Dividend Sleuthing: Public Storage

Summary

• Public Storage is the largest owner of self-storage facilities in the U.S., and it owns a stake in two REITs, spinoff PS Business Parks and a European company, Shurgard.
• From one storage unit in 1972, to a fast-growing real estate investment trust, to a mature sector leader, Public Storage has plateaued, resulting in a flat dividend since 2017.
• The company has avoided a fight with Elliott Management by agreeing to place two Elliott representatives on the company's board (called "trustees").
• The company has low debt and is one of only two REITs with a Standard & Poor's credit rating of A. The Public Storage Investor Day is May 3, 2021.
• Looking for a helping hand in the market? Members of Margin of Safety Investing get exclusive ideas and guidance to navigate any climate. Learn More »

Self-Service Storage

Public Storage (NYSE:NYSE:PSA) is the largest owner of self-storage facilities in the U.S., with 2,548 facilities and 175 million rentable square feet in 38 states (2020 10-K, p.5).

PSA benefits from scale, which makes it competitive on price. Its nationwide presence and familiar orange logo give it very valuable name recognition. PSA has made significant investments in customer-friendly Internet technology for online advertising and for making reservations.

Public Storage's dominance is reflected in the company's position as the largest real estate investment trust in the Self-Storage sub-sector of the FTSE Nareit All REITs Index, with an equity market capitalization of $39.786 billion as of 1/31/21. This was considerably more than the combined equity market cap of the other five self-storage REITs in the index.

PSA's strength is complemented by two other investments. PSA owns 42% of PS Business Parks, Inc. (NYSE:PSB), an industrial-focused REIT that offers flex space in multi-tenant buildings in multi-building business parks for manufacturing, product assembly or distribution, typically with adjoining office space. PSA also has a 35% interest in a European business, Shurgard Self Storage SA ("SHUR" on Euronext Brussels).

Public Storage's experienced management team is led by CEO Joseph D. Russell, Jr., 60.

Brief History

Public Storage has a dominant self-storage market position and an A credit rating. Founder Wayne Hughes hated debt and grew the business during the heyday of private investing. Rather than bonds, PSA uses mostly preferred stock that is perpetual but callable, giving PSA maximum flexibility to issue new shares when advantageous. Here's a capsule history of the company:

• 1972--Opened first self-storage facility in California as a partnership of founders Wayne Hughes and Ken Volk.
• 1977--Formed first of many real estate limited partnerships, raising $200,000 to $300,000 annually from 200,000 institutional and individual investors, for a total of $3 billion from 1977-1989.
• 1980--Organized as a REIT, and began to convert some RELPs to REITs, in which PSA held interests as a joint partner and/or shareholder.
• 1986--PS Business Parks organized as a division of Public Storage.
• 1995--Became self-administered and self-managed, bringing together Storage Equities 16 other spinoff REITs, an advisor, a manager, a facilities operator, a business park operator, 33 retail stores, 65 trucks available for rent at 45 locations, and a pick-up and delivery service.
• 2006--Acquired rival Shurgard Storage Centers, with properties in 38 states and 7 European countries for $3.2 billion.
• 2007--Public Storage, Inc. reorganized as Public Storage.
• 2018--Shurgard initial public offering in Europe.
• 2020--Beyond Self Storage acquired for $528 million.

Vital Signs

PSA's 2020 Q4 press release reported net income of $1.098 billion, or $6.29 per share, for 2020, down from $1.273 billion, or $7.29 per share, in 2019. FFO (funds from operations) was $9.75 per share, down from $10.58 in 2019, a decrease of 7.8%. PSA is one of only two REITs with a Standard & Poor's credit rating of A.

The graph below indicates steady growth from the 2009 Great Recession low through a peak in 2016. The uptrend in FFO (total green area) plateaued in 2017. Dividends (dark green area) have been flat since 2017. F.A.S.T. Graphs projects modest future dividend growth.

