Self storage giant Public Storage (PSA) has just announced a call on the 5.125% perpetual preferred (PSA-C) issue.
Now everyone knows (or should know) that PSA will call for redemption anytime they can gain a small advantage–this has been the case for years and it continues to be true. Currently holders will take about a 2% spanking on this call–shares are at about $25.80 now.
The call date is effective on 6/30/2021. Shares have been redeemable for 10 days (since 5/17/2021).
Thanks all !! woke up this morning and found I must have opened up a can of worms. Great discussion an learning from experts. Guess its still a educated crap shoot at best, like everything else.
Mike asked: “has anyone a simple formula against the 10 year or “something else” to determine probable call status?”
Mike, I am going to over simplify an approach to consider on whether PSA preferreds will be called. A more detailed discussion is too long for an III post. There are many assumptions that go into this, not the least of which is whether the best benchmark to compare PSA preferreds is the US Treasury 10 year. We are going to ignore that question and just use the UST 10. The question to ask is what yield was PSA able to go to market with compared to the UST 10 year yield on the same date? The difference between these two is “the spread.” The spread varies from company to company and also over time. So this analysis is specific to PSA preferreds. Here is the data I have on the currently trading PSA preferreds including the recently called –C:
Symbol IPO or First Trade Date Call Date Coupon Yield 10 Year UST Yield Spread
PSA-C 5/10/16 5/17/21 5.13% 1.76% 3.37
PSA-D 7/13/16 7/1/2021 4.95% 1.47% 3.48
PSA-E 10/6/16 10/14/21 4.90% 1.74% 3.16
PSA-F 5/23/17 6/2/22 5.15% 2.29% 2.87
PSA-G 7/31/17 8/9/22 5.05% 2.29% 2.76
PSA-H 2/27/19 3/11/24 5.60% 2.69% 2.91
PSA-I 9/5/19 9/12/24 4.88% 1.57% 3.32
PSA-J 11/5/19 11/15/24 4.72% 1.87% 2.85
PSA-L 6/8/20 6/17/25 4.63% 0.88% 3.74
PSA-M 8/11/20 8/14/25 4.13% 0.66% 3.47
PSA-N 9/29/20 10/6/25 3.88% 0.65% 3.23
PSA-O 11/9/20 11/17/25 3.90% 0.96% 2.94
Median 3.194
The median spread is 3.194% but the most recent –O was floated with a 2.94% spread. We will use 3.00% to keep it simple. You have assumed that the UST 10 year yield will be 2.00% on 10/14/21 when the –E becomes callable. This would imply that PSA would have to pay 5.0% if they wanted to float a new issue. Very clear in this case that the new issue of 5.0% is 0.10% greater than the 4.9% yield of –E. So it would be a money losing proposition for PSA to call E and replace it.
We will ask a different question? At what 10 Year UST 10 year yield would it be cost effective for PSA to call –E? We will make another assumption that PSA would only issue a new issue if they can save 0.25% or greater.
Required UST 10 year yield= 4.90%-3.00%-0.25%
= 1.65%
You can change the two variables in this simple model to forecast if/when any PSA issue will be called. For example you see PSA had to pay a spread of 3.74% when they floated –L on 6/8/20. Since the spread has been dropping since then, maybe they could go out at say 2.75%. And maybe they only demand a 0.15% savings. In that case, they would call –E with a UST 10 year yield of
Required UST 10 year yield= 4.90%-2.75%-0.15%
=2.00%
Bottom line is that is each investor will have to use their own assumptions to decide. I have an opinion on –E but it is not worth much as my crystal ball seems to have gotten COVID and is on sick leave.
Think you may be wrong, Tex. The 5-year seems more relevant to me than the 10, inasmuch as these are all callable 5 years from issue. When the O was issued it was at 347 bps spread to the 5yT. Today, that would be a 4.26% coupon. Unless rates move up, E gets called, so says my very imperfect crystal ball.
I also consider that PSA can issue straight debt at a much lower rate and have issued a good deal of debt recently. 7yr notes at 1.85% and 1yr at 2.30% just 6 weeks ago. $1.3 billion worth. At those kinds of rates you see companies swapping out preferred for debt.
