Public Storage: Best in Class

09/25/2013 7:00 am EST



Our latest Focus Stock is the best in class operator among real estate investment trusts that invest in self-service storage facilities (mini-warehouses), says Royal Shepard, S&P Capital IQ equity analyst in The Outlook.

Measured by market capitalization, S&P Capital IQ estimates that Public Storage (PSA) is the third largest US 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 (PSB), a publicly traded REIT that owns commercial business parks.

The trust has expanded its real estate portfolio through an active acquisition program, development of new locations, and the expansion of existing facilities.

From 2010 through June 2013, it acquired 80 facilities with more than 5.5 million square feet at a cost of $567 million.

We consider Public Storage as a best in class operator, with 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.

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.

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