Business context and reporting period
Public Storage’s unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The Maryland REIT principally owns and operates self-storage facilities; it also earns ancillary revenue and holds equity-method investments in PS Business Parks (PSB) and Shurgard Europe. At quarter-end, it had interests in 2,392 U.S. self-storage facilities and a 49% interest in Shurgard Europe.
Unless otherwise noted, financial amounts below are in millions of U.S. dollars. The company reports as a REIT and says it met applicable REIT requirements.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $669.9 | $645.5; up 3.8% |
| Operating income | $327.6 | $326.7; up 0.3% |
| Net income | $344.4 | $344.0 |
| Net income allocable to common shareholders | $287.8 | $281.1 |
| Diluted earnings per common share | $1.65 | $1.62 |
| Self-storage net operating income (NOI) | $449.4 | $435.8; up 3.1% |
| Same-store revenue / NOI | $549.9 / $395.9 | Revenue up 2.1%; NOI up 1.7% |
| Same-store operating margin before depreciation | 72.0% | 72.3% |
| Funds from Operations (FFO) per diluted share | $2.37 | $2.34; up 1.3% |
| Core FFO per share, a company-defined non-GAAP measure | $2.48 | $2.37; up 4.6% |
| Cash provided by operating activities | $458.5 | $459.1 |
| Cash and equivalents at March 31 | $363.0 | $433.4 at December 31, 2017 |
| Notes payable, carrying value | $1,442.9 | $1,431.3 at December 31, 2017 |
Q1 investing cash outflow was $114.9 million, including $23.6 million of maintenance capital expenditures and $75.2 million spent on construction in process. Financing cash outflow was $413.6 million, including $403.1 million of shareholder distributions. Cash, equivalents and restricted cash decreased $70.1 million to $386.0 million, of which $23.0 million was restricted cash.
Debt principal was approximately $1.45 billion, including $1.00 billion of U.S.-dollar unsecured notes, $421.5 million of euro-denominated unsecured notes and $28.8 million of mortgage debt. The weighted-average effective rate was 2.6%; the company reported no outstanding borrowings on its $500 million revolving facility and $483.9 million of available capacity after letters of credit. Preferred shares had a $4.025 billion liquidation preference.
Material changes versus the prior comparable period
- Common-share net income increased $6.7 million and diluted EPS rose $0.03. The company attributed the increase chiefly to $13.6 million higher self-storage NOI, a $10.9 million equity share of PSB’s higher real-estate sale gains, and $6.0 million less income allocated to preferred shareholders.
- Offsets included $7.8 million of additional executive share-based compensation, $7.1 million higher interest expense and $6.3 million higher foreign-exchange losses. Reported foreign-exchange loss was $11.8 million versus $5.6 million.
- Same-store revenue growth slowed: the company reported 2.1% year-over-year growth, compared with 4.1% in Q1 2017 versus Q1 2016. Same-store weighted-average occupancy fell to 92.3% from 93.1%; realized rent per occupied square foot rose 3.0% to $17.30.
- Same-store operating costs rose 3.3%, led by property taxes (+4.5%) and on-site manager payroll (+4.2%). The non-same-store portfolio’s NOI grew 15.1%, reflecting acquisitions, development and lease-up, while its depreciation and amortization also increased.
- Equity earnings from unconsolidated real-estate entities increased $10.8 million to $30.8 million, mainly due to PSB gains on property sales and improved operating results.
Outlook, management commentary and risks
- Management described softer demand across substantially all major markets, lower move-in volumes and limited pricing power for new tenants. It cited new supply in markets including Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston and New York. The company is increasing internet marketing and using lower new-tenant rates and promotions; it cautioned that these steps may weigh on near-term revenue trends.
- Management expected moderate revenue growth for the remainder of 2018, primarily from rent increases to existing tenants, and said it expected such increases to be similar to Q1 2017. This is commentary, not formal numerical revenue or earnings guidance.
- The company expected same-store property-tax expense growth of about 4.5% for the remainder of 2018 and anticipated inflationary increases in several operating-cost categories. It expected development-related earnings dilution to increase as additional space enters the portfolio.
- Development and redevelopment projects in process were estimated to add 5.0 million net rentable square feet at a total cost of approximately $661.9 million; $382.3 million remained to be spent, primarily over the next 18 months. Some projects depend on entitlements and permits. Construction commitments under contract totaled $162.1 million at quarter-end.
- Management estimated approximately $1.1 billion of capital resources over the next year against current planned needs of approximately $416 million. Resources included $363.0 million of cash, $483.9 million of available revolver capacity and $200–$300 million of expected retained operating cash flow. Needs could increase if development or acquisitions expand.
- The board declared a regular $2.00-per-common-share quarterly dividend on April 25, payable at the end of June 2018. The company reported $403.1 million of shareholder distributions during Q1. Future dividends remain subject to board declaration and REIT distribution requirements.
- The CEO and CFO announced their retirements from executive roles at year-end 2018. Accelerated amortization of their share awards added approximately $7.8 million to Q1 share-based compensation; similar increases were expected for the rest of 2018.
- Currency movements affect the euro-denominated debt and Shurgard investment. Other disclosed risks include real-estate market and competition conditions, development and acquisition execution, regulation and taxation, joint ventures, insurance exposure, and access to capital. Management said material loss from existing legal proceedings was remote; no asset impairments were recorded in the periods presented.
Important facts for investors to verify
- Whether the slowdown in same-store revenue growth, occupancy and new-tenant demand continues, particularly in markets facing new supply.
- Whether rent increases to existing tenants can offset rent roll-down, promotions and weaker move-in volumes without further occupancy pressure.
- Actual cost, timing, approvals and lease-up performance for the $661.9 million development and redevelopment pipeline, and its impact on earnings and liquidity.
- How much of Q1’s profit and FFO growth depended on PSB property-sale gains, and whether those gains recur.
- The remaining 2018 executive share-compensation expense and its effect on reported results versus the company’s Core FFO measure.
- Exposure to euro exchange-rate movements, including the $421.5 million equivalent euro-denominated debt, and the timing and amount of debt maturities.
- Whether operating cash flow and available liquidity remain sufficient to fund distributions, maintenance spending, development and acquisitions if capital needs rise.