Public Storage — Q2 2019 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Public Storage operates U.S. self-storage facilities and related merchandise and tenant-reinsurance businesses, and holds equity-method investments in PS Business Parks and Shurgard. At quarter-end, it had interests in 2,456 U.S. self-storage facilities with approximately 166 million net rentable square feet.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $711.0 million | $685.5 million | $1,400.0 million | $1,355.5 million |
| Net income | $371.5 million | $405.3 million | $739.1 million | $749.7 million |
| Net income allocable to common shareholders | $306.4 million | $348.3 million | $608.2 million | $636.1 million |
| Diluted EPS | $1.76 | $2.00 | $3.49 | $3.65 |
| FFO per diluted share | $2.57 | $2.65 | $5.09 | $5.02 |
| Core FFO per diluted share | $2.64 | $2.57 | $5.18 | $5.05 |
Q2 revenue increased 3.7%, while common-shareholder net income fell 12.0%. For the first half, revenue rose 3.3% and common-shareholder net income declined 4.4%. The filing reports self-storage net operating income (NOI) of $473.3 million for Q2, up 1.7%, and $930.0 million for the first half, also up 1.7%. Same-store NOI grew 0.8% in Q2 and 0.7% in the first half; same-store revenue rose 1.9% and 1.7%, respectively, while operating costs rose 5.1% and 4.5%.
Cash flow and investment. First-half operating cash flow was $1,015.2 million, versus $979.3 million. Investing activities used $413.1 million, compared with $256.0 million, including $196.2 million for acquisitions and $146.4 million paid toward development and expansion. Financing activities used $602.3 million; shareholder distributions were $807.6 million. Cash and equivalents were $360.3 million at June 30, 2019, versus $361.2 million at year-end 2018.
Debt and liquidity. Notes payable totaled $1,908.1 million, up from $1,412.3 million at December 31, 2018. The company issued $500 million of 3.385% senior notes due 2029. Debt carried a 2.9% weighted-average effective rate; there were no substantial principal maturities before 2022. The $500 million revolver had no borrowings, with $484.1 million available after letters of credit; its maturity was extended to April 2024. Management estimated approximately $1.1 billion of capital resources over the next year against identified needs of $415.1 million, including $328.6 million of remaining development spending. Expected retained operating cash flow was $200–$250 million.
Material changes and unusual items
- Common EPS fell in Q2 chiefly because of less favorable foreign-exchange effects on euro debt, the absence of PS Business Parks’ $24.0 million share of real-estate sale gains recorded in Q2 2018, and $8.9 million allocated to preferred shareholders upon Series Z redemption. The first-half comparison also reflects the absence of $34.9 million of PSB sale gains recorded in 2018 and $17.4 million of preferred-redemption allocations in 2019.
- Same-store occupancy remained high: 94.0% in Q2 versus 93.8%. However, management cited softer demand and lower move-in rental rates; new-tenant contract rent per occupied square foot declined to $13.81 from $14.38 in Q2. Results varied by market, with Houston particularly weak: Q2 same-store NOI fell 8.8% and occupancy declined to 88.9%.
- Same-store cost growth, especially property taxes (+5.0% in the first half) and marketing (+39.4%), outpaced same-store revenue growth. Marketing increases reflected higher internet advertising costs amid more aggressive competition.
- First-half equity earnings from unconsolidated entities fell to $36.6 million from $72.8 million, largely reflecting prior-year PSB property-sale gains and Shurgard-related effects. Management expected further year-over-year declines in Shurgard equity earnings in the remainder of 2019.
- The company issued Series H preferred shares and redeemed Series Y and Z preferred shares. Common distributions were $2.00 per share for Q2 and $4.00 per share for the first half. The board subsequently declared a $2.00 quarterly common dividend payable in September 2019.
- Adoption of the new lease standard on January 1, 2019 added $38.7 million of right-of-use assets and a substantially similar amount of lease liabilities.
Outlook, risks, and contingencies
Management expected moderate rental revenue growth for the remainder of 2019, primarily from rent increases to existing tenants, while noting that short-term trends are volatile and not a guarantee of future growth. It expected same-store property-tax expense to rise about 5% for the rest of 2019, continued increases in internet advertising expense, and inflationary pressure on payroll and other property costs. Management expected development-related earnings dilution to continue at similar levels in the second half of 2019.
2019 maintenance capital expenditures were expected to approximate $200 million. The development and expansion pipeline was estimated at $520.5 million, with $328.6 million remaining to spend, primarily over the next 18 months; some projects remained subject to entitlement approvals. Subsequent to quarter-end, the company acquired or was under contract to acquire ten facilities for $86.5 million.
Principal risks include increased self-storage supply and competition, local economic and demand conditions, development delays and cost overruns, property taxes, labor costs, natural disasters and insurance exposure, foreign-currency movements, and risks associated with unconsolidated investments and REIT qualification. The filing identifies a potential California ballot initiative that could increase assessed property values and taxes. The company reported no material off-balance-sheet arrangements and assessed material loss from pending legal proceedings as remote. It reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether same-store revenue and NOI growth can improve as new-supply competition and softer move-in rates persist, particularly in challenged markets such as Houston.
- Whether cost growth, including property taxes, marketing, and labor, continues to outpace same-store revenue growth.
- How the development pipeline, acquisitions, and elevated maintenance spending affect returns, cash needs, and development-related earnings dilution.
- Whether the company sustains its expected liquidity and dividend funding while managing $1.9 billion of debt and future preferred-share redemptions.
- How euro exchange rates and the operating performance of PSB and Shurgard affect reported earnings and cash distributions.