Public Storage Spins Off Office Holdings Into REIT

The country’s largest self-storage firm, Glendale-based Public Storage Inc., or PSI, is spinning off its office and industrial holdings into a new publicly held real estate investment trust.

The new REIT, an owner of 60 business parks, primarily in California, Texas and Virginia, will be renamed PS Business Parks and is expected to begin trading on the American Stock Exchange today under the ticker symbol PSB. The business park upstart could have a market capitalization of about $475 million, officials say, based on its predecessor’s stock price.

The complex and somewhat incestuous deal allows Public Storage to focus on its core business of warehousing and give its overlooked office and industrial assets greater value.

Under terms of the deal, publicly traded Public Storage XI Inc., which owns mini-warehouses, will swap those properties for the business park assets of its much larger affiliate, Public Storage.

Once Public Storage XI acquires the office parks, it will merge with American Office Park Properties, an entity controlled by Public Storage, and use the warehouse firm’s public status to give the newly combined company quick and inexpensive access to Wall Street.

“It’s a much more efficient way to bring AOPP to the marketplace,” said Harvey Lenkin, president of Public Storage. “We don’t have to pay investment bankers and we avoid the market risks of an IPO.”

The deal, which was announced to little fanfare last year, has since attracted a high-profile stable of major institutional investors, including Cohen & Steers Capital Management, Harvard Private Capital Realty and Morgan Stanley Asset Management, which are making a total investment of $155 million in the company in exchange for a 24% stake.

After the merger, the major owners will be Public Storage, with 54% of the stock, the group of seven institutional investors with 24% and a separate unit of New York State Common Retirement Fund, which has contributed six business park properties in exchange for 18% of the firm’s stock, according to company documents.

Analysts say these investors are willing to take a gamble on the small REIT with its unremarkable properties totaling almost 7 million square feet because it will be debt-free and claim a niche that few others have tapped--small business parks with tenants of just a few thousand square feet each.

“It’s got a lean balance sheet and an ample supply of acquisition deals,” said Jim Sullivan, a senior analyst with Newport Beach-based Green Street Advisors. “These are the deals that fall between the cracks [of other major office and industrial REITs].”

He said that many of the pension funds that own these parks are now looking to trade their ownership in these properties for a more liquid form of investment like REIT stock.

But analysts also caution that the new firm’s growth prospects will hinge on its ability to put together a management team that can stand on its own.