Public Storage — Q1 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014; balance-sheet comparisons are with December 31, 2014. Public Storage operates self-storage facilities and holds investments in Shurgard Europe and PS Business Parks (PSB). At quarter-end, it had interests in 2,258 self-storage facilities, including 2,245 consolidated U.S. facilities and one in London; it also held a 49% interest in Shurgard Europe and an approximately 42% interest in PSB.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages. Reported figures may not sum due to rounding.
| Metric | Q1 2015 / March 31, 2015 | Comparable period / change |
|---|---|---|
| Total revenue | $569.4 | $519.6; up 9.6% |
| Operating income | $264.9 | $217.1; up 22.0% |
| Net income | $283.3 | $228.3; up 24.1% |
| Net income attributable to common shareholders | $212.6; diluted EPS $1.23 | $174.1; diluted EPS $1.01 |
| FFO per diluted share (non-GAAP) | $1.91 | $1.74; up 9.8% |
| Core FFO per diluted share (non-GAAP) | $1.94 | $1.80; up 7.8% |
| Net cash provided by operating activities | $369.2 | $330.7 |
| Cash and cash equivalents | $152.8 | $187.7 at Dec. 31, 2014 |
| Total assets | $9,772.0 | $9,818.7 at Dec. 31, 2014 |
| Notes payable | $58.7 | $64.4 at Dec. 31, 2014 |
Q1 investing activities used $94.1 million, including $62.7 million for development and $32.3 million for acquisitions. Financing activities used $309.5 million, including $305.9 million of distributions to shareholders and noncontrolling interests. Cash declined by $34.5 million, before a $0.4 million foreign-exchange effect.
Same-store facilities generated $472.3 million of revenue, up 6.1%, and $329.8 million of net operating income (NOI), up 8.4%. Same-store NOI margin was 69.8%, versus 68.3%. Weighted-average occupancy rose to 93.4% from 92.6%; realized annual rent per occupied square foot increased 5.6% to $15.19. Self-storage operating income increased 18.8% to $262.9 million.
Public Storage had no credit-facility borrowings at quarter-end. Its amended revolving facility has a $500 million limit, with approximately $485 million available after letters of credit. Notes payable had a 4.0% weighted-average effective interest rate; the company reported no interest expense in Q1 2015 because the $0.6 million incurred was capitalized. The $145 million Series O preferred-share redemption was classified as a liability at quarter-end and paid on April 15, 2015.
Material changes versus Q1 2014
- Common-share net income rose $38.5 million, primarily reflecting a $41.7 million increase in self-storage operating income.
- Same-store revenue growth reflected higher rental rates and occupancy. Revenue per available square foot increased 6.5% to $14.19.
- Non-same-store operating income improved to $13.6 million from a $1.6 million loss, supported by acquisitions and the fill-up of newer facilities.
- Ancillary operating income increased to $26.2 million from $14.9 million, principally because Q1 2014 tenant-reinsurance costs included a $7.8 million legal-settlement accrual.
- General and administrative expense increased $5.2 million to $24.2 million; legal costs rose $4.0 million, primarily due to litigated matters.
- Equity earnings from unconsolidated entities increased to $16.2 million from $14.6 million. PSB earnings rose, including Public Storage’s share of PSB’s property-sale gain; Shurgard Europe earnings fell to $5.7 million from $8.9 million.
- Foreign-currency translation produced a $30.4 million other-comprehensive loss, largely related to Shurgard Europe; the euro weakened against the U.S. dollar. This reduced reported equity, not Q1 net income.
Outlook, commentary, and risks
- Management said it expected continued revenue growth during the remainder of 2015, supported by rent increases to existing tenants, higher move-in rates and/or lower promotions. This is commentary, not formal earnings guidance. Management cautioned that seasonal and local-market factors make short-term trends volatile.
- Management expected same-store property-tax expense growth of approximately 4% for the remainder of 2015. It also anticipated inflationary pressure in wages, repairs and maintenance, utilities, and allocated overhead.
- The development pipeline was expected to add approximately 3.6 million rentable square feet at an estimated total cost of $436 million; $136 million had been incurred by March 31, with most remaining spending expected in 2015 and 2016. Some projects depend on approvals. Management warned development may dilute earnings while new space is being filled, with dilution expected to grow.
- Management estimated capital resources of approximately $848 million, including cash, available credit and expected retained operating cash flow over the next 12 months. It estimated commitments of approximately $552 million, including development spending, the Series O redemption, acquisitions and lease buyout, and near-term debt maturities. It expected approximately $76 million of 2015 maintenance capital expenditures.
- On April 29, 2015, the board declared a $1.70 quarterly common dividend, an increase of $0.30, or 21%, from the prior quarter. Q1 dividends declared were $1.40 per common share. Management said future distributions would depend on REIT distribution requirements and operating cash flow.
- After quarter-end, the company acquired or was under contract to acquire seven facilities for $80 million and a land-lease buyout for $15 million. Acquisitions face competition; development faces site, permitting and entitlement constraints.
- Key risks include self-storage demand and competition, economic and seasonal conditions, property development and acquisition execution, foreign-currency movements, REIT qualification and tax matters, natural disasters and insurance exposure. The company reported various legal proceedings but considered material loss remote. It reported no material off-balance-sheet arrangements and no material change in market-risk disclosures.
- Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether same-store rent growth and occupancy gains continue, and how pricing and promotions affect move-ins, move-outs and revenue.
- Whether the development pipeline is completed on schedule and budget, receives required approvals, and achieves stabilized occupancy without greater-than-expected earnings dilution.
- Funding and timing of planned development, acquisitions, preferred-share redemptions and dividends; confirm actual liquidity and credit availability as commitments evolve.
- Shurgard Europe’s operating performance and the impact of euro exchange rates and refinancing costs on equity earnings and reported equity.
- The duration and financial consequences of litigated matters, given the increase in legal expense; also monitor tenant-reinsurance claims and the reported insurance limits.
- Use of non-GAAP FFO, Core FFO and NOI alongside GAAP results; definitions and calculations may differ from those of other REITs.