Public Storage — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Public Storage is a REIT focused on self-storage, with ancillary merchandise and tenant-reinsurance operations. It reported interests in 2,504 U.S. self-storage facilities and equity investments in Shurgard and PS Business Parks (PSB).
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $730.7 million | $729.3 million | $2,156.0 million | $2,129.3 million |
| Net income | $325.8 million | $399.4 million | $1,008.8 million | $1,138.6 million |
| Net income allocable to common shareholders | $246.9 million | $337.4 million | $806.2 million | $945.5 million |
| Diluted earnings per common share | $1.41 | $1.93 | $4.62 | $5.42 |
| FFO per diluted common share | $2.28 | $2.76 | $7.18 | $7.86 |
| Core FFO per diluted common share | $2.63 | $2.73 | $7.68 | $7.90 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $1,530.3 million | $1,567.6 million |
For the nine months, investing activities used $528.2 million and financing activities used $1,116.8 million. Cash and equivalents were $294.0 million at September 30, 2020, down from $409.7 million at year-end 2019. Self-storage same-store NOI margin was approximately 71.3% in Q3 2020, versus 72.0% a year earlier; for the nine-month period it was 70.3%, versus 71.8%.
At September 30, total assets were $11.385 billion, notes payable were $2.500 billion, total liabilities were $2.933 billion, and total equity was $8.452 billion. Debt had a weighted-average effective rate of 2.4%; the company reported no substantial debt maturity before September 2022. The $500 million revolving credit facility was undrawn, with $475.7 million available after letters of credit.
Changes versus comparable periods
- Q3 total revenue rose 0.2%, but net income allocable to common shareholders fell 26.8%; diluted EPS declined from $1.93 to $1.41. Nine-month diluted EPS fell from $5.42 to $4.62.
- Reported results were materially affected by foreign-exchange losses on Euro-denominated debt: $41.9 million in Q3 2020 versus a $15.6 million gain in Q3 2019, and $52.3 million for the first nine months versus an $18.1 million gain a year earlier. Preferred-share redemption allocations and higher depreciation also weighed on common earnings.
- Same-store self-storage revenue declined 2.7% in Q3 and 1.5% for the nine months. Same-store NOI declined 3.7% and 3.5%, respectively. Higher occupancy was offset by lower realized rents and sharply lower late fees and administrative charges.
- Acquisitions and newer facilities partly offset same-store weakness: total self-storage NOI declined 2.0% in Q3 and 1.6% for the nine months, with non-same-store operations contributing growth.
- Core FFO per share, which excludes specified items including foreign-exchange effects and preferred-redemption allocations, declined 3.7% in Q3 and 2.8% for the nine months.
Outlook, commentary, and risks
- Management said demand, occupancy, and rates charged to new tenants improved in Q3 beyond its expectations. Same-store occupancy averaged 95.5% in the quarter, up from 94.2%; at September 30, occupancy was 94.6%, up 2.0% year over year. In-place contractual rent was 0.2% higher year over year.
- Management expected late charges and lien fees to remain significantly lower year over year. It cautioned that lower move-outs may be temporary and that more normal move-out patterns could pressure occupancy and revenue. The filing does not provide formal earnings or FFO guidance.
- The COVID-19 pandemic had negatively affected the business; management expected impacts to continue through the rest of 2020 and possibly beyond, but said the duration and magnitude could not be estimated. Risks include weaker demand or collections, renewed restrictions, changes in customer moving patterns, and capital-market disruption.
- Management estimated approximately $1.2 billion of capital resources over the next year against approximately $1.1 billion of currently identified needs. Resources included cash, available revolver capacity, $274.6 million of net proceeds from Series N preferred shares issued October 6, 2020, and expected retained operating cash flow of $150–$200 million. Identified needs included $686.9 million of property acquisitions under contract and $386.5 million of remaining development-pipeline spending.
- Subsequent to quarter-end, the company acquired or was under contract to acquire 54 facilities for $686.9 million; 12 properties totaling $193.9 million were expected to close as construction completed in 2021. Its development pipeline comprised 12 new facilities and 26 expansions, expected to add 3.7 million square feet at an estimated cost of $563.2 million.
- Other watch items include competition from new facilities, rising marketing costs, potential property-tax increases in California (the filing said the outcome of Proposition 15 was not yet certified), foreign-currency exposure, construction and permitting risks, and a $109.5 million construction commitment. The company said legal contingencies were not expected to result in material loss.
Important facts for investors to verify
- Whether Q3 improvements in occupancy and move-outs persist, and whether rental-rate growth can offset lower fees and potential normalization of move-outs.
- The continuing effects of COVID-19 on demand, rent collection, customer behavior, and operating restrictions.
- Euro exchange-rate exposure: the company had €842.0 million of Euro-denominated notes, alongside its investment in Shurgard; currency losses materially affected reported earnings.
- Execution, closing conditions, funding, and expected returns for the announced acquisitions and development pipeline.
- California property-tax exposure and the eventual outcome of Proposition 15; the filing did not state a certified result.