Valuentum Exclusive Analysis for the Discerning Investor

Symbol Keyword

Image Shown: Shares of Public Storage have recovered a considerable amount of lost ground since the pandemic-induced drop in March 2020. We continue to like Public Storage as a holding in our High Yield Dividend Newsletter and are big fans of self-storage companies with significant exposure to the US.

By Callum Turcan

The self-storage real estate investment trust (‘REIT’) Public Storage (PSA) is included as a holding in our High Yield Dividend Newsletter portfolio. We strongly appreciate its free cash flows, which are relatively rare in the REIT industry given that the growth-related capital expenditures of most REIT’s tend to be enormous. Shares of PSA have rebounded strongly off their March 2020 lows and yield ~3.6% as of this writing.

Operations Update

Public Storage’s operations have held up relatively well during the initial stages of the ongoing coronavirus (‘COVID-19’) pandemic, all things considered. Its weighted average occupancy in square feet terms came in at 93.7% during the first half of 2020 (up 50 basis points year-over-year) and 94.2% during the second quarter of 2020 (up 20 basis points year-over-year). However, Public Storage’s same facility net operating income dropped by single-digits in both the first half and second quarter of 2020 versus the same period the prior year due to rising operating expenses and declining revenues.

The decline in revenues was primarily due to lower realized annual rental rates per occupied square feet (particularly as it relates to Public Store’s second quarter performance), and reduced administration charges and late fees. Rising operating expenses were the result of the complexities arising from COVID-19 (driving payroll expenses higher) and increased marketing expenses. While this pressured Public Storage’s financial performance during the first half of this year, its GAAP revenues and GAAP operating income declined by only 1% and 3% year-over-year, respectively, during this period.

Financial Update

During the first half of 2020, Public Storage generated $1.0 billion in net operating cash flows while spending $0.2 billion on its capital expenditures (defined here as ‘capital expenditures to maintain real estate facilities’ plus ‘development and expansion of real estate facilities’), allowing for $0.8 billion in free cash flows which fully covered $0.8 billion in dividend obligations (defined as ‘distributions paid to preferred shareholders, common shareholders and restricted share unitholders’) during this period. Please note Public Storage also spent approximately $0.25 billion on acquisitions during the first half of 2020, activities that were funded by the balance sheet.

Though an imperfect metric (as we have often noted in the past), a REIT’s funds from operations (‘FFO’) is a way to gauge the strength of its dividend coverage and ability to push through payout increases. We will caution that this does not take the REIT’s balance sheet considerations and refinancing needs into account. During the first half of 2020, Public Storage saw its core FFO per share (an adjusted non-GAAP metric) drop by 3% year-over-over to $5.04 while the firm paid out $4.00 in dividends per share during this period. Public Storage’s ~79% payout ratio during the first two quarters of this year (dividends per share divided by core FFO per share) is decent as we prefer payout ratios below 80%.

Pivoting to Public Storage’s balance sheet, the REIT had $1.3 billion in cash and cash equivalents on hand at the end of June versus $2.5 billion in notes payable. Additionally, please note Public Storage also had $0.5 billion in preferred shares called for redemption at the end of the second quarter of 2020. Here is a brief explanation of its recent financing activities from its latest 10-Q filing:

On June 17, 2020, we issued 22.6 million depositary shares, each representing 0.001 of a share of our 4.625% Series L Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $565.0 million in gross proceeds, and we incurred $15.8 million in issuance costs.

In June 2020, we called for redemption of, and on July 10, 2020, we redeemed our 5.375% Series V Preferred Shares, at par. The liquidation value (at par) of $495.0 million was reclassified as a liability at June 30, 2020… We recorded a $15.1 million allocation of income from our common shareholders to the holders of our Preferred Shares in the three and six months ended June 30, 2020 in connection with this redemption.

At the end of June, Public Storage had ~$4.1 billion in total outstanding preferred shares by liquidation preference value. For the remainder of 2020 and throughout 2021, Public Storage has a negligible amount of debt coming due (primarily in the form of maturing mortgage debt). In 2022, $0.5 billion of Public Storage’s unsecured debt matures, along with a negligible amount of mortgage debt. The weighted average effective interest rate of Public Storage’s debt load was just 2.4% as of June 30, 2020 (the low effective interest rate is partially a product of its Euro-denominated debt and largely a product of its strong financial standing).

Due to its rock solid ‘A-rated’ investment grade credit ratings (A/A2), Public Storage will likely retain access to debt markets at attractive rates going forward. Considering the strength seen at shares of PSA of late (and its recent preferred share issue), the firm will also likely retain access to equity markets at attractive rates going forward as well.

Concluding Thoughts

We appreciate Public Storage’s ample cash on hand, strong free cash flows, and staggered debt maturity schedule (which makes refinancing activities significantly easier). As the REIT does not have a significant amount of debt coming due anytime soon, the firm has ample financial flexibility to ride out the COVID-19 pandemic with its payout intact. We continue to like the self-storage REIT industry and appreciate the resilience of Public Storage’s operational and financial performance during the pandemic, all things considered. On a final note, we also continue to like CubeSmart (CUBE) as a holding in our High Yield Dividend Newsletter portfolio.

-----

Related: UHAL, CAR, PSA, R, URI, CUBE, EXR, JCAP, VNQ, PSTG, SPY

----

Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.

Callum Turcan does not own shares of any of the securities mentioned above. CubeSmart (CUBE), Public Storage (PSA), and Vanguard Real Estate ETF (VNQ) are all included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.