But then a lot can happen in 5 months, so we shall see.
Bob said : “The 5-year seems more relevant to me than the 10 . . ”
Bob, don’t open that can of worms! The reason I chose UST 10 year was because Mike specifically asked about that. To simplify that I run correlations for large numbers of prefereds against many different interest rates including UST 3 month, 1 year, 5 year, 10 year, 30 year and several others. Turns out for most preferreds traditionally the Moodys corporate Baa rates has the highest correlation. And I have run these against the oldest preferreds I have good data on, which is around 1995. Grid will happily point out some of the preferreds that are from the civil war era (slight exaggeration) but I was not able to find daily trade data on them. So the best I could do was issues that started trading in 1995.
And of course the spread data is both cyclical and noisy. Spreads blew out in 2008-2009 and again in 2020, but there were still large swings even in non-crisis times.
Like I said in the original post, I am not going to publish a dissertation on III. It just overly complicates things to the point it might be counter productive to III’ers newer to preferreds. I think it is more important to convey the methodology you can use for the call/no call analysis.
Thanks,
Tex the 2nd
Tex, it is no exaggeration ..DMRRP was issued pre Civil War, 1863!
Bob, They way I understand it anyways, the 10 year is typically used when comparing the current “spread” between perpetuals and govt long end. Though, yes, companies view in 5 year call windows and even resets.
But, that is part of the built in asymetric risk for buyer where the odds are automatically tilted into the “houses favor” to use casino jargon.
Grid – 10 is “conventional wisdom” but I’m looking at what is happening. The yield curve is much steeper recently (10-5 spread is wider) yet the coupons of new issues have not moved up. Suggests to me rates are being set off the 5.
It’s clearer perhaps in the institutional market with the 5-year resets. FWIW, PSA has always issued pref into the retail market but I don’t take it as a given. Their last 3 issues have all been notes into the institutional market. Almost 2 billion worth. I’m thinking PSA could issue 5-year resets at something like 4%. They have to be thinking about it.
Bob, with their credit rating and the tightness to IG and govt credit spreads, I see little chance of them issuing a reset. No reason for them to lose the built in asymetric risk advantage over a few bps when they can hang someone out to dry on a perpetual basis.
Grid – great point about the asymmetric risk, and an opportunity to beat the drum a bit on resets.
Resets don’t protect you from falling interest rates but do protect some against rising rates. They will keep you, as I say, from getting stuck with 5% in a 6% world. So, they do have a benefit to investors above and beyond what a fixed rate can do for you.
But most of the resets are coming out in the institutional market. Example, ALLY just called the lovely ALLY-A from retail but did issue two new 5-year resets, both at 4.7%. One resets in 5 years, the other in 7.
02005NBN9
02005NBM1
The reset aspect has value. To me, perhaps 50 bps. So, 4.7 is perhaps 5.2. Not great but not terrible, depending on your needs.
When I looked it showed a -1.7% YTC but you need to be careful about short call risks/YTC. They can be skewered by a short call being annualized.
The Q is where could they float a new one. Seems like way below 4.90. It’s anyones guess if they call on schedule or give you some bonus time. In general I sell negative YTC. Even if you roll another qtr or two doesn’t seem worth it. Yes you are correct that neg ytc issues offer more protection against downward moves if the market goes bad. So there is no clear answer. If you are in a net positive to the call, then it doesn’t matter (as much) to you because you earned positive return. Yeah you’d be upset the day after the call. But as part of a balanced portfolio holding some like that is comforting IMO
Also PSA seem to do smaller deals. Another reason they can get away with lower rates. They are not trying to book a billion or 2…they shot for like 250 mm per pop.
I agree that YTC figures are problematic when the call is close at hand. (Unless you want to get into daily compounding.) I do something different.
Simply, if you buy PSA-E at today’s close of 25.70, what do you get if PSA calls at the first opp? You get 2 more full divis and a part divi for about half a month. Adds up to a bit less than 70 cents. So if called you have broken even for holding 4+ months. It’s not a deal I would make but almost 24k shares traded hands today so some people did make the deal.
