's enough self-pity. I'll give you a moment to dry your eyes and compose yourself and when you're ready, I'll beg your indulgence once again. I need you to replace the violin music in your head with some stirring recovery music. You know the kind I mean. It starts low and slow and gradually builds to a goose bump-inducing crescendo. Ah, you recover quickly for I already hear the new music. With that, we can continue.
After I felt sorry for myself for what I considered an appropriate length of time, I realized that things were not so bad as they seemed. I still had my capital and I had to look no further than a few miles from my home to see the soundness of the self-storage business plan. I'm basically very lazy, so instead of going to the trouble of finding another tract of land and building a facility myself, I decided to find an entity that had already done that for me. After a few months of research, I found what I was looking for, a limited partnership by the name of Shurgard Self Storage. After some additional study, I swallowed hard and invested my money in Shurgard.
For the next year, whenever I received some correspondence from Shurgard, I would open the envelope with some trepidation. After all, I'd been told by acquaintances more sophisticated in investing than I that limited partnerships were just that, limited, especially to the returns I could expect. But as the years passed and the value of my holdings increased, I began to look forward to the next Shurgard report with anticipation instead of dread. Nothing could describe my decision to go with Shurgard with more clarity and succinctness than the old adage, "Sometimes, even the blind squirrel finds the nut." With Shurgard Self Storage, I'd stumbled on a bowlful.
While there were a few setbacks over the next decade, the money I had in Shurgard continued to grow at a respectable pace. Then, in 1995, Shurgard organized itself into a REIT and began trading under the symbol SHU. An astute investor as yourself knows that REITS are required to pay dividends and by the time Shurgard went public, even a slow learner such as I had learned to appreciate the power of reinvested dividends. I can tell you're still with me because I can hear the music building.
Aside from the start of an European expansion by Shurgard in 1998, the next few years proved to be blissfully uneventful. I put my dividends back into Shurgard and went about my life. Then in 2000, Public Storage (NYSE:PSA) began buying Shurgard stock. $50 million later and PSA was Shurgard's largest shareholder. Soon after, Shurgard was approached by Public Storage about combining the two companies. Shurgard management, much to my relief, declined the proposal. Shurgard was doing very well on its own, thank you very much, and by extension, so was I. PSA considered a hostile takeover, thought better of it, reduced its stake in Shurgard and went away; not all that far away, however.
In 2005, PSA again expressed interest in Shurgard and in early 2006 made the proverbial offer that couldn't be refused. Hey, a 39% premium to Shugard's prevailing share price was hard to ignore. While the dust from the deal was settling, I tried to make up my mind whether to take the money or go with Public Storage. Fate intervened. The storage facility down the road was adding yet another row of units. If they could expand, then so could I. I left my investment in PSA. While I freely admit to the paucity of shrewd investment decisions on my part, the numbers and facts in the next few lines will attest to the fact that the blind squirrel had found another nut.
First, some numbers:
A $10,000 investment in PSA in 2005 is worth $50,000 today.
In the last decade, dividends paid by the company have risen from $2 a share to $6.50 a share.
The 15 year total return for PSA stands at 18%, beating the total returns of both the Industrial REIT Index and the S&P 500 of 14% and 6% respectively for the same time period.
All important Funds From Operations have grown from $4.72 a share in 2010 to $8.79 a share in 2015.
FFO estimates are $9.65 a share in fiscal 2016 and $10.42 a share in 2017.
Now, some facts:
PSA operates 2277 self-storage facilities in 38 states.
PSA has a 42% interest in PS Business Parks Inc. (NYSE:PSB).
PSA has a 49% interest in, and is the managing partner of Shurgard Europe.
On Sertember 16, 2016, REITS will have their own sub-sector in the S&P Dow Jones Indices. Of the 90 REITS that will compose the new sub-sector, PSA is the second largest by market cap.
Okay, that's enough recovery music. You must be getting a headache. Now, how about a soft melody that encourages thought and subjectivity. Got it? Good.
There are some investors who say that Public Storage is overpriced when compares to its competitors, most specifically Soveran Self Storage (SSS), CubeSmart (CUBE) and Extra Space Storage (EXR). In some respects, these folks are correct. For example, PSA is selling at 9 times book, in contrast to Soveran and CubeSmart which are both trading at 3.5 times and Extra Space which is changing hands at a multiple of 5. Also, PSA is carrying a price to sales ratio of 19 while the its rivals are pegged at around 12 collectively. On its face, PSA's lofty 44 times earnings might not seem too exorbitant when taken in context with its peers; SSS 36 times, CUBE 77 times and EXR at 58 times earnings. The stronger growth prospects of this trio, however, might lend credence to the argument while they might be deserving of such heady valuations, PSA, an older company and supposedy lless nimble, has no business flying at such altitudes.
Conversely, if there is a premium attached to PSA, I believe it's justified. The management of PSA are allergic to debt. The company's total debt to equity is a miniscule 3.7%. This aversion to leverage translates into operating and profit margins, along with investment, asset and sales returns that dwarf those of its adversaries. This financial construct, along with its effective application by management, has proved itself year after year. That fact, along with the outlook for the self-storage industry in general, are why I'll always, however vicariously, be in the self-storage business.
Thanks for the background music. Without it, I couldn't have written this article.
More importantly, thanks for your time.
Disclosure: I am/we are long PSA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.