Public StorageÂ (PSA, Financial) delivered its third-quarter and nine-months results on Oct. 26. The $37 billion storage company delivered 7.72% sales growth to $1.9 billion nine months into 2016 with 10.8% profit growth to $831 million.
As a result, the company’s share price closed -5.17% the following day while the broader Standard & Poor’s 500 index closed -0.3%.
Public Storage is a Maryland Real Estate Investment Trust organized in 1980 (3). The company has four business activities: self-storage operations, ancillary operations, investments in PS Business Parks (PSB, Financial) and in Shurgard Europe (7).
Self-storage operations can be further subdivided into U.S. and Europe self-storage businesses. Public Storage’s self-storage operation often has the leading market share in its U.S. activity, as shown in the image below.
(Public Storage market share and NOI figures, annual filing)
U.S. operations contributed 74.3%, or $2.2 billion in fiscal 2015 sales while the EU operations contributed 7%. U.S. operations also has the highest net operating income (NOI) margin with 73.7% among all of Public Storage’s segments while its EU business had 57.6% for fiscal 2015 (5). Together, U.S. and EU self-storage operations grew 9.1% in fiscal 2015.
Nine months into 2016, self-storage operations grew 7.79% to $1.79 billion with a gross profit margin (minus cost of operations) of 73%.
Public Storage had four ancillary businesses: merchandise, tenant reinsurance, third-party property management and European ancillary businesses (6).
In fiscal 2015, the segment contributed 5.8%, or $175 million, in total sales while growing 13.6% year on year. The segment also carried a NOI margin of 69.1% for the period.
Three quarters into 2016, ancillary operations grew 6.62% to $117 million compared to the same period last year with a gross profit margin of 65.4%.
Same-store and nonsame-store figures
To better understand its operations, Public Storage also reports its figures in same-store and nonsame store groups of properties (8).
In fiscal 2015, same-store properties that are owned by Public Storage for at least three years grew 6.5% to $1.97 billion and had a NOI margin of 74%. Nine months into 2016, same-store properties grew 5.84% to $1.6 billion and had 73.4% NOI margin.
In fiscal 2015, recently acquired or (re) developed properties delivered 33% sales growth to $263 million with a NOI margin of 70.7%. Three quarters into 2016, the segment grew 23.7% to $224.8 million with 70.6 NOI margin.
Overall, Public Storage had a five-year sales and profit growth averages of 7.66% and 14.3% (2).
Cash, debt and book value
As of Sept. 30, the storage company had $57.2 million in cash and $430.9 million in debt with a debt-equity ratio of 0.05. Public Storage also had 2.15%, or $212.5 million, out of its $9.87 billion assets in goodwill and intangibles while having a book value of $9.09 billion for the period.
(Cash flow, quarterly filing)
Public Storage grew its cash flow from operations by 12.8% to $1.48 billion. Capital expenditures were $252 million, leaving the company with $1.2 billion in free cash flow (9). Public Storage also allocated $257.7 million in acquisitions in the period.
About 160%, or $1.97 billion, of its free cash flow were used for preferred share redemption and dividends. Public Storage also issued preferred and common shares amounting to $812.3 million for the period while also issuing another $93.6 million in senior unsecured notes.
Public Storage had a trailing 12-month price-earnings (P/E) multiple of 32.7 times (industry median: 15.5), price-book (P/B) multiple of 7.3 times (industry median: 1) and price-sales (P/S) ratio of 14.7 times (industry median: 7). The company also sponsors a trailing 12-month dividend yield of 3.26% and 107% payout ratio (1).
Public Storage had a five-year total return of 14.4% while the broader index had 14.25% (2). Year to date, Public Storage underperformed the market greatly with -11%, compared to the index’s 8%.
(Public Storage share price, Google Finance)
After suffering a poor year-to-date performance, it may be time to get on the REIT train. Also observed was that Public Storage’s overall storage business was noticeably strong and growing despite broader challenges experienced in other sectors (energy).
However, payout ratio seemed inappropriately high in recent years, including its trailing 12-month payouts. But Public Storage carries a conservative balance sheet, which can probably provide cushion in down times.
Post-earnings announcement, FBR & Co. ranks Public Storage shares as market perform with a $225 price target. Historical five-year earnings multiple multiplied by its five-year profit growth average provided with a 20% margin gave me a value of $214 a share.
Nonetheless, traditional valuations compared to its peers did not indicate that Public Storage’s shares are a buy right now.
In summary, Public Storage is a Hold with a target price of $220.
(1) GuruFocus data.
(2) Morningstar data.
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
(4) Quarterly filing: the Same Store Facilities represent those facilities that have been owned and operated on a stabilized level of occupancy, revenues and cost of operations since Jan. 1, 2014.
(5) Investopedia: Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses.
(6) Annual filing:
- Merchandise: mainly locks and boxes sold to self-storage customers.
- Tenant reinsurance: reinsurance of policies sold to our self-storage customers by a third-party insurance company.
- Third-party property management: fees we received for managing other owners’ properties.
- European ancillary businesses: sales of merchandise and insurance commissions received by Shurgard.
(7) Author: There are several business arrangements whereby Public Storage only gets a share of the total revenue per segment. This was not highlighted in this article.
For further clarification, please download and read Public Storage’s recent Securities and Exchange Commission (SEC) filing on this link: Public Storage SEC Filings.
(8) Annual filing, excluding European storage business operations.
Same stores are properties we have owned and stabilized for over three years. Nonsame stores consist of recently acquired, newly developed or redeveloped properties. Public Storage’s same stores reflect organic growth, while the nonsame stores benefit from fill-up as the properties attain a stabilized level of occupancy and rental rates.
(9) Author: I added the items "Capital expenditures to maintain real estate facilities" and "Construction in process" in Public Storage’s quarterly filing to determine the capital expenditure value.
Disclosure: I do not have shares in any of the companies mentioned.
Start aÂ free seven-day trialÂ of Premium Membership to GuruFocus.