Public Storage (PSA): A Great Place to Store Profits

Public Storage (NYSE:PSA) is one of the leading self-storage Real Estate Investment Trusts (REITs) in the U.S., paying investors a dividend yield of 3.3%. The company is poised to move higher thanks to housing tailwinds, where the demand for self-storage tends to be tied to household moving activity. Along with its storage operations, Public Storage also has a 41% ownership in PS Business Parks Inc (NYSE:PSB), a REIT that has commercial properties with approximately 28.3 million square feet of space.

Public Storage (NYSE:PSA) competes with the likes of Sovran Self Storage Inc (NYSE:SSS)and PS Business Parks. Yet, Public Storage is the largest owner and operator of storage facilities in the U.S., with a significant presence in Europe. In terms of market cap, Public Storage is by and large the market leader, with a $26 billion market cap compared to smaller market caps of other major peers.

Tailwinds

Goldman Sachs Group, Inc. (NYSE:GS) has reiterated that the housing market has more room to run. Via Goldman’s detailed housing analysis, the firm finds that even if rates move higher the housing market will continue its rebound. According to Goldman Sachs Group, Inc. (NYSE:GS), even if 30-year fixed-rate mortgage rates reach 3.8%, the typical American home buyer can afford a $279,000 house. That’s 45% more than the current price of homes.

In 2012, Public Storage (NYSE:PSA) acquired 10 self-storage facilities positioned in some of the best growth markets, including Florida, Georgia and California. The company has the balance sheet to make more of these strategic acquisitions, with some $17 million in cash and $130 million available under its credit facility.

Valuation

Public Storage (NYSE:PSA) trades around 22 times forward funds-from-operation (FFO) estimates, which is a 40% premium to the industry average, but I believe this premium is warranted given the REIT’s return on equity of 15.9% versus the industry average ROE of negative 5.1%. And although the stock is up nicely over the past five years, the REIT has managed to continue generating impressive free cash flow all along the way. Also, analysts project robust growth in FFO, going from $5.93 in 2011 to $6.68 in 2012, and then an expected $7.17 in 2013 and $7.40 in 2014.

Going into the second quarter there were a total of 18 hedge funds long the stock, which was a 22% decrease from the first quarter. AEW Capital Management holds the largest position in Public Storage (NYSE:PSA), worth around $230 million and making up 5.7% of its 13F portfolio (check out AEW’s portfolio).

Other REITs

Sovran Self Storage Inc (NYSE:SSS), another storage REIT, has ownership interests in some 461 properties across 25 states. Based on facilities owned, Sovran is the fourth-largest U.S. operator of self-storage properties, operating under the trade name Uncle Bob’s Self-Storage, and across the U.S. in the East, Midwest, Arizona and Texas. One of the advantages of Sovran is that it offers ancillary services, including Uncle Bob’s tuck move-in program that assists customers. Sovran pays a dividend yield of slightly less than 3.0%.