PSA's stock price (black line) has made sharp up and down movements. The stock has made lower highs and lower lows. From the peak in 2015 through the March 2020 low, PSA's stock trend has been relatively flat with a downward bias. In early 2020, prior to the pandemic, PSA's stock appeared to be attempting a recovery. Since the beginning of the pandemic, the price has made a classic "W" pattern. Is the stock attempting to resume the early 2020 upswing that was interrupted by the coronavirus recession?

From F.A.S.T. Graphs

Strategy

Public Storage was one of the fastest growing US businesses in the 1980s-1990s. Since then, PSA has become a mature company that seems to be consolidating and integrating its US and European businesses amid increasing competition. Some people see PSA as a sleepy performer, evidenced by a plateau in FFO and no dividend increase for the past four years.

In December 2020, Elliott Management rang a "wake-up" bell when the activist investment firm announced it believes PSA has failed to take advantage of its "first mover" position and has underperformed due to two main issues:

1. A failure to invest more aggressively in its strong asset base; and
2. Lagging sales growth.

Elliott sought six PSA board ("trustee") positions. CEO Joe Russell and his team addressed some of Elliott's concerns in a December 14 press release that presents management's case for future growth. On January 5, PSA agreed to appoint two Elliott Management representatives to their board and to create a Long-Term Planning Committee "focused on Public Storage's long-term planning, strategy, growth, capital allocation priorities and capital structure management."

Self-storage is a competitive industry. PSA faces threats from small and regional operators and from other listed REITs. PSA also faces threats from government regulators, but Elliott Management suggests that PSA's greatest threat may be complacency. It is encouraging that the company has taken important steps to address Elliott's concerns.

Public Storage seeks to be a "green" neighbor, with a strong sustainability consciousness. The REIT partners with communities to improve the landscape where possible, such as by repurposing and renovating old structures.

From the PSA 2019 Sustainability Report

The Dividend

PSA's $2.00 quarterly dividend ($8.00 annually) yields 3.40% at a 3/5/21 closing price of $235.05. From 2010 to 2017, PSA raised the dividend seven straight years, with a 5-year growth rate of 14.9% and a 10-year DGR of 13.8%. However, the dividend has been $2.00 per quarter since 2017.

The average high yield for the past 5 years was 4.28%, with the highest yield of 5.1% reached on March 23, 2020. The 52-week price range has been $155.37-$246.52.

Investment Thesis

From the Q4 2020 earnings call: The occupancy rate for Q4 was 95.2%. Of 600,000 move-ins during 2020, half came from PSA's e-rental contactless leasing channel. PSA's new third-party management business grew to 120 properties. Acquisitions and development have averaged about $250 million for each of the past five years, funded with retained cash flow, preferred stock or unsecured debt. PSA has record low issuances of debt and preferred equity. In January, they issued a 5-year bond at less than 1% interest.

Public Storage seems well positioned to grow. In Q4 they saw an uptick in move-ins by people making home renovations and by those needing more space due to working from home. PSA is seeing more properties available for purchase, at occupancy rates around 65%. Typically, investors in those properties are impatient with low occupancy rates and this provides a buying opportunity for PSA. At the recent Q4 2020 earnings call, analysts expressed appreciation for the 38-page supplemental presentation, which is timely and helpful for anyone considering an investment.

Public Storage has many strengths: an A credit rating, a dominant footprint across the U.S., deep relationships in many communities, an obvious first call for any investors wanting to sell their storage facilities, a stake in PS Business Parks and Shurgard, a ready market for their low-yielding preferred stock and bonds, and an effective digital platform for advertising and reservations.

The dividend is relatively safe, with a "very safe" 96 rating from Simply Safe Dividends. Lackluster FFO growth and a flat dividend are disappointments. Investors will want to watch for the impact of Elliott Management's new representation on the PSA board (or "trustees"). Specifically, will the new trustees support increased debt? Will PSA continue to freeze the dividend?

The company's Investor Day is May 3, 2021.

Analyst’s 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.

This article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for individual selection. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.

