Public Storage (NYSE:PSA) is a very well-known Real Estate Investment Trust that deals in the acquisition, development, and operations of various self-storage facilities in the United States and in Europe (which is managed by Shurgard Europe). Of the properties in the United States, there are 2,277 self-storage facilities located throughout 38 states. In Europe however, Public Storage simply holds 49% equity interest in a self-storage company, Shurgard Europe that owns 216 self-storage facilities throughout seven countries under that brand name. In addition to ownership, the REIT sells reinsurance policies on losses to the goods inside of the storage units and sells merchandise at their facilities.
As of end of day April 21st, 2016, Public Storage was trading at the share price of $255.19. This is lower than their 52 week high of $277.60 and is much higher than their 52 week low of $182.08. As is the case with a handful of REITs currently, the price of the Trust appears to be on the high side. The difference between the current price and the high is only a marginal $22.41.
As for the company's dividend, it currently issues a dividend yield of $6.80/share. This equates to 2.59% yield at the current price. The ex-dividend date has also just passed as of March 14th, 2016. The yield is horribly low for an REIT. When thinking of the tax implications that can come at a premium with REITs if not deferring the taxes, it would appear that this would be a terrible fit for anyone looking for a high dividend payout for their portfolio. If on the other hand, the earnings are growing tax differed, it may not be as bad with a yield as small as 2.59%.
One area that Public Storage really stands out is with their funds from operation. The company has had growing FFO for an incredible amount of time. In 2011 the Trust had 968, then 1084 in 2012, and in 2013 they showed an FFO of 1300. In more recent past, the FFO has continued to grow. In 2014 they showed FFO of 1382 which was much smaller growth for the company but in 2015 this was corrected by a nice leap forward to a strong FFO of 1525. As FFO are what I would deem the most important metric for an REIT, these results are very impressive and I can see why so many investors have moved towards a position in the Trust for quite some time.
Next I move to the net asset value as I generally rely on this metric to help price out REITs. I rely heavily on NAV/share to price REITs because it shows what I would consider to be the intrinsic value of the Trust. When calculated, the NAV per share of Public Storage comes to a shockingly low 52.97. Normally, a NAV of 52.97 would be a pretty great number as it shows that the company is generally pretty profitable but in this case the difference between the NAV and the cost per share is so different from each other that it comes off as a bad number. One would expect the NAV per share to be higher for a company trading at such a premium. The difference between the NAV per share and the price currently traded is a gut punching 202.22. Now, I am no mathematician but it would seem that the value of this company has been driven up way beyond the value that it actually holds in the bank account.
This would be a bigger issue if it were not for their shockingly low debt-to-equity ratio. Public Storage comes in with a debt-to-equity ratio of only 0.06. If I could have a D/E ratio that low for all of the stocks that I hold, I could die a very happy man. I would argue that companies with debt as low or lower the Public Storage fair best when you need them most to do so (when the market is down) because with so little debt, they have little problem keeping the business running smoothly no matter how powerfully the recession hits. Debt can crush companies far bigger than Public Storage.
Let us move on to the analyst reports. I will move from oldest to newest today. On February 19th, 2016 Jaywalk Consensus rated the REIT as a buy. On March 11th, 2016, Research Team in comparison rated it as a hold. Then on April 15th, 2016, Ford Equity Research rated it a buy again. I do not want to place too much of my decisions on the consensus of a bunch of analysts but I do like to list them because I feel they are important. When investing in anything, it is essential in my opinion to have the views of others expressed. This is because I feel that it can shed light on other areas that have not been thought of. If I have reviewed a stock and all my senses are telling me that it is a buy but the analysts all say unanimously that it is a sell, I try to look at it again to make sure I did not miss anything. In this case, it looks like the analysts point towards a buy which is no surprise as the company itself seems to work as good as any other well-oiled machine- efficiently and without flaw.
Speaking of which, the company does still have a few worries but I will stick to just the one I feel is most important. Although the facilities owned by PSA are generally in major market areas, competitors are a dime a dozen. PSA only owns about 6% per their estimate of the storage facilities in the United States which is good but hardly enough to say that they serve as any sort of block to competition setting up shop nearby and under cutting their product. As Mr. Wonderful always asks on the show Shark Tank, what is to stop someone from walking in and setting up shop next door and crushing them like the ants they are? To this question my answer is not much although Public Storage is hardly an ant. It really would not take very much for another business to open up across the street and charge even a few dollars less a month and become a major headache for Public Storage . Costs to maintain such a property typically are not much. This is shown by their yearly reports. This means that it would appear that pretty much anyone could come in, set up shop, and probably still be profitable as long as there was a market in the area for public storage needs. On the same side of the coin however, it would not take much for Public Storage to lower their own prices and drive them out as their margins are easy to lower if necessary.
Moving forward I want to talk about the prospects of Public Storage . The company seeks to improve the operating performance of their existing facilities, acquire new properties, expand on currently existing facilities, and grow their side venture, PS Business Parks, Inc. to diversify their holdings. This goes hand in hand with the future growth of their properties in Europe under the Shurgard name which are admittedly limited as demand for storage space in Europe has not yet been climbing but Public Storage expects that to change in the near future. Debt appears to always be under management with Public Storage which is excellent for any company to put at the forefront. If debts are paid off in a timely manner, they have a much less likely habit of coming back and biting the company later.
In conclusion, I would have to partially agree with the analysts. The company is one heck of a good investment. Their business is solid, they have great revenues, they carry almost no debt, and they pay a dividend to investors to reward them for investing with them. On the other hand, I would have to say that I would not buy this stock unless it came down to around $100 a share. Admittedly, this will likely not happen until a recession occurs once more but I am willing to wait for the drop. The net asset value of the company is so horribly different from where the cost of the shares are right now that it would seem that investors have lost their minds. Do not get me wrong, there is a lot to be said for a company that has as many good things going for it as Public Storage has but there comes a point where an investor has to stop and wonder if we are really going to pay four times as much for the company as it is truly worth simply for some peace of mind. This being the case, I truly feel that at this time the market has valued the company so high simply because of the stability of the business model and the low debt load. These factors are great for recession proofing your portfolio a little but the price is simply too high to buy into it currently.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.