Public Storage — Q1 2010 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2010; comparisons are with Q1 2009 unless stated otherwise. Public Storage is a REIT principally owning and operating self-storage facilities. At quarter-end, it had interests in 2,009 facilities across 38 states, one London facility, a 49% interest in Shurgard Europe, and a 41% interest in PS Business Parks (PSB). Domestic self-storage generated 94% of operating revenue.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Total revenue | $398.1 million | $404.2 million; down 1.5% |
| Net income | $129.9 million | $153.4 million |
| Net income allocable to common shareholders; diluted EPS | $34.7 million; $0.21 | $159.5 million; $0.95 |
| Operating cash flow | $233.1 million | $259.9 million |
| Cash and cash equivalents | $720.0 million | $763.8 million at Dec. 31, 2009 |
| Marketable securities | $95.2 million | None reported at Dec. 31, 2009 |
| Notes payable | $516.1 million; 5.7% weighted average effective rate | $518.9 million at Dec. 31, 2009 |
Same-store self-storage revenue was $347.8 million, down 2.2%; costs declined 0.7%, and net operating income (NOI, a non-GAAP measure) fell 3.0% to $221.3 million. Same-store gross margin before depreciation was 63.6%, versus 64.2%. Average occupancy improved to 88.4% from 87.9%, but realized rent per occupied square foot declined 3.0% to $12.46. Consolidated interest expense was $7.3 million, down from $8.1 million. The filing does not provide a consolidated operating margin or EBITDA figure.
Cash from operations less maintenance capital improvements and distributions to equity holders was $48.6 million, compared with $86.8 million. Cash used in investing was $106.2 million, including $95.2 million of marketable-security purchases; financing used $169.9 million, mainly distributions. The company reported debt equal to 5.9% of book-value total equity and no borrowings on its $300 million revolving credit facility; $18.3 million of letters of credit reduced availability.
Material changes and unusual items
- Common diluted EPS fell to $0.21 from $0.95, but the comparison is heavily affected by accounting allocations for preferred-security transactions. The company said EITF D-42 reduced year-over-year common-allocable income by approximately $120.2 million, or $0.71 per diluted share. In Q1 2010, the Series A redemption allocation reduced common-allocable income by $25.7 million; Q1 2009 included a $94.5 million benefit from preferred-security repurchases, including PSB’s repurchases.
- A $34.8 million foreign-exchange loss related principally to the euro-denominated Shurgard loan was recorded, similar to the $34.7 million loss in Q1 2009. The $527.2 million loan bears 9% interest and matures March 31, 2013; it is unhedged.
- Equity in earnings of real estate entities decreased to $10.0 million from $22.8 million, largely because Q1 2009 included a $16.3 million share of PSB’s preferred-security repurchase benefit. Q1 2010 also included a $1.0 million asset impairment charge.
- At March 31, Series A Equity Shares called for redemption were classified as a $205.4 million liability; they were redeemed April 15. Separately, the company subsequently called $155 million of Series V preferred shares for redemption, payable May 18.
Outlook, commitments and risks
Management reported improving occupancy and revenue trends and expected them to continue through Q2 2010, while stating that trends after Q2 were unclear. Its occupancy strategy targets approximately 89%–90%, using rental rates, promotions and marketing to manage occupancy. Management expected same-store property-tax expense to grow about 3.5% for the rest of 2010, moderate payroll and repair-cost growth, and general and administrative expense of $8–$10 million per quarter, plus about $2 million of acquisition-related expense in Q2. It expected Other Facilities to contribute growth, but at a lower rate than in 2009. Development activity was largely suspended; the company planned to pursue acquisitions where opportunities arose.
Subsequent to quarter-end, Public Storage agreed to acquire 30 facilities for $189 million, comprising $89 million cash and $100 million assumed debt. Eight facilities had closed by May 7 for $38 million; remaining closings were expected through June 30, subject to conditions. Management cited approximately $575 million of capital commitments over the 12 months ending March 31, 2011, including the Series A and Series V redemptions, acquisition cash costs and related improvements, and debt principal payments. About $251 million of existing debt matures in 2013; management said it currently intended to repay debt at maturity rather than refinance it with additional debt.
Key risks include recession-related pressure on demand, rental rates and occupancy; competition and property-tax increases; access to capital; REIT qualification and required distributions; natural catastrophes and insurance limits; and euro exposure. Shurgard Europe’s joint ventures had approximately $296 million of third-party debt, including $156 million due July 2010 and $140 million due May 2011, non-recourse to Public Storage. Public Storage also had a remaining commitment of $66.4 million for potential Shurgard Europe equity contributions. The company said it had no material off-balance-sheet arrangements. It reported pending litigation and other claims, but believed other pending proceedings were unlikely, in aggregate, to materially affect operations or financial position. Management cautioned that Q1 results are not necessarily indicative of full-year results, including due to seasonality.
Most important facts for investors to verify
- Whether same-store revenue and NOI trends improved after Q1, and whether rent declines stabilized as occupancy recovered.
- How much of reported common EPS changes reflect recurring operations versus EITF D-42 preferred-security allocations and foreign-exchange movements.
- Completion and financing of the 30-facility acquisition, its operating contribution, and the assumed debt and capital-improvement costs.
- Liquidity after the Series A and Series V redemptions, the $117 million of scheduled principal payments cited for the coming year, and the 2013 maturity concentration.
- Shurgard Europe’s ability to meet its loan obligations and address joint-venture maturities, alongside Public Storage’s unhedged euro exposure.
- Performance of key cost assumptions, especially property taxes, repairs, and insurance, and any developments in disclosed legal, environmental, insurance, or REIT-qualification risks.