Comments

[Miguel Lorca]

@Dividend Sleuth - nice article. I owned PSA for years and got really used to those double digit dividend increases. Recently I saw a chance to buy WPC. So I sold PSA and switched over to a higher yield. Time will tell if this was a good move because I like both companies.

[Dividend Sleuth]

@Miguel Lorca, thank you for your comment. I understand your decision. Four years with no increase is noteworthy. WPC and JNJ are my two oldest holdings, from mid-2009. i continue to be impressed with WPC's diversity and discipline.

[BM Cashflow Detective]

I only recently bought shares in Public Storage.

In response to a letter from Elliott Associates, Public Storage has already issued a statement that it will continue to take decisive action to drive sustainable value creation.

Public Storage has lagged behind its competitors in terms of performance since the beginning of the year, but the other way around, due to the likely initiatives of Elliott Associates, there could still be some potential for surprises lurking behind the scenes. This investment requires stoic patience in anticipation of future changes.

If the current stock valuation is maintained, I see a possible annual total return of 8% to 10% over the next 3 years. In the next 5 years the results could possibly get even better.

But it should also be remembered that public storage is one of the most profitable and efficient companies out there.

$PSA [TTM ROC (Joel Greenblatt) 862.49% / still good 5-year forward PEG ratio of 1.75 = 492.85% actual ROC reduced by premium surcharge due to the priced in growth prospects with 369.64%].

According to my categorization it is a “Super Magic Formula stock 2nd class” (from ROC 60%) without additional leverage (up to PEG ratio 2.00).

The very high actual ROC is particularly evident in comparison to Apple.

$AAPL [TTM ROC (Joel Greenblatt) 211.34% / poor 5-year forward PEG ratio of 2.02 = 104.63% actual ROC reduced by premium surcharge due to the priced in growth prospects with 106.71%].

Since the allocation of my total assets consists of over 99% of stocks, the stocks of Public Storage basically have the function of bonds in my portfolio. And in this context I am more than satisfied with this admixture.

[Dividend Sleuth]

@BM Cashflow Detective, thank you for your comment. You've done some good homework and it sounds like PSA is fulfilling a "bond-like" role, with possible upside (through potential appreciation and potential dividend increases). It doesn't have bond-like guarantees, of course, but that's the price of admission to the common stock arena.

[BM Cashflow Detective]

@Dividend Sleuth
Exactly.

But bond-like guarantees are still unreasonably overrated in times of over-indebted states and inflation.

Bond-like guarantees also contain bond-like risks, such as possible long-term inflation, hyperinflation and currency reform. Theoretically maybe a "New Dollar" with an exchange rate of 10 to 1. Of course the same with the "New Euro".

That's why I like stock-like guarantees. They are true and real assets. And the real guarantee is "increasing through cash flow". These are real guarantees to my liking. A bit of volatility is tolerable in this regard very well. :-))

[mbkeng]

Bought PSA in 2017 for $208, sold in 2018 for $220 and thought I got a good deal. It went up to $260s and every time driving by their sites (we have a lot of them in my country!) I banged my head up against steering wheel - how could I be so stupid!
Bought again in 2020 for $180 and 170… and removed it from my watch list… away from any temptation may come in my head.
Anyway, it’s not about PSA.
There was a service road not too far from my house. Several years ago they started developing that area – built a couple of hotels, something else… One day I saw another construction site with a little address sign. I looked it up on internet – a new medical center. Ok, good!
For over a year I have been walking or riding my bike along that street watching the new building coming up and when it was about to be finished I said to myself: “That’s the ugliest medical center I ever saw in my life!”
A week later - a big sign right on the front wall above the entrance – CubeSmart Self Storage. I said to myself: “That’s the most beautiful self-storage I ever saw in my life!” Went home, checked CUBE stock price and bought for $24, added at 27… and removed it from my watch list… away from any temptation may come in my head.

