Public Storage 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Public Storage, a Maryland real estate investment trust (REIT) specializing in self-storage facilities, commercial properties, and ancillary operations. The report covers the three and nine months ended September 30, 2008. A significant corporate event during this 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 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $436.9 million | $1,323.8 million |
| Net Income | $137.3 million | $783.5 million |
| Net Income Per Common Share (Diluted) | $0.42 | $3.47 |
| Net Cash Provided by Operating Activities | N/A | $796.5 million |
| Cash and Cash Equivalents (Ending Balance) | $789.3 million | $789.3 million |
| Total Debt (Notes Payable) | $646.1 million | $646.1 million |
| Dividends Declared (Nine Months) | N/A | $475.6 million |
Material Changes vs. Prior Period
- Net Income Surge (9 Months): Net income increased significantly to $783.5 million from $289.6 million in the prior year. This is primarily driven by a one-time gain of $341.9 million on the disposition of a 51% interest in Shurgard Europe.
- Foreign Exchange Impact: The company recorded a foreign currency exchange loss of $53.2 million for the quarter and $12.2 million for the nine months ended September 30, 2008, compared to gains of $30.4 million and $41.0 million, respectively, in 2007. This is due to the strengthening of the U.S. Dollar against the Euro affecting the intercompany note receivable from Shurgard Europe.
- Depreciation and Amortization: Expenses decreased by 38.0% for the quarter and 37.2% for the nine months, largely due to the deconsolidation of Shurgard Europe and reduced amortization of tenant intangibles from the 2006 Shurgard Merger.
- Operating Performance: Same-store domestic self-storage rental income increased 2.4% for the quarter and 2.8% for the nine months, driven by higher realized rental rates despite economic headwinds.
Guidance, Outlook, and Risks
- Liquidity and Capital: The company holds $789.3 million in cash, largely from the Shurgard Europe sale. Management notes that accessing capital markets for equity or credit has become difficult due to the credit crisis. They intend to fund growth with permanent capital (equity) when market conditions improve.
- Dividends: A special dividend of $0.60 per common share was declared on November 6, 2008, payable December 30, 2008. Regular quarterly dividends remain at $0.55 per share.
- Shurgard Europe Exposure: Public Storage retains a 49% interest in Shurgard Europe and holds a $566.1 million note receivable denominated in Euros. Repayment is expected by March 31, 2010. Further foreign exchange losses are anticipated if the Euro weakens further against the Dollar.
- Development Pipeline: The company has 19 projects in the development pipeline with estimated remaining costs of $55.8 million to be incurred over the next 24 months.
- Risks: Key risks include the potential failure to qualify as a REIT, impairment of long-lived assets due to economic downturns, and the impact of foreign currency fluctuations on the Shurgard Europe note receivable.
Investor Verification Checklist
- Gain on Sale: Verify the sustainability of earnings by excluding the $341.9 million one-time gain on the Shurgard Europe disposition when analyzing core operating performance.
- Foreign Exchange Sensitivity: Assess the impact of the $566.1 million Euro-denominated note receivable on future earnings, given the volatility of the Euro/USD exchange rate.
- Debt Maturities: Review the debt maturity schedule; while the company states no significant refinancing risk, $13.9 million of debt matures in the remainder of 2008.
- Dividend Coverage: Confirm that operating cash flow remains sufficient to cover the substantial dividend requirements ($475.6 million paid in the first nine months) to maintain REIT status.
- Shurgard Europe Arbitration: Monitor the pending arbitration regarding the acquisition of partner interests in European joint ventures, which could trigger additional loan commitments up to $440.6 million.