REIT Public Storage Breaks the 5% Floor
By: Tim McPartland,
It had to happen sooner or later in the current low interest rate environment and REIT Public Storage (NYSE:PSA) is the perfect company to offer a preferred offering with a coupon of just 4.95%–the 1st preferred offered with a coupon under 5% for many, many years. PSA is investment grade rated and is a genuine “money machine”.
We have written many times over the years about the free cash generated by PSA. Over the last 12 months the company had net income of over 1.3 billion dollars–we are talking about true net income, not funds from operations (FFO–a measure used by REITs which shows cash available for distributions). FFO for PSA is about 1.8 billion dollars. As REIT investors know the company has to pay at least 90% of their net income to investors (either common shareholders or preferred holders) to maintain their REIT status. Being in the self-storage business PSA tosses off cash in good times and in bad and while their growth rate is modest the company has plenty of room to grow as there are over 54,000 self-storage facilities in the U.S. and only 2,300 are owned by PSA.
Preferred stock investors know that PSA has been on a continuous cycle of issuing new low coupon preferreds while using the proceeds to redeem higher coupon issues. PSA has now reached a point where there are no issues that are redeemable until 1/2017 so the $600 million generated from the last 2 preferred offerings are to be used for general corporate purposes, meaning the company can use it for any purpose they desire, which would certainly include some level of acquisition activity.
The new issue began trading last Friday under the OTC Grey market ticker symbol PBSDP and has been trading between $24.85 and $25/share. We would not expect that this issue will rise much above par, unless we continue to see interest rates fall (very possible) in which case these shares will become more attractive to income investors. For those interested in trading on the OTC Grey market our primer can be found here.
Details of this new issue can be found here. Needless to say we are not interested in this issue at this coupon.
PSA has a total of 12 outstanding preferred issues and they can be compared on our “swaps” page here.