[Dividend Sleuth]

@mbkeng, great stories. Thank you for sharing them with us. You have developed a Philosophy of Buy & Hold Investing that would make Peter Lynch proud. I hope you didn't crack the steering wheel. :-)

[Steve Rasher]

@Dividend Sleuth Ted, thanks for the article. I have owned $CUBE for some time and just recently bought some more before its latest runup. Smaller but, I believe, a bit more nimble. Also, it recently increased its dividend. Steve

[Dividend Sleuth]

@Steve Rasher, thank you for your comment. CUBE continues to grow and strengthen its position. It's that sort of development that prompted Elliott Management to take their action to try to reclaim some of PSA's nimbleness, I believe.

[Steve Rasher]

@Dividend Sleuth Yes, I understand. But why buy $PSA, a huge battleship that is always fighting the law of big numbers and will take a good bit of time to turn in the right direction, when you can buy an existing nimble competitor that recently increased its dividend, continues to grow, and, as a result, since last May is up around 40%? Steve

[Dividend Sleuth]

@Steve Rasher, you raise a good question. I want everyone to know I'm not advocating that anyone buy PSA. I'm watching to see what happens with their interaction with Elliott Management. I would need to see some commitment to growing earnings, FFO and the dividend. I'm interested in PSA because of its stability and its rare A credit rating. At age 70, my main concern is relative dividend safety. PSA isn't there yet, and may not get there. I'm a bit heavy with REITs. I have a full position in FRT, CPT, WPC and HTA, plus a half position in PLD. My priority is to fill the other half of PLD, so in addition to the other things I would want from PSA, it would need to drop below $200 for me to be interested. I think everyone should be aware of it, as well as SPG. But it's important to be aware of both pros and cons. :-)

[RoseNose]

Thanks for the honest article and asking the ?s that need to be asked. I have been watching it for years solely because of its "A" credit rating. I guess it enjoys keeping it there since 2017 with no dividend raises. Too pricey for me, but still quality bond like 3-4% yield. Best to you Ted !

[Dividend Sleuth]

@RoseNose, thank you for your comment. We watch and wait! Best to you, always!

[Croogie]

I think the competitors of PSA are in better shape. It may be a bit "fat" today - dont know the reasons.

[Dividend Sleuth]

@Croogie, thank you for your comment. Hunger is a motivator. Elliott Management may have drawn the same conclusion and decided to "seize the day."

[Shaine]

I have several of PSA preferreds.

[Dividend Sleuth]

@Shaine, thank you for your comment. I'm a former holder of one of the preferred issues. They have used more bonds lately. The last one had an interest rate of less than 1%. That sort of situation makes groups like Elliott Management ask, "Why not borrow more?"

[Mister Doom]

@Shaine me too and there are lots of them. PSA-L my last one.

[Hugh Arhue]

@Dividend Sleuth Great article, $PSA seems a bit rich for me at this price level. . . . , From your experience, what is your take on the price performance of a stock when activist hedge fund managers make a PR presence and board seat demands? Is it safe to assume the hedge fund is interested in a 20-25% plus increase in their stake?

[Dividend Sleuth]

@Hugh Arhue, I appreciate your kind words. I'm sure they have, or will, identify a target price that they think would be where PSA should be trading now. If they are successful in accomplishing the changes they have described, perhaps they would become long-term shareholders rather than looking for a quick profit. That would seem to be a good approach for a REIT.

[Mark335]

Thanks for the article. It led me to wonder why it hasn't made it through my screener. Zero dividend increase in years is why. Probably not a big deal to younger investors, but as a retiree this is no bueno for me, but I'll keep it on my radar.

[Dividend Sleuth]

@Mark335, thank you for your comment. I'm a former holder of the common and preferred shares. The flat dividend is an obstacle for me to get back in. I'm watching with interest Elliott Management's involvement.

[Ol' Hickory]

@Mark335
Dividend safety looks good, but no growth and the modest current yield make it unattractive. That said, opportunities today aren’t exactly plentiful.

[Dividend Sleuth]

@NWdividend, thank you for your comment. I concur with all four of your points. I guess that's why I keep a watch list. Maybe I should call it a Waiting List. :-)