Public Storage — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited interim results; amounts below are in U.S. dollars. Public Storage is a REIT focused on self-storage, with 2,234 directly and indirectly held facilities in the U.S. and interests in European self-storage and commercial property businesses.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $571.6 million | $512.0 million | $1,629.3 million | $1,468.2 million |
| Operating income | $282.7 million | $250.0 million | $765.4 million | $699.0 million |
| Net income | $295.0 million | $285.6 million | $801.5 million | $759.6 million |
| Net income allocable to common shareholders | $231.8 million | $231.4 million | $624.2 million | $601.0 million |
| Diluted earnings per common share | $1.34 | $1.34 | $3.61 | $3.48 |
| Funds from Operations (FFO) per diluted share | $2.08 | $2.00 | $5.81 | $5.40 |
| Core FFO per diluted share | $2.11 | $1.92 | $5.88 | $5.36 |
Q3 revenue rose 11.6%, while common earnings were nearly unchanged as improved self-storage operations were partly offset by currency effects, higher depreciation, and increased preferred-share allocations. Nine-month diluted EPS increased 3.7%; FFO per share rose 7.6% and Core FFO per share rose 9.7%. FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Same-store self-storage: Q3 revenue grew 5.5% and net operating income (NOI) grew 7.3%; nine-month revenue grew 5.3% and NOI grew 6.7%. Same-store NOI margin was 73.0% in Q3 versus 71.7%, and 71.2% year to date versus 70.2%.
- Same-store average occupancy was 94.7% in Q3, up from 94.4%; realized rent per occupied square foot rose 5.3%. Management attributed revenue gains to rent increases and higher occupancy.
- Non-same-store NOI increased to $40.1 million in Q3 from $17.6 million, mainly reflecting acquisitions since January 2013.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $1,153.1 million, up from $1,039.7 million. Investing activities provided $9.8 million, versus $546.7 million used in the prior period, including $421.2 million of proceeds from the sale and repayment of the Shurgard Europe shareholder loan.
- Financing activities used $1,083.0 million, including $896.7 million of shareholder distributions. Cash increased to $98.3 million from $19.2 million at year-end 2013.
- At September 30, total debt was $71.6 million, down from $839.1 million at December 31, 2013. The company repaid its $700 million term loan and $50.1 million credit-facility balance; notes payable were $71.6 million. The $300 million revolving credit facility had no borrowings and approximately $286 million available after letters of credit; the company reported covenant compliance.
- Total assets were $9.62 billion and total equity was $9.29 billion. Preferred shares had a $4.14 billion liquidation preference. Preferred dividends were approximately $60.8 million per quarter.
- Common dividends declared were $1.40 per share in Q3 and $4.20 per share for the first nine months, compared with $1.25 and $3.75, respectively, in 2013. Nine-month common and preferred distributions totaled $896.7 million.
- Capital expenditures to maintain facilities were $63.6 million for the first nine months; management estimated approximately $76 million for full-year 2014. Development and expansion projects were expected to add 3.0 million net rentable square feet at an estimated total cost of $342 million; $73 million had been spent by September 30.
Material changes and unusual items
- The company acquired 31 facilities for approximately $276 million during the first nine months of 2014. After quarter-end, it acquired ten facilities for approximately $98 million and had four more under contract for approximately $63 million.
- Shurgard Europe refinanced in July: it increased bank borrowings, issued €300 million of unsecured notes at an average 3.0% rate, and repaid its €311 million shareholder loan. Public Storage received $204.9 million for its share of the loan. This ended further currency gains or losses on that receivable.
- Foreign-exchange results shifted from a $16.1 million gain in Q3 2013 to a $3.0 million loss in Q3 2014; nine-month results shifted from a $9.3 million gain to a $7.0 million loss. Currency translation also reduced comprehensive income and the reported value of foreign investments.
- Nine-month ancillary costs included a $7.8 million accrual related to a legal settlement and a $4.1 million reduction associated with recognition of a deferred tax asset. These items were excluded in the company’s Core FFO calculation.
- Depreciation and amortization increased, reflecting acquired facilities and higher amortization of acquired tenant intangibles. No impairment charges were recorded in the periods presented.
Outlook, risks and contingencies
- No formal earnings guidance was provided. Management expected continued revenue growth in the remainder of 2014, citing current occupancy, rent and move-in trends, but cautioned that short-term trends are volatile and seasonal.
- Management expected to continue rent increases for longer-term tenants. It also anticipated approximately $2 million more advertising and selling expense in Q4 year over year, property-tax growth of about 4% for the remainder of 2014, and roughly $77 million of remaining development spending in Q4.
- Management estimated approximately $519 million of capital resources at September 30, including cash, estimated retained operating cash flow for the remainder of 2014 and available credit. It estimated remaining 2014 capital commitments of about $241 million, including acquisitions and development, and expected commitments to grow as it pursued opportunities.
- Key risks include competition and local demand, acquisition and development execution, permitting and entitlement delays, property taxes and operating costs, seasonality, REIT qualification, insurance and legal exposures, and foreign-currency, refinancing and joint-venture risks. Management noted that acquisitions can take 24 months or more to stabilize and may not achieve expected returns.
- The company said legal proceedings and claims were not expected to result in a material loss. It reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Whether same-store rent growth and occupancy can be sustained, particularly as management noted a narrowing year-over-year occupancy gap and planned increased Q4 advertising.
- Acquisition and development returns, remaining project costs, and the effect of new facilities on depreciation and cash needs.
- How dividend distributions, preferred-share obligations and future capital spending compare with operating cash flow and available liquidity.
- Shurgard Europe’s operating performance, refinancing costs and exposure to euro movements after repayment of the shareholder loan.
- The nature, status and potential financial impact of the legal settlement accrual and other contingencies; the filing does not provide a clear settlement amount or further case detail.