Public Storage — FY2009 Form 10-K
Reporting period: Year ended December 31, 2009; this is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless noted.
Business context
Public Storage is a REIT focused on month-to-month self-storage rentals. At year-end, it had direct and indirect interests in 2,010 U.S. facilities (127 million rentable square feet), a 49% interest in Shurgard Europe, and a 41% interest in PS Business Parks (PSB), a commercial-property REIT. U.S. self-storage accounted for approximately 93% of operating revenue.
Financial and operating results
| Metric | FY2009 | FY2008 | Change / context |
|---|---|---|---|
| Total revenue | $1,627.7 million | $1,723.6 million | Down 5.6% |
| Rental income and ancillary operations | $1,597.9 million | $1,687.4 million | Down 5.3% |
| Net income | $790.5 million | $973.9 million | Down $183.4 million |
| Net income allocable to common shareholders | $586.0 million | $705.8 million | Diluted EPS $3.47 vs. $4.18 |
| Net cash from operating activities | $1,112.9 million | $1,077.0 million | Up 3.3% |
| Net cash from investing activities | $(91.4) million | $340.0 million | 2008 included Shurgard Europe sale proceeds |
| Net cash used in financing activities | $(938.4) million | $(984.1) million | Included distributions and debt/security repurchases |
| Cash and cash equivalents, year-end | $763.8 million | $680.7 million | Up $83.1 million |
| Total debt, year-end | $518.9 million | $643.8 million | Down $124.9 million |
- Domestic same-store performance: 1,899 facilities. FY2009 revenue declined 3.2% to $1,389.5 million; average occupancy was 88.7% versus 89.5%, realized rent per occupied square foot fell 2.8% to $12.71, and NOI fell 3.9% to $934.9 million. Same-store operating margin before depreciation was 67.3%, versus 67.8%.
- Europe: Shurgard Europe same-store revenue declined 3.6% on a constant-currency basis; average occupancy fell to 86.1% from 86.9%, and NOI declined 7.3% to $70.0 million for the 94-facility same-store group.
- Liquidity and leverage: The company reported a 4% debt-to-assets ratio under its preferred-share covenant and debt equal to 5.7% of total equity by book value. Its $300 million revolving credit facility had no borrowings at year-end; it expires March 2012. Debt maturities included $131.4 million in 2011 and $251.4 million in 2013.
- Distributions: Common distributions were $2.20 per share in 2009, down from $2.80 in 2008, which included a $0.60 special dividend. Preferred distributions totaled $232.4 million.
Material changes versus the prior period
- Net income fell primarily because 2008 included a $344.7 million gain on the sale of a 51% interest in Shurgard Europe. Public Storage has since equity-accounted for its remaining 49% interest rather than consolidating Europe’s results.
- Same-store U.S. revenue and NOI weakened as recession, unemployment, lower housing sales, and reduced moving activity pressured occupancy and rental rates. Management lowered rents, expanded promotions, and increased marketing.
- Debt declined following repayment and repurchases, including the 2009 tender purchase of $110.2 million face value of senior unsecured debt. The company also repurchased preferred shares and partnership units at discounts.
- Development and acquisitions were sharply curtailed. No new properties were acquired in 2009; the company completed one new U.S. facility and four expansions. Truck-rental and containerized-storage operations were discontinued.
Outlook, risks, and unusual items
- Management expected revenue for the first quarter of 2010 to be below the comparable 2009 quarter and said visibility beyond that period was unclear. It expected continued pressure on rents and occupancies; 2010 property-tax expense was projected to rise about 3.5%.
- Development remained minimal, with no current plan to expand it. Management intended to pursue acquisitions selectively, including potential distressed-owner opportunities, but said timing and availability were uncertain.
- Management expected cash on hand and operating cash flow to cover operations, debt service, capital improvements, and distributions for the foreseeable future. Planned 2010 maintenance capital improvements were approximately $80 million.
- Public Storage announced redemption of all Series A Equity Shares on April 15, 2010 for $205.2 million, to be funded with cash. The board also declared a $0.65-per-common-share dividend on February 26, 2010, an increase of $0.10 from the prior quarter.
- Shurgard Europe had $561.7 million of Public Storage loans due in March 2013, and Public Storage had commitments for up to a further €185 million of loans and $66.4 million of equity contributions. Shurgard Europe joint-venture debt of about $168 million matured in July 2010 and $153 million in May 2011, creating refinancing and potential funding risks.
- Unusual items included an $8.2 million intangible-asset impairment tied to an eminent-domain proceeding, $3.5 million of truck-disposal expenses, and gains on property dispositions. PSB’s share issuance also generated a $30.3 million gain for Public Storage; preferred-unit repurchases contributed $72.0 million to income allocated to shareholders.
- Risks include continued economic weakness, competitive pricing, property-tax and insurance costs, natural disasters and self-insured losses, foreign-exchange exposure, REIT qualification, and refinancing or joint-venture risks. The filing describes an employment class action still pending before the California Supreme Court; management said other ordinary-course claims were not expected to be material in aggregate.
Most important facts for investors to verify
- Whether same-store occupancy, realized rents, and NOI stabilized or continued to decline after year-end, especially in weaker Southeast and West Coast markets.
- Shurgard Europe’s ability to refinance the 2010 and 2011 joint-venture maturities, meet its 2013 loan obligation, and manage Public Storage’s additional funding commitments.
- The cash impact of the $205.2 million Series A redemption, ongoing preferred distributions, and the increased common dividend.
- Underlying earnings and recurring property performance apart from the prior-year Shurgard sale gain, PSB share-issuance gain, preferred-unit repurchase benefit, and other unusual items.
- Public Storage reported unqualified audit opinions and effective disclosure controls and internal control over financial reporting as of December 31, 2009; investors may confirm these against the full audited statements and notes.