Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by Public Storage (PSA). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
The New Issue
Before we submerge into our brief analysis, here is a link to the 424B5 Filing By Public Storage – the prospectus.
For a total of 11M shares issued, the total gross proceeds to the company are $275M. You can find some relevant information about the new preferred stock in the table below:
Public Storage 4.875% Cumulative Preferred Share of Beneficial Interest, Series I (NYSE: PSA-I) pays a fixed dividend at a rate of 4.875%. The new preferred stock has a ‘BBB+’ Standard & Poor’s rating and is callable as of 09/12/2024. Currently, the new issue trades a little above PAR at a price of $25.20 and has a 4.84% Current Yield and YTC of 4.71%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” current yield and YTC would be 4.03% and 3.93%, respectively.
Here is what the stock’s YTC curve looks like right now:
Public Storage, incorporated on March 13, 2007, is a real estate investment trust (REIT). The Company’s principal business activities include the ownership and operation of self-storage facilities, which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, ancillary activities, such as merchandise sales and tenant reinsurance to the tenants at its self-storage facilities, as well as the acquisition and development of additional self-storage space. The Company’s segments include Self-Storage Operations, Ancillary Operations, Investment in PS Business Parks, Inc. (PSB) and Investment in Shurgard Europe.
Source: Reuters.com | Public Storage
Below, you can see a price chart of the common stock, PSA:
For 2018, the common stock has paid а $8.00 yearly dividend. With a market price of $257.81, the current yield of PSA is at 3.10%. As an absolute value, this means it pays $1.396B in dividends yearly. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued series I preferred stock) of the company are around $210.53M.
In addition, with a market capitalization of around $44.67B, PSA is the second-biggest Industrial REIT in the US (according to Finviz.com).
Below you can see a snapshot of Public Storage’s capital structure as of the time of its last quarterly filing in June 2019. You also can see how the capital structure evolved historically.
As of Q2, PSA had a total debt of $1.91B ranking senior to the newly issued preferred stock. The new Series I preferred shares’ rank is junior to all outstanding debt and equal to the other preferred shares of the company, which total $3.74B.
The Ratios Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of PSA but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of preferred stocks compared to common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-Term Debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 44670/(1910 + 4015) = 7.53, which is a superior number for all creditors of the company, indicating the company is very low leveraged.
- Earnings/(Debt and Preferred Payments). This is also quite an easy-to-understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM financial results from the Income Statement data is 1460/(40+ 210) = 5.84 repeating the ratio above, showing significant buffer for the preferred stockholders and the bondholders so to be calm about the payments. Moreover, the company manages to pay almost $1.4B dividend expense for its common which is junior to its liabilities.
The Public Storage Family
The group is composed of 12 more preferred stocks with fixed rates. Their dividends are not qualified but they are the company that broke the 5% nominal yield mark for the first time for the last 3 years. The previous fixed-rate preferred stock with less than 5% nominal yield is again owned by Public Storage, 4.90% PSA-E, issued on October 6, 2016. Of course, we are talking about exchange-traded fixed-income securities.
On September 11, Public Storage announced it is calling all of its outstanding 5.625% Preferred Stock, Series U (NYSE:PSA.PU) on October 14, 2019. Thus with this refinancing with the newly issued Series I Preferred Stock, PSA is saving itself an annual rate of 0.75%.
I’ll compare the newly issued PSA-I with the rest of its “brothers” by their Yield-to-Call and Current Yield.
PSA-A obviously has the highest Current Yield of the group but on the other hand, its YTC is negative. In fact, it is the preferred stock with the highest nominal yield, becomes callable in 3 months, and with the current spread of 1% in refinancing with the new preferred stock, PSA-A is also very likely to be called for redemption.
Since all issues are trading above their par value, their Yield-to-Call is the Yield-to-Worst of the group. So let’s see what the yield curve looks like, excluding the callable ones:
The higher the YTC, the better the security. With its 4.71% YTC, PSA-I rewards a 0.40% more than the maximum you could realize if you choose second-highest YTW in the group, PSA-E. However, it is the issue with the lowest nominal fixed dividend rate, which means it is the most vulnerable from subsequent rate hikes. Still, we are entering a low rate environment and a good yield can hardly be found without taking higher credit risk.
