There's an interesting letter out this morning from Public Storage (NYSE:PSA) to the members of the board at ShurgardStorage Centers (NYSE:SHU).

The letter is largely a reiteration of Public Storage's buyout offer of about $52.37, or 0.8 of its shares, for each Shurgard share and another attempt to get Shurgard to the bargaining table. The added kicker is that Public Storage is willing to discuss a possible enhancement to the offer if Shurgard can bring non-public information to the table that Public Storage has not factored into the original offer. In addition, Public Storage hinted that it may be willing to structure its offer differently.

The other interesting piece of information in Public Storage's letter, that again is meant to encourage Shurgard to start talking, is that Public Storage claims to have now spoken with holders of more than 50% of Shurgard's shares. According to Public Storage, these share owners agree that the price is fair, there are further benefits to be realized from the merger, and that both public storage REITs should be talking.

In a separate filing with the SEC this morning, Shurgard explained why the offer was turned down. In Shurgard's opinion, the offer doesn't properly reflect the value of its portfolio, the potential for a reduced dividend, slower funds from operations (FFO) growth, and the tax burden that Shurgard holders would face, because Public Storage's offer would be a taxable transaction.

The argument that there is uniqueness in Shurgard's portfolio and that the portfolio has greater growth opportunities does hold some water, as does the tax burden that the offer would place on Shurgard shareholders. But the statements about FFO growth and a lower dividend are tough to swallow because the company has missed its own FFO growth targets a few times and its dividend is not fully supported by FFO. Shurgard also contends its dividend is met through asset sales and not via debt, as Public Storage had mentioned in its previous communication. That's tough to argue with, but as a member of the Motley Fool Income Investor team, I'll take a shot. A regular dividend funded through asset sales should not be regarded as superior to one funded by debt; both methods are suboptimal.

It looks like there is headway being made here, though. An offer being too low is quite different than Shurgard's "not being for sale," and the response does indicate at least some willingness to talk.

In Shurgard's presentation, it estimates that it is worth at least $61.47 per share with further benefits to be realized from cost reductions. Storage REITs do have less volatile valuations than a number of their REIT counterparts such as apartment REITs like Archstone-Smith (NYSE:ASN) and Equity Residential (NYSE:EQR), primarily because it's cheaper to develop a property and there is less economic sensitivity to storage needs. However, as an individual investor, it's tough for me to value a company like Shurgard above a price in the mid-50s and still expect to earn a market-beating return. At the moment, Shurgard shares trade at $53.76, which means the market sees a value slightly higher than Public Storage's implied bid of $52.37 (Public Storage's stock price of $65.46 times 0.8 shares), so a higher bid seems likely, but a bid over $61.50 still seems too rich to me.

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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.