Public Storage packs up profits

This REIT is the best in class play among self-service storage facilities.

By Sep 27, 2013 11:26AM
File photo of boxes at a Public Storage location in Eagle Rock, Los Angeles (© Ric Francis/AP)By Royal Shepard, S&P Capital IQ, The Outlook

Public Storage (PSA), our latest Focus Stock, is the best in class operator among real estate investment trusts that invest in self-service storage facilities (mini-warehouses).

The trust has a national portfolio and a widely recognized brand name. In addition, it is leading the consolidation of what we view as a still fragmented industry. From 2010 through June 2013, it acquired 80 facilities with more than 5.5 million square feet at a cost of $567 million.

Measured by market capitalization, we estimate that Public Storage is the third largest U.S. equity REIT. As of June 30, 2013, the trust owned 2,081 self-storage facilities in 38 states.

In addition, it owned a 49% interest in Shurgard Europe, an operator of 187 self-storage facilities in western Europe. It also holds a 41% stake in PS Business Parks, a publicly traded REIT that owns commercial business parks.

We believe smaller players face an increasingly difficult task in matching the company’s economies of scale and its marketing clout online. As a result, we think acquisition opportunities could accelerate as “mom and pop” operators cash out.

In our view, Public Storage’s strong brand name recognition is an important factor in its out-performance. We believe this has become even more essential as more consumers conduct their shopping online.

We expect positive revenue and earnings growth for Public Storage in 2013 and 2014, reflecting gains in occupancy rates and higher rents on new leases.

We also expect incremental earnings from recent acquisitions and an expanding pipeline of development projects. We see 2013 funds from operations (FFO) rising 8.2% in 2013 and 5.1% in 2014.

Public Storage’s long-term growth profile is enhanced, in our view, by a strong balance sheet and conservative financial strategy. Over the last five years, the trust has steadily reduced an already low debt burden.

As of June 30, 2013, its ratio of total debt to total capitalization was just 1.3, well below its REIT peers. Based on our price-to-FFO analysis, we think Public Storage is trading at a compelling valuation.

At recent levels, the stock was trading at 20.1-times our 2014 FFO per share estimate and about a 10% premium to our coverage universe of comparable self-storage REITs.

Over the next 12 months, we expect the valuation premium to widen due to its strong financial position, above-average occupancy and rent growth, and new acquisition opportunities. Using our price-to-FFO methodology, we derive a 12-month target price of $195.

We think the 13.6% dividend increase in 2013, to $5.00/share annually, signals management’s increasing confidence in expanding cash flows from new leasing activity and acquisitions.

In light of our view of the trust’s above-average prospects for earnings growth, we consider an additional hike in the dividend as possible over the next 12 months. The stock carries S&P Capital IQ’s highest investment recommendation of 5- STARS or “strong buy”.

More from


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.