Time will tell.
when investing in PSA, remember their preferreds are issued in lieu of traditional equity and will be called when interest rates on new issues swing in their favor. They are very lucky to be able to do this.
Question for anyone? Thought this was an appropriate place to ask. I hold Psa -e and psa-j in roths and trad ira. Over paid for both a while back, while holding my nose. Was willing to chance tying those funds up in my sock drawer with a pitiful return but seemingly safe hoping to protect and recoup the over payment, thru time. The E is callable in oct @ 4.9% then 4.70% later on the J, I’ve picked up some ideas here on valuing these but has anyone a simple formula against the 10 year or “something else” to determine probable call status. My guess is 10 year just shy of 2% on the E thanks to any ones for help.
Last 2 prefs went off at 3.875 and 3.90. 5-yr has gone up maybe 50 bps since, so current issue rate might be 4.40% range.
In that case, both your holdings are strong candidates for a call. At 25.77 I’d be selling E.
J has a 2.41% YTC and 3.5 years to first call. I certainly would not be a buyer and I might be a seller.
Your highest YTC PSA issue is PSA-O at 3.65%.
You are so right. PSA’s are all rich. I rarely get positions in them, the rate ho that I am. All this 6 trillion dollar budget talk is getting me especially skittish about low coupons.
thanks bob: Pretty much confirms my thinking but with the stinking commissions I paid and would pay to sell where my accounts are at , I’m in no man’s land either way. I’ve Read the forum here for a couple years, and came to “the obvious conclusion” its not really feasible to trade, without a zero commission account. Still nicely positioned with several issues purchased March ’20 during the draw down but short of those few opportunities my hands are tied, its my own fault. Still hoping there’s a reasonable rise in interest rate in the middle of the curve would help out in a lot of areas.
The flip side to that Mike is that if you trade for pennies you miss dollars. And or I’m picking up pennies in front of a steam roller! I use to very actively trade my positions.. But lost the ability to do so for ‘technical’ reasons.
As per commission rates tell the guy what you’re willing to pay. It is a buyers market
I show PSA-E at a price of 25.77 with a YTC of about -1%.
Yes, I show 3 PSA issues with neg YTC. If there is anyone who is sure to call it’s PSA.
I show PSA D, E, and F with a negative YTC. It seems to me anyone holding is in effect guessing that there is going to be a “just so” increase in yields – enough so PSA doesn’t call but not so great that there is a significant deterioration of principal. Maybe not impossible, but I don’t like the odds.
Thanks nhcoast: you just explained the “rub” /dilemma. I’m in the same spot if I sell the E or if it’s called in October. However If it escapes a call then and down the road I’m content w/ 4.9% on something pretty safe and stable, while holding my nose. The J has life left in it “24 I’d like the odds on that a lot more if I could predict interest rates, but like the yield a lot less regardless. Got a little less skin in the game on this one and more time?
Comparing TCBIO (which I like & own) to PSA is a joke.
A3/BBB+ rated vs Ba2/B
49 billion dollar market cap vs 4 bill market cap
PREFERREDS ARE NOT “THAT” MUCH DIFFERENT THAN BONDS. So your yield is not reflected in the purchase price or the yield as a call is announced, but in actually figuring your YTCall. There is no spanking being taken. Generally there are on going opps to add to your preferreds with newer issuances as TCBIO. In a month TCBIO is up by another 2% even after selling $25.40 to $25.60 not the long ago. It is when the sponsors stop calling the preferreds against real interest rates retuning when the buyers of preferreds will have to become concerned about calls. PSA preferreds are not even paying tax advantaged distributions. REIT preferred not get tax advantaged status.
Tim:
“REIT preferred not get tax advantaged status”.
That is incorrect. The 2017 Tax Law allowed a 20% tax deduction for all dividend income from REITs – including REIT preferred stock. These are called Section 199A dividends.
Personally, I have taken a large deduction at tax time for the last few years due to my REIT preferred and REIT dividend income. It has been very welcomed.