Public Storage — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2023. Public Storage is a REIT operating self-storage facilities and ancillary businesses. At quarter-end it had interests in 2,888 U.S. facilities with approximately 206.0 million net rentable square feet, and a 35% interest in Shurgard, which operates in Western Europe.
Financial and operating performance
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Total revenue | $1,119.8 million | $1,032.0 million; up 8.5% |
| Self-storage NOI | $798.4 million | $735.3 million; up 8.6% |
| Net income | $581.2 million | $656.9 million |
| Net income allocable to common shareholders | $528.3 million; $3.00 diluted EPS | $603.4 million; $3.42 diluted EPS |
| Core FFO per share | $4.28 | $3.99; up 7.3% |
For the six months, revenue was $2,214.0 million, up 10.4%; net income was $1,101.6 million versus $1,173.2 million; diluted EPS was $5.65 versus $6.05; and Core FFO per share was $8.36 versus $7.64, up 9.4%. The declines in reported net income and EPS primarily reflect substantially lower foreign-exchange gains and the absence of earnings from PS Business Parks (PSB), sold in July 2022. Core FFO excludes foreign-exchange effects and certain other items and is a non-GAAP measure.
Same-store Q2 revenue rose 6.3% and NOI rose 6.6%. Realized rent per occupied square foot increased 8.3%, while average occupancy fell to 93.7% from 95.7%. Same-store operating costs increased 5.2%; the same-store NOI margin before depreciation and amortization was 77.3%, versus 77.0%. For the six months, same-store NOI increased 8.8%.
Operating cash flow for the six months was $1,579.3 million, up from $1,453.8 million. Investing activities used $547.3 million, including $359.7 million of capital expenditures across maintenance, enhancements, energy projects, and development. Financing activities used $1,155.1 million, including $1,152.6 million of shareholder distributions. Cash and equivalents were $651.7 million at June 30, down from $775.3 million at year-end 2022.
Notes payable were $6,894.2 million at quarter-end, with a 2.3% weighted-average effective rate; estimated fair value was approximately $6.0 billion. Debt-to-total-assets was approximately 13%, and adjusted EBITDA to interest expense was approximately 24x, both within covenant limits. The amended revolving credit facility provides $1.5 billion of capacity, with no borrowings outstanding and $16.7 million of letters of credit reducing availability. Total equity was $10,158.6 million.
Material changes and notable items
- Common quarterly dividend increased 50%, from $2.00 to $3.00 per share. Q2 common distributions were $527.6 million; the board declared another $3.00 quarterly dividend for payment in September 2023.
- On June 12, Public Storage amended its revolver, increasing capacity from $500 million to $1.5 billion and extending maturity to June 2027.
- During the first half, the company acquired 16 facilities for $190.8 million and completed development or redevelopment adding 0.6 million square feet. Since the start of 2021, acquisitions totaled 322 facilities for approximately $6.0 billion.
- Q2 results included only $9.6 million of equity earnings from unconsolidated real estate entities, versus $48.5 million a year earlier, primarily because PSB was sold in July 2022. Foreign-currency results also reversed: a $1.1 million Q2 loss versus a $101.7 million gain in Q2 2022.
Outlook, risks and contingencies
Management said demand softened from the second half of 2022 through the first half of 2023 and returned to more typical seasonal patterns. It expects weaker industry demand for the remainder of 2023, driven by macroeconomic conditions and reduced moving activity. Management expects revenue growth to decline significantly during 2023 and noted that year-over-year revenue declines are possible in the second half. The company is using lower move-in rates, promotions, and increased advertising to support occupancy. Inflation in labor, utilities, repairs, and development costs, higher property taxes, and foreign-exchange movements remain risks.
Management expects 2023 property-tax expense growth of 5.3%, maintenance capital expenditures of approximately $173 million, and approximately $160 million for its Property of Tomorrow program. It expects approximately $400 million of retained operating cash flow for 2023. The remaining development and expansion pipeline was approximately $577 million, expected to be spent primarily over 18–24 months.
Subsequent to quarter-end, Public Storage agreed to acquire BREIT Simply Storage for $2.2 billion in cash, subject to customary closing conditions, with closing expected in Q3 2023. The portfolio includes 127 owned facilities and management of 25 third-party facilities. On July 24, the company issued $2.2 billion of senior notes to support the transaction, including floating-rate debt and fixed-rate notes bearing 5.125%, 5.100%, and 5.350% interest. The company also reported $118.2 million of additional facilities acquired or under contract after quarter-end.
Approximately $809 million of principal matures in 2024, including $700 million of U.S. dollar notes and €100 million of Euro notes; management plans to refinance these maturities. On August 2, the company announced a planned UPREIT reorganization, expected August 14, with no expected change to assets, liabilities, or operations. Management considers material loss from current legal proceedings remote. Construction commitments were $244.6 million at June 30; insurance limits could be exceeded in the event of multiple catastrophic events.
Important facts for investors to verify
- Whether occupancy and new-tenant pricing stabilize, and whether weaker demand leads to the potential second-half revenue declines management identified.
- Completion, financing, and expected contribution of the $2.2 billion Simply Storage acquisition, including the impact of newly issued debt and higher financing costs.
- Execution of the planned refinancing of 2024 maturities and funding of development, capital spending, and the increased dividend.
- How property-tax, labor, marketing, and insurance costs affect same-store NOI and margins.
- Performance of Core FFO and other non-GAAP measures relative to GAAP earnings, and the effects of foreign exchange and the prior PSB sale on comparisons.