Public Storage — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Public Storage is a REIT principally operating self-storage facilities. At quarter-end, it had interests in 2,054 U.S. facilities and a 49% interest in Shurgard Europe, which owned 188 facilities. The company also held a 41% interest in PS Business Parks (PSB).
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $434.8 million | $407.6 million | $854.7 million | $805.1 million |
| Net income | $210.9 million | $131.2 million | $421.5 million | $261.1 million |
| Net income allocable to Public Storage shareholders | $206.4 million | $125.0 million | $412.6 million | $249.0 million |
| Diluted net income per common share | $0.77 | $0.36 | $1.64 | $0.56 |
| Operating cash flow | Not reported quarterly | $582.5 million | $525.6 million | |
| Funds from operations (FFO) per diluted common share | $1.39 | $0.92 | $2.88 | $1.69 |
Q2 total revenue grew 6.7%; first-half revenue grew 6.2%. Self-storage rental revenue increased 5.8% in both comparisons. Same-store revenue rose 4.0% in Q2 and 3.7% for the first half; same-store NOI rose 6.2% and 5.8%, respectively. Same-store operating margin before depreciation was 67.2% in Q2 versus 65.8%, and 66.1% for the first half versus 64.8%. Q2 same-store occupancy averaged 92.3%, up from 91.0%, and realized rent per occupied square foot rose 2.2%.
Cash and capital: Cash and equivalents were $144.5 million at June 30, down from $456.3 million at year-end; the company had no marketable securities remaining. First-half investing cash outflow was $194.3 million and financing outflow was $700.5 million, including $413.6 million of shareholder distributions and net preferred-share redemptions. After maintenance capital improvements and distributions, management reported $117.4 million of operating cash available for debt repayment and reinvestment.
Debt and liquidity: Notes payable totaled $449.5 million, down from $568.4 million at year-end; weighted average effective rate was 5.3%. Debt was 5.2% of book equity. The $300 million revolver, expiring March 2012, had no borrowings; $18.5 million of letters of credit reduced availability. Approximately $266.0 million of debt principal was due in 2013. Management reported compliance with debt covenants.
Changes and notable items
- Common-shareholder income increased substantially, but comparisons were materially affected by foreign-exchange results: a $10.5 million Q2 gain and $41.7 million first-half gain in 2011, versus losses of $49.2 million and $84.0 million in 2010. These were primarily tied to the euro-denominated Shurgard loan.
- Shurgard Europe acquired the remaining interests in two joint ventures in March. Public Storage funded the acquisition with a $237.9 million loan; in June, its joint-venture partner effectively acquired 51% of that loan for $121.3 million, exchanged for an equity interest. The company’s Shurgard investment rose to $391.9 million; its loan receivable was $514.6 million.
- Public Storage issued $375 million gross of Series Q preferred shares and redeemed $517.5 million liquidation value of Series I preferred shares. Redemption accounting included a $15.9 million allocation from common shareholders, reducing income available to common holders.
- First-half acquisitions included six self-storage facilities and a leasehold interest; total reported real-estate acquisition cost included assumed debt. Two further property acquisitions totaling $23.3 million closed in July.
Outlook, risks and contingencies
- Management said same-store trends had improved since 2010 and expected improvement to continue through Q3 2011. It planned to maintain full-year average same-store occupancy around 89%–90% and expected second-half revenue growth primarily from rent increases to existing tenants. No annual revenue, earnings or FFO guidance was provided.
- Management expected moderate payroll growth, minimal growth in repairs and maintenance, and approximately $35 million of remaining-2011 maintenance capital spending. Property-tax estimates remain uncertain because many bills arrive later and some assessments are contested.
- Management cited competition for acquisitions and no assurance that attractive purchase opportunities or continued operating recovery would materialize. Newly acquired facilities may take 24 months or more to stabilize.
- Remaining-2011 capital uses were estimated at approximately $608.3 million, including a $424.8 million Series K preferred redemption, $154.3 million for partnership interests, property purchases and debt payments. Subsequent to quarter-end, the company raised $487.5 million gross from Series R preferred shares and expected $116 million repayment of the PSB loan. It called Series K for redemption on August 22, 2011.
- A putative class action by a limited partner challenges the consideration in the planned $154.3 million acquisition of interests in five affiliated partnerships and seeks to block the mergers. The company said it considered the claims without merit; closing was subject to litigation and other conditions. The transactions involve the Hughes family, including the company chairman, and were reviewed by an independent trustee committee.
- Key risks include self-storage demand and local economic conditions, competition, property taxes, natural disasters and insurance exposure, REIT qualification, euro exchange-rate movements, access to capital, and joint-venture and acquisition risks. The company reported no material off-balance-sheet arrangements and no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating progress from foreign-exchange gains, preferred redemption allocations and other nonrecurring effects; FFO and NOI are non-GAAP measures.
- Track same-store rental growth, occupancy, rent trends and expense growth, especially property taxes, and compare management’s outlook with subsequent results.
- Review Shurgard’s ability to service and repay the $514.6 million euro-denominated loan, its third-party debt maturities, and Public Storage’s resulting currency exposure.
- Confirm completion, final consideration and any litigation outcome for the affiliated-partnership mergers, and assess related-party governance and cash/share election impacts.
- Assess liquidity after preferred issuance and redemptions, distributions, acquisition commitments and the revolver’s March 2012 expiry; verify the expected PSB loan repayment and debt maturity plans.