Public Storage — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Public Storage is a REIT focused on self-storage, with commercial property and European self-storage investments. At quarter-end it had interests in 2,056 U.S. facilities and a 49% stake in Shurgard Europe.
Financial highlights
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $453.0 million | $422.3 million | $1,307.4 million | $1,227.1 million |
| Net income | $194.5 million | $245.8 million | $616.0 million | $506.9 million |
| Net income allocable to common shareholders | $117.9 million | $182.2 million | $397.5 million | $277.8 million |
| Diluted earnings per common share | $0.69 | $1.07 | $2.33 | $1.64 |
| FFO per diluted common share (non-GAAP) | $1.29 | $1.69 | $4.17 | $3.39 |
- Operating performance: Same-store self-storage revenue rose 5.8% in Q3 and 4.4% for the nine months. Same-store NOI increased 8.6% and 6.8%, respectively. Q3 same-store occupancy averaged 92.2% versus 91.0%; realized rent per occupied square foot rose 4.0% to $13.15. Same-store operating margin before depreciation was 69.1% in Q3 versus 67.3%, and 67.1% for nine months versus 65.6%.
- Cash flow: Nine-month operating cash flow was $908.8 million, up from $821.7 million. Capital improvements were $57.0 million. After these improvements, distributions to noncontrolling interests and Public Storage shareholders, $207.3 million remained for debt principal payments and reinvestment. Investing activities used $102.3 million; financing activities used $1,101.9 million.
- Debt and liquidity: Notes payable were $418.9 million at September 30, down from $568.4 million at year-end 2010; weighted-average effective rate was 5.3%. Cash was $160.7 million, with no borrowings on the $300 million revolving credit facility, which expires March 2012. Debt equaled 5.0% of book-value total equity. The largest scheduled debt maturity is $264.9 million in 2013.
- Balance sheet and distributions: Total assets were $9.09 billion. Nine-month distributions to Public Storage shareholders totaled $632.2 million, including $459.3 million to common shareholders and restricted share unitholders. The Q3 common distribution was $0.95 per share.
Changes versus prior comparable periods
- Q3 common-allocable income fell $64.2 million and diluted EPS declined $0.38. The main drivers were a $28.3 million foreign-exchange loss versus a $55.5 million gain a year earlier, and $16.2 million of preferred-redemption-related EITF D-42 allocations. Stronger property operations and higher Shurgard equity earnings partly offset those items.
- For the nine-month period, common-allocable income rose $119.7 million and diluted EPS increased $0.69, reflecting stronger same-store and non-same-store operations, a $13.5 million FX gain versus a $28.6 million loss, and higher Shurgard-related earnings and interest income.
- General and administrative expense rose to $14.1 million in Q3 from $8.9 million, and to $40.9 million for nine months from $29.1 million, primarily due to performance-based share compensation and acquisition-related costs. Interest expense declined, mainly following the February 2011 maturity of approximately $103 million of notes.
Outlook, risks and unusual items
- Management expected improved operating trends to continue in Q4 2011, but revenue and NOI growth to be below Q3’s rate. Its stated strategy was to maintain full-year same-store occupancy around 89%–90%; Q3 average occupancy exceeded that range.
- Management expected approximately 2% property-tax growth for the remainder of 2011, moderate payroll and call-center cost growth, minimal repairs-and-maintenance growth, and roughly $20 million of remaining-2011 capital improvements. It described the development pipeline as minimal and had no current plans to expand development activity.
- Management said cash and operating cash flow should cover operating costs, debt service, capital improvements and distributions for the foreseeable future, and that it was not dependent on capital markets for near-term obligations. It cited $124.4 million of remaining-2011 capital commitments, including a $105 million Series H preferred redemption, a $10.5 million property acquisition and $6.3 million to acquire partnership interests.
- Shurgard Europe’s $466.3 million Euro-denominated loan receivable bears 9% interest and matures in March 2013. The filing highlights unhedged currency exposure. Shurgard expected to arrange a €215 million term loan to refinance joint-venture debt and make a principal payment to Public Storage; completion was subject to contingencies, and Public Storage expected to extend its loan maturity to Q1 2015 if financing proceeded.
- Preferred-share activity included $862.5 million of gross issuance and $1,042.3 million of redemptions during the nine months. A further $105 million Series H redemption was called after quarter-end, payable November 28, 2011. The filing also reports substantial related-party partnership acquisitions involving the Hughes family; the company said an independent-trustee special committee reviewed the transactions.
- Risks discussed include economic and local-market weakness, competition, property-tax estimates, natural disasters and insurance exposure, REIT qualification, acquisition execution, joint ventures, and foreign-exchange movements. Management assessed pending legal matters as unlikely to cause a material loss. Disclosure controls were concluded effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether same-store rent, occupancy and NOI growth continued after Q3, and how seasonal pricing and discounts affected results.
- The size and direction of FX effects on the Euro loan and Shurgard investment, and the status and terms of Shurgard’s proposed refinancing.
- Funding and timing of preferred redemptions, the 2013 debt maturity, and the March 2012 credit-facility expiration.
- Whether REIT distribution requirements, property-tax estimates and tenant-reinsurance claims affect cash available for common distributions.
- The transaction terms and governance review for acquisitions involving the Hughes family, and the assumptions behind non-GAAP FFO and NOI measures.