Public Storage — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Public Storage is a REIT focused on self-storage, with ancillary merchandise and tenant-reinsurance activities and equity investments in PS Business Parks (PSB) and Shurgard Europe. At quarter-end it had interests in 2,291 self-storage facilities in the U.S. and 49% of Shurgard Europe.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $611.8 million | $564.9 million; up 8.3% |
| Operating income | $310.3 million | $261.6 million; up 18.6% |
| Net income | $317.3 million | $283.3 million; up 12.0% |
| Net income allocable to common shareholders | $241.3 million | $212.6 million |
| Diluted earnings per common share | $1.39 | $1.23 |
| Funds from Operations (FFO) per diluted share | $2.10 | $1.91; up 9.9% |
| Core FFO per share | $2.21 | $1.94; up 13.9% |
| Cash provided by operating activities | $441.0 million | $382.5 million |
Amounts are in U.S. dollars. Reported operating margin was approximately 50.7%, compared with 46.3% a year earlier. Same-store NOI margin, before depreciation and amortization, was 72.4%, versus 69.8%.
- Same-store performance: Across 2,007 facilities, revenue rose 6.5% and NOI rose 10.4%. Average occupancy increased to 93.6% from 93.4%; realized annual rent per occupied square foot increased 6.1% to $16.15. Same-store operating costs fell 2.6%, partly reflecting lower snow-removal and advertising costs.
- Growth and investment: Non-same-store NOI increased 29.0% to $47.9 million, reflecting acquisitions and development. The company acquired 12 facilities for $98.1 million, including $12.9 million of assumed mortgage debt. Development and expansion projects in progress represented 4.6 million square feet and an estimated $607 million total cost; $275 million had been incurred by quarter-end.
- Balance sheet and debt: Cash was $305.7 million, up from $104.3 million at December 31, 2015; total assets were $10.06 billion. Debt was $336.7 million, comprising $274.8 million of senior notes and $61.9 million of mortgages. The $500 million revolving credit facility had no borrowings and $485 million of available capacity after letters of credit. A separate $375 million Series Q preferred redemption was classified as a liability at quarter-end and paid on April 15, 2016.
- Cash uses and distributions: Investing activities used $162.7 million, including $85.2 million for acquisitions and $68.0 million for construction in process. Financing activities used $76.3 million; shareholder distributions were $357.3 million, including $295.1 million to common shareholders and restricted units. The common distribution was $1.70 per share for the quarter.
Material changes versus Q1 2015
- Common-share net income increased $28.7 million, primarily from a $45.3 million increase in self-storage NOI, partly offset by an $11.0 million foreign-exchange loss on euro-denominated debt.
- Self-storage same-store revenue growth was primarily driven by higher realized rents, including rent increases to existing tenants. Same-store costs declined, but property taxes rose 4.4%.
- Equity earnings from unconsolidated real estate entities decreased $2.0 million to $14.2 million. PSB earnings were lower mainly because its Q1 2015 results included a property-sale gain; Shurgard earnings increased modestly.
- Ancillary revenue increased to $37.2 million, while ancillary operating costs rose to $13.4 million, mainly from higher tenant-reinsurance claims and exposure.
Outlook, risks and unusual items
- Management expected continued same-store revenue growth in the remainder of 2016, supported by tenant rent increases and higher new-tenant rates; it expected similar rent increases for existing tenants as in comparable 2015 periods. Management cautioned that short-term rental and occupancy trends are volatile and seasonal. No full-year earnings or EPS guidance is provided in the filing.
- Management expected same-store property-tax expense to increase about 4.5%–5% in the remainder of 2016 and anticipated inflationary pressure in payroll, repairs, utilities and other property costs. Lower Q1 snow-removal costs may not recur.
- Development is expected to dilute earnings in the near term: management cited a three-to-four-year stabilization period and expected dilution to increase in 2016 and beyond. Remaining spending on the existing pipeline was estimated at $332 million, primarily over the next 18 months; some projects depended on entitlement approvals and permits.
- Management estimated $830 million of capital resources against current planned needs, including cash, undrawn credit, retained operating cash flow, April debt proceeds and a forecast $106 million Shurgard dividend. Planned needs included pipeline spending, acquisitions under contract, debt repayments and the Series Q redemption. The company said needs could rise if it expands development or acquisition activity or redeems its Series R preferred shares.
- After quarter-end, the company issued €100 million of 1.54% senior notes due 2024, receiving $113.6 million net proceeds, and acquired or was under contract to acquire 12 facilities for $100 million. The Board declared a $1.80 common quarterly dividend on April 25, $0.10 above the prior quarter.
- Foreign-exchange exposure includes the euro-denominated notes and the Shurgard investment; euro movements affected reported earnings. Other principal risks include real-estate demand and competition, acquisitions and development execution, natural disasters, regulatory and REIT qualification risks, insurance exposure, cybersecurity and capital-market access.
- The filing reports various legal proceedings but says the likelihood of a material loss is remote. It reports no material off-balance-sheet arrangements and no impairment charges in the periods presented.
Most important facts for investors to verify
- Whether same-store rent growth remains durable as occupancy is already high and new-tenant pricing, move-outs and seasonal demand fluctuate.
- Development pipeline costs, entitlement progress, lease-up pace and the expected period of earnings dilution.
- Liquidity after the Series Q redemption, planned acquisitions and construction spending, and any decision on Series R redemption.
- Euro exchange-rate effects on debt and Shurgard results, and whether the forecast Shurgard dividend is received as expected.
- Tenant-reinsurance claims and costs, and the continued ability to qualify as a REIT and satisfy relevant covenants.