Public Storage — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Public Storage is a REIT focused on self-storage, with ancillary tenant insurance and merchandise operations and equity investments in PS Business Parks (PSB) and Shurgard Europe.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $645.5 million | $611.8 million | +5.5% |
| Operating income | $326.7 million | $310.3 million | +5.3% |
| Net income | $344.0 million | $317.3 million | +8.4% |
| Net income allocable to common shareholders | $281.1 million | $241.3 million | +16.5% |
| Diluted earnings per common share | $1.62 | $1.39 | +$0.23 |
| FFO per diluted share (non-GAAP) | $2.34 | $2.10 | +11.4% |
| Core FFO per diluted share (non-GAAP) | $2.37 | $2.21 | +7.2% |
| Cash provided by operating activities | $459.1 million | $441.0 million | +4.1% |
Self-storage revenue rose 5.8%; self-storage net operating income (NOI) increased 5.1% to $435.8 million. Same-store revenue grew 4.0% and same-store NOI grew 4.1%; the same-store NOI margin was 72.3%, compared with 72.2%. Ancillary net income rose to $26.8 million from $23.8 million. Equity earnings from unconsolidated real estate entities increased to $19.9 million from $14.2 million, led by PSB.
Cash and equivalents were $120.9 million at March 31, 2017, down from $183.7 million at year-end. Investing activities used $118.1 million, including $24.4 million of cash maintenance capital expenditures and $71.0 million for construction in process. Financing activities used $403.8 million, including $408.3 million of distributions to shareholders. Cash flows, debt, and distributions are reported in thousands in the filing; figures above are converted to millions.
Total debt was $395.9 million: $365.3 million of euro-denominated senior unsecured notes and $30.5 million of mortgage notes. The weighted-average effective rate was 2.1%; the company reported compliance with debt covenants. No revolver borrowings were outstanding; $484.8 million of the $500 million facility was available after letters of credit. Preferred shares had a $4.37 billion liquidation preference, separate from debt.
Material changes and operating trends
- Common-shareholder earnings increased partly because the 2016 comparison included an $11.3 million preferred-share redemption allocation that did not recur. Lower foreign-exchange losses also helped; the company recorded a $5.6 million currency loss in Q1 2017 versus $11.0 million in Q1 2016.
- Same-store rental revenue growth slowed to 4.0% from 6.8% in Q1 2016. Realized annual rent per occupied square foot increased 4.9%, but weighted-average occupancy declined to 93.1% from 93.6%; March 31 occupancy was 93.2%, down 0.7 percentage points year over year.
- Same-store operating costs rose 3.9%, including property taxes up 4.4% and advertising and selling costs up 29.9%. New and non-same-store properties increased NOI, but higher depreciation contributed to a 9.5% decline in non-same-store net income.
- Common distributions were $2.00 per share for the quarter, totaling $348.2 million; preferred distributions were $60.1 million. The board declared a regular $2.00-per-share common dividend on April 26, 2017.
Outlook, risks, and unusual items
Management reported softer demand and reduced pricing power for new tenants in substantially all major markets, attributing some weakness to local conditions and added supply, particularly in markets including Dallas, Houston, Chicago, Washington, Denver, Miami, and New York. The company is increasing online and television marketing and reducing new-tenant rates or increasing promotional discounts; management cautioned that these actions may weigh on near-term revenue trends. It expects existing-tenant rent increases in the remainder of 2017 to be similar to Q1 levels and continued revenue growth, while emphasizing short-term volatility.
Management expects same-store property tax expense to grow about 4.5% for the remainder of 2017, continued increases in advertising expense, and inflationary cost pressure in several categories. It expects development-related earnings dilution to increase in 2017 and beyond: new or redeveloped facilities can take three to four years to stabilize. The development and redevelopment pipeline was approximately 5.2 million rentable square feet at an estimated total cost of $618.2 million; $412.9 million remained to be spent, primarily over the next 18 months. Some projects depend on entitlement approvals or permits.
The company estimated next-12-month capital resources of $855.7 million against then-planned needs of $440.1 million, including pipeline spending, acquisitions under contract, and debt repayments. These are management estimates, and capital needs could rise with additional development or acquisitions. Subsequent to quarter-end, Public Storage acquired or was under contract to acquire five facilities for $25.5 million. Two preferred series totaling $922.5 million became eligible for optional redemption by May 3, 2017; management said current refinancing economics did not provide a sufficient benefit.
Key risks include real-estate competition and local demand, development and permitting delays, foreign-currency exposure (including euro-denominated debt and Shurgard Europe), REIT qualification and tax matters, joint-venture exposure, and natural disasters. Management said material loss from pending legal proceedings was remote. Insurance limits could be exceeded in the event of multiple catastrophic events. No material off-balance-sheet arrangements were reported. Management identified no formal earnings guidance in the provided filing text.
Important facts for investors to verify
- Track same-store rent growth, occupancy, move-in pricing, promotional discounts, and supply conditions; reported revenue growth is slowing despite higher realized rents.
- Review the definition and reconciliation of NOI, FFO, and Core FFO; these are non-GAAP measures and may not be comparable across REITs.
- Assess the cost, timing, permitting contingencies, and expected returns of the $618.2 million development pipeline, along with the risk of further earnings dilution.
- Monitor cash distributions relative to operating cash flow and the company’s planned capital spending; Q1 distributions exceeded operating cash flow.
- Confirm the impact of currency movements and any preferred-share redemptions or new financing on earnings, liquidity, and capital costs.