Public Storage 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 2008, for Public Storage, a Maryland real estate investment trust (REIT). The Company operates self-storage facilities in the U.S. and Europe (under the Shurgard brand) and owns commercial properties. A significant event during the period was the deconsolidation of Shurgard Europe effective March 31, 2008, following the sale of a 51% interest to an institutional investor.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $886.9 million | $881.7 million |
| Net Income | $646.2 million | $136.9 million |
| Net Income (Common Shareholders) | $514.8 million | $10.1 million |
| Diluted EPS (Common) | $3.05 | $0.06 |
| Operating Cash Flow | $502.6 million | $468.8 million |
| Cash and Cash Equivalents (End of Period) | $775.0 million | $46.7 million |
| Total Debt (Notes Payable) | $651.9 million | $1,031.8 million |
| Self-Storage Rental Income | $806.2 million | $809.6 million |
Material Changes vs. Prior Period
- Net Income Surge: Net income increased by $509.3 million year-over-year. This is primarily driven by a one-time gain of $341.9 million on the disposition of a 51% interest in Shurgard Europe.
- Deconsolidation Impact: Following the March 31, 2008 transaction, Shurgard Europe operations are no longer consolidated. Revenues and expenses from these facilities are now reflected as "Equity in earnings of real estate entities."
- Balance Sheet Strength: Cash and cash equivalents increased significantly from $245.4 million to $775.0 million due to net proceeds of approximately $609.1 million from the Shurgard Europe sale. Total notes payable decreased by $380 million due to the deconsolidation of Shurgard Europe's debt.
- Operating Performance: Same Store domestic self-storage facilities saw a 3.1% increase in rental income and a 3.2% increase in Net Operating Income (NOI) for the six-month period, driven by higher realized rents.
- Amortization Reduction: Depreciation and amortization expense decreased by $126 million year-over-year, largely due to the cessation of amortization on Shurgard Europe intangible assets and the completion of amortization for certain domestic intangibles acquired in the 2006 Shurgard Merger.
Guidance, Outlook, and Risks
- Dividend Policy: The Company anticipates a minimum quarterly distribution of $0.55 per common share for 2008. A dividend of $0.55 per share was declared for the third quarter, payable September 30, 2008.
- Capital Strategy: Management intends to fund growth and debt obligations using cash on hand ($775 million), retained cash flows, and equity issuances. Due to difficult credit market conditions, issuing preferred securities is currently not a viable option for refinancing.
- Shurgard Europe Note: Public Storage holds a $618.7 million note receivable from Shurgard Europe (denominated in Euros) bearing 7.5% interest. Shurgard Europe is expected to repay this via third-party debt by March 31, 2010. The Company has committed to provide additional loans up to €305 million if necessary.
- Risks: Key risks include foreign currency fluctuations (Euro vs. USD), potential failure to qualify as a REIT, environmental liabilities, and the impact of economic downturns on moving activity and storage demand. The Company also faces litigation regarding wage and hour laws and insurance licensing, though management does not expect material adverse effects.
- Development Pipeline: The Company has 25 projects in the development pipeline with an estimated remaining cost of $71.1 million to be incurred over the next 24 months.
Investor Verification Checklist
- Gain on Sale: Verify the $341.9 million gain on the Shurgard Europe disposition and its impact on non-GAAP measures like FFO (Funds From Operations).
- Cash Deployment: Monitor how the $775 million cash balance is deployed, given the current inability to issue preferred equity at attractive rates.
- Shurgard Europe Solvency: Assess the credit risk of the $618.7 million note receivable and Shurgard Europe's ability to refinance third-party debt by 2010.
- Same Store Trends: Review the 3.1% rental income growth in Same Store facilities to gauge organic operational performance excluding the European divestiture.
- Preferred Share Redemptions: Track the redemption dates for Series W (Oct 2008) and Series X (Nov 2008) preferred shares and the Company's ability to refinance them in the current market.