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Public Storage’s Traditional Free Cash Flow Coverage of the Dividend Is Unique for a REIT

publication date: Feb 25, 2021
author/source: Brian Nelson, CFA

Image Source: Mike Mozart

By Brian Nelson, CFA

Public Storage (PSA) reported better-than-expected fourth-quarter 2020 results February 24. For the period ending December 31, 2020, net income came in at $1.67 per common share, down from last year’s level but mainly because of a non-operating negative impact related to forex on Euro denominated debt ($35.1 million). On an operating basis, Public Storage’s self-storage net operating income advanced $16.5 million year-over-year in the quarter, which was only modestly offset by higher general and administrative expenses ($12.3 million).

Underlying business performance at Public Storage remains very healthy, in our view. Core funds from operations (FFO) per share came in at $2.93 in the quarter, up 3.2% in the year-ago period (above the consensus forecast of $2.85). The measure comfortably covers its regular quarterly dividend of $2 per share, as declared on February 16. Here’s what Public Storage’s CEO Joe Russell had to say about the quarter and outlook for 2021:

At Public Storage, our focus on the health and safety of employees and customers, enhancing the industry’s leading platform and brand, and utilizing unparalleled capital access to fund growth drove our success in 2020. The outlook is favorable as we enter 2021. Public Storage is transforming the customer experience through innovation amidst strong consumer demand while executing on a robust external growth environment through property acquisitions, development, and redevelopment.

A big reason why we include Public Storage in the High Yield Dividend Newsletter portfolio has to do with the profile of its traditional free cash flow generation, which is superb especially when it comes to the REIT space. For example, during the past three fiscal years, inclusive of 2020, Public Storage’s cash flow from operations has averaged $2.06 billion while capital expenditures (both to maintain and expand real estate facilities) have averaged ~$437 million--good enough for traditional free cash flow generation of ~$1.6 billion, on average, during the past three fiscal years.

Public Storage’s traditional free cash flow generation has been roughly in line with its distributions paid to preferred shareholders, common shareholders and restricted share unitholders, showcasing strong dividend coverage on a GAAP basis. REITs that generate traditional free cash flow that fully cover dividend obligations are few and far between, and Public Storage manages to do so, even during difficult economic environments such as that during the COVID-19 crisis.

In light of Public Storage’s core FFO coverage of the payout and its traditional free cash flow coverage of the payout, we think its dividend is about as healthy as any REIT’s gets. Public Storage is also one of the highest-rated REITs by the credit rating agencies, with Standard & Poor’s and Moody’s assigning an A credit rating and A2 credit rating on its senior debt, respectively. Shares yield ~3.3%, and we continue to like exposure to this rock-solid dividend-paying REIT in the High Yield Dividend Newsletter portfolio.

Tickerized for PSA, CUBE, EXR, NSA, LSI, SELF, JCAP 

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Brian Nelson owns shares in SPY, SCHG, QQQ, and IWM. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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Don Coffield (Locust)

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