Public Storage — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017; comparisons are with the same 2016 periods. Public Storage is a self-storage REIT. At quarter-end it had interests in 2,358 U.S. self-storage facilities, one facility in London, a 49% interest in Shurgard Europe, and an approximately 42% interest in PS Business Parks (PSB). The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $664.3 million | $634.2 million | $1,309.9 million | $1,246.0 million |
| Operating income | $356.6 million | $336.9 million | $683.3 million | $647.2 million |
| Net income | $355.2 million | $358.4 million | $699.2 million | $675.7 million |
| Net income allocable to common shareholders | $276.7 million | $280.8 million | $557.8 million | $522.1 million |
| Diluted earnings per common share | $1.59 | $1.61 | $3.20 | $3.00 |
| FFO per diluted share | $2.31 | $2.34 | $4.65 | $4.43 |
| Core FFO per share | $2.51 | $2.40 | $4.88 | $4.61 |
- Same-store NOI increased 2.6% in Q2 and 3.3% for the first half. Same-store NOI margin was 73.2% in Q2 versus 73.7%; first-half margin was 72.7% versus 73.0%.
- Same-store revenue rose 3.3% in Q2 and 3.7% in the first half, while same-store operating costs increased 5.4% and 4.7%, respectively. Average same-store occupancy was 94.5% in Q2, down from 95.4%.
- Cash from operations was $965.3 million for the first half, essentially unchanged from $964.7 million. Investing cash outflow was $245.4 million and financing cash outflow was $545.2 million. Cash ended the period at $358.3 million.
- Debt at June 30 was $420.8 million: $390.7 million of euro-denominated senior notes and $30.1 million of mortgage notes. The weighted-average effective rate was 2.1%; $404.1 million of principal maturities fall thereafter, with modest scheduled repayments through 2021. The $460 million Series S preferred redemption was separately classified as a liability at quarter-end, not included in stated debt.
- The $500 million revolving facility had no borrowings at June 30; $15.4 million of letters of credit left $484.6 million available. The company reported $55.2 million drawn as of July 28.
- First-half distributions to shareholders were $818.0 million, including $696.6 million to common shareholders and restricted unit holders. Common distributions were $4.00 per share for the first half.
Material changes versus the prior period
- Q2 common-shareholder income declined $4.1 million and diluted EPS fell $0.02, chiefly because foreign-exchange losses increased by $34.1 million; higher self-storage NOI and equity earnings partly offset the impact.
- For the first half, common-shareholder income increased $35.7 million and diluted EPS rose $0.20. Higher self-storage NOI and equity earnings, plus lower preferred-redemption-related income allocations, outweighed increased foreign-exchange losses.
- Q2 same-store revenue growth slowed to 3.3% from 6.3% in Q2 2016. Realized rent per occupied square foot rose 4.4%, but occupancy weakened and operating costs grew faster than revenue.
- Equity earnings from unconsolidated real estate entities increased to $20.1 million in Q2 from $10.2 million, and to $40.0 million for the first half from $24.4 million, led by PSB and Shurgard Europe.
Outlook, commentary, risks and unusual items
- Management said demand was softening in substantially all major markets, with limited pricing power for new tenants; it cited local conditions and increased new supply, particularly in Dallas, Houston, Chicago, Denver, Miami and New York. Houston same-store Q2 revenue declined 2.3% and NOI declined 5.1%.
- Management expected remainder-of-2017 revenue growth to rely primarily on rent increases to existing tenants, which it expected to be similar to 2016. It also increased advertising and reduced new-tenant rates and increased promotions to support move-ins, actions that could weigh on near-term revenue.
- Management expected same-store property-tax expense to grow about 4.5% for the rest of 2017 and anticipated continued increases in advertising, payroll, repairs and maintenance, and allocated overhead. It expects development-related earnings dilution to increase as the pipeline expands.
- At June 30, the development and redevelopment pipeline was estimated at 5.6 million rentable square feet and $658.6 million total cost, with $376.2 million remaining. Management estimated next-12-month capital resources of about $1.1 billion versus planned needs of about $885 million, including the Series S redemption, contracted acquisitions and pipeline spending. Some projects depend on permits or other approvals.
- The Series S preferred shares, with $460 million liquidation value, were redeemed at par on July 26, 2017. The company issued $280 million of Series F preferred shares in June. The filing reports no formal earnings-per-share guidance.
- Euro-denominated debt produced a $25.4 million Q2 and $31.0 million first-half foreign-exchange loss. Currency movements also affect the Shurgard Europe investment and reported results.
- No impairment charges were recorded in the periods presented. Management considered material losses from pending legal matters remote. The company disclosed exposure to catastrophic property events, tenant reinsurance claims, REIT qualification and other regulatory, competitive, development, economic, cyber and foreign-currency risks.
Most important facts for investors to verify
- Whether same-store rent growth and occupancy stabilize, particularly in oversupplied or weaker markets, and whether new-tenant pricing continues to require greater promotions.
- Whether expense growth, especially property taxes and advertising, continues to outpace same-store revenue growth.
- Execution, approvals, remaining funding requirements and lease-up progress for the $658.6 million development and redevelopment pipeline.
- Effects of euro-dollar movements on debt, Shurgard Europe earnings and reported results; distinguish operating performance from translation effects.
- Post-redemption preferred-share obligations, future capital raising or redemptions, and the use of liquidity for dividends, acquisitions and development.