Public Storage — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Amounts below are in U.S. dollars; financial amounts are in millions unless otherwise noted.
Business context
Public Storage is a REIT focused on self-storage rentals, with ancillary merchandise and tenant-reinsurance operations. At September 30, 2016, it had interests in 2,319 U.S. self-storage facilities and one London facility, plus a 49% interest in Shurgard Europe and an approximately 42% interest in PS Business Parks (PSB).
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $663.1 | $618.9 | $1,909.1 | $1,772.4 |
| Operating income | $352.9 | $324.5 | $1,000.1 | $886.2 |
| Net income | $369.1 | $341.1 | $1,044.8 | $952.4 |
| Net income allocable to common shareholders | $309.0 | $273.5 | $831.1 | $750.0 |
| Diluted earnings per common share | $1.78 | $1.58 | $4.78 | $4.32 |
- Q3 revenue rose 7.2%; common-shareholder income rose 13.0%. For the nine-month period, revenue rose 7.7% and common-shareholder income rose 10.8%.
- Self-storage NOI was $457.3 million in Q3, up 6.6%, and $1,308.7 million for nine months, up 8.9%. Same-store NOI increased 4.7% in Q3 and 7.1% year to date. Same-store NOI margin was 73.8% in Q3 and 73.4% for nine months, versus 74.1% and 72.5%, respectively, in 2015.
- Same-store revenue increased 5.1% in Q3 and 5.8% year to date, largely from higher realized rent per occupied square foot. Occupancy was 95.3% for Q3 and 94.8% year to date. Same-store operating costs rose 6.4% in Q3 and 2.5% year to date.
- Operating cash flow was $1,480.0 million for nine months, compared with $1,311.8 million in 2015. Investing activities used $455.6 million; financing activities used $1,071.4 million. Cash ended the period at $57.2 million, down from $104.3 million at year-end 2015.
- Cash capital expenditures to maintain facilities were $62.0 million; construction spending was $190.4 million and cash acquisitions were $257.7 million. Distributions to Public Storage shareholders were $1,098.8 million.
- Total debt was $430.9 million, comprising $383.4 million of euro-denominated senior unsecured notes and $47.5 million of mortgage notes, versus $319.0 million at December 31, 2015. There were no revolving-credit borrowings; $484.8 million remained available after letters of credit. Weighted average effective debt rate was 2.2%; most principal maturities fall after 2020.
- Management estimated approximately $1.1 billion of capital resources over the next year against $594 million of then-planned needs. Resources included expected retained operating cash flow and $338.1 million of net proceeds from the October Series E preferred issuance.
Material changes and notable items
- Growth reflected both same-store rent increases and the contribution of acquired, developed and redeveloped properties. The non-same-store portfolio grew to 308 facilities from 255 a year earlier.
- Q3 diluted FFO per share, a non-GAAP measure, was $2.51, up 10.6%; Core FFO per share was $2.53, up 8.6%. For nine months, diluted FFO was $6.94, up 9.6%, and Core FFO was $7.14, up 10.9%.
- Foreign-currency losses on euro-denominated notes were $3.7 million in Q3 and $6.0 million for nine months. The company also reported $15.1 million of other comprehensive loss for nine months, primarily related to currency translation.
- In 2016, the company issued $825.0 million of preferred shares and redeemed $862.5 million of higher-coupon preferred shares. It reported $26.9 million of preferred-redemption income allocation for the nine-month period. On October 14, it issued Series E preferred shares for $350 million gross proceeds.
- The Board declared a $2.00-per-common-share quarterly dividend on October 26, an increase of $0.20 from the prior quarter. The nine-month common distribution was $5.30 per share.
Outlook, risks and contingencies
- Management expected same-store revenue growth to moderate in the remainder of 2016 and cited softer demand in several major markets, including Houston, Denver, Chicago, New York and Washington, D.C. It attributed some weakness to local economic conditions and new supply, and increased marketing while lowering new-tenant rates and increasing promotions—actions expected to weigh on near-term revenue trends.
- Management expected continued rent increases for existing tenants, but noted that lower rental rates for new move-ins versus vacating tenants were moderating contract-rent growth. It expected property-tax expense growth of about 5% for the remainder of 2016 and higher marketing expense; development activity was expected to cause greater near-term earnings dilution as new facilities lease up.
- Development and redevelopment projects represented 5.3 million square feet and estimated total costs of $688.2 million, with $426.8 million remaining. Some projects depended on entitlement approvals; permits, site availability and acquisition competition could constrain growth. Twenty-one facilities, for $149.5 million, were acquired or under contract after quarter-end.
- Risks identified include real-estate demand and competition, development and acquisition execution, foreign-exchange exposure, joint ventures, REIT qualification and tax matters, regulation, litigation, insurance exposure, and access to capital. The company said material loss from existing legal proceedings was remote and reported no material off-balance-sheet arrangements.
- Property and general-liability insurance have per-occurrence deductibles of $25 million and $2 million, respectively; aggregate policy limits could be exceeded in multiple catastrophic events. No asset impairments were recorded in the periods presented.
Important facts for investors to verify
- Whether softer demand, new supply and promotional pricing further slow same-store rent and revenue growth, particularly in the markets management identified.
- How quickly recently acquired and developed facilities reach stabilized occupancy and whether the stated development costs, timing and expected returns hold.
- Whether operating cash flow and available financing cover development, acquisitions, debt repayments and distributions as planned, including the effect of any additional capital raising.
- The effect of euro exchange-rate movements on Shurgard Europe, the investment balance and euro-denominated debt.
- Preferred-share distributions, redemption timing and the common dividend’s funding relative to retained cash flow; assess FFO and Core FFO alongside GAAP results and cash flow.