In addition, you can see a comparison between PSA’s preferred stocks and the fixed-income securities benchmark, the iShares U.S. Preferred Stock ETF (PFF). On the following chart, a close correlation can be seen between all preferreds (except for the called PSA-U and reaching its call date PSA-A) and PFF. The close behavior during the recession late last year gradually goes into a smashing outperformance of all PSA’s securities over the fixed-income benchmark.
Furthermore, there are 3 Corporate Bonds issued by the company:
For my comparison, I choose the bond that matures closest to the call date of PSA-I, the 2022 Corporate Bond.
Source: FINRA | PSA4541617
PSA4541617, as it is the FINRA ticker, is rated an ‘A’ and has a yield-to-maturity of 1.809%. This should be compared to the 4.84% yield-to-call of PSA-I, but when making that comparison, remember that PSA-I’s YTC is the maximum you could realize if you hold the preferred stock until 2024. The result is a yield spread of 3% between the two securities. One can justify this margin by the higher rank in the capital structure, the higher credit rating, and the two years earlier maturity date.
The chart below contains all preferred stocks in the “REIT – Industrial” sector (according to Finviz.com) that pay a fixed dividend, have a par value of $25 and a positive YTC. It is important to take note that none of these preferred stocks are eligible for the 15% federal tax rate.
by their Yield-to-Call and Current Yield
All preferred stocks in the sector are trading above their par value, and the current yield is, in fact, their Yield-to-Best. That’s why the best way to compare the group is by their Yield-to-Worst (equal to their Yield-to-Call). This is a much more plausible yield curve. One more filter will be added, the security must not be callable.
by their Years-to-Call and Yield-to-Call
All REIT Preferred Stocks
In the charts below, I’ll compare all REIT preferred stocks with a par value of $25 that pay a fixed dividend rate, excluding the preferred stocks issued by CBL & Associates (CBL) and Washington Prime Group (WPG), as these companies have a lot of problems right now:
The next chart presents only the preferred stocks with a positive yield-to-call:
I will add one more condition – the preferred stocks to be rated by Standard & Poor’s:
The next bubble chart will examine how the yield curve in the sector looks. It presents only these preferred stocks that are not callable, have a positive YTC and are rated by S&P, by their years-to-call and YTC:
All ‘BBB+’ Preferred Stocks
The last chart contains all preferred stocks that pay a fixed dividend rate, have a ‘BBB+’ Standard & Poor’s rating and positive yield-to-call.
Nothing out of the ordinary.
Use of Proceeds
We estimate that the net proceeds from this offering will be approximately $ million (or approximately $ million if the underwriters exercise their over-allotment option in full), after all anticipated issuance costs. We intend to use the net proceeds from this offering to make investments in self-storage facilities and in entities that own self-storage facilities, for the development of self-storage facilities, and for general corporate purposes, including the redemption of our preferred shares.
Source: 424B5 Filing by Public Storage
Addition to the iShares U.S. Preferred Stock ETF
With the current market capitalization of the new issue of around $275M, PSA-I is a possible addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. If so, it will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, PSA-I is no exception, and the homework we always do we share with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market.
The company has great financials in terms of fixed income investors, having 7.5x times more equity than liabilities and is paying 7x times more dividends on its common stock than all of its outstanding preferred stocks that are standing above in the capital structure. So, here the credit risk is absolutely out of the table. Despite its lower nominal yield, PSA-I has a 0.4% higher YTW than the second-highest one in the family, PSA-E. The same is also observed in the comparison with all other REIT preferred stocks and these that have the same rating of “BBB+” as the new IPO. However, its current yield is the lowest both in the sector and with the “BBB+” rated ones. This is not necessarily a bad thing when we are talking about an environment of lowering interest rates. But whether this trend will continue after 5 years, for sure, a question that is difficult to answer.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.