Public Storage — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Public Storage is a REIT focused on self-storage. At quarter-end, it had interests in 2,110 U.S. and European self-storage facilities, plus a 43% common equity interest in PS Business Parks (PSB).
Financial performance and position
- Revenue: Q3 revenue was $512.0 million, up 7.3% year over year; nine-month revenue was $1.468 billion, up 7.0%. Self-storage revenue was $478.0 million in Q3 and $1.369 billion for the nine months.
- Profit and per-share results: Q3 net income was $285.6 million versus $264.8 million; net income allocable to common shareholders was $231.4 million, or $1.34 diluted EPS, versus $202.5 million, or $1.18. Nine-month common-shareholder income was $601.0 million, or $3.48 diluted EPS, versus $460.2 million, or $2.68.
- Operating performance: Same-store self-storage revenue increased 5.5% in Q3 and 5.3% for the nine months; same-store NOI rose 7.2% and 8.3%, respectively. Same-store average occupancy was 94.4% in Q3, up from 93.0%; realized rent per occupied square foot rose 4.0%. Company operating income was $250.0 million in Q3 and $699.0 million for the nine months.
- FFO (non-GAAP): Diluted FFO per share was $2.00 in Q3 versus $1.73, and $5.40 for the nine months versus $4.46. Core FFO per share was $1.92 and $5.36, respectively, versus $1.76 and $4.82.
- Cash flow: Nine-month operating cash flow was $1.040 billion, compared with $955.8 million. Investing used $546.7 million, including $392.4 million for facility acquisitions; financing used $453.4 million, including $798.3 million in shareholder distributions and $701.7 million net proceeds from preferred-share issuance. Cash was $57.0 million at September 30.
- Debt and liquidity: Notes payable were $100.1 million, down from $335.8 million at year-end 2012; no borrowings were outstanding on the $300 million revolver at quarter-end. Debt carried a 5.1% weighted-average effective rate. At November 5, the revolver had $135 million outstanding. Total equity was $8.807 billion; preferred shares had a $3.563 billion liquidation preference.
- Distributions: Common dividends declared were $1.25 per share for Q3 and $3.75 for the nine months. On October 31, the board declared a quarterly common dividend of $1.40 per share.
Changes versus comparable periods
- Growth was led by domestic same-store operations: higher occupancy, rent increases and reduced promotional discounts supported revenue and NOI gains. Management said year-over-year occupancy gains had narrowed during the year and expected the spread to narrow further in Q4.
- Q3 common-shareholder income increased $28.9 million, with management citing higher self-storage NOI, lower preferred-income allocations, and larger foreign-exchange gains, partly offset by higher depreciation and lower real-estate sale gains. Nine-month common-shareholder income rose $140.8 million, principally from higher self-storage NOI and lower preferred-income allocations.
- Foreign-currency results shifted to gains: $16.1 million in Q3 and $9.3 million for the nine months, versus a $2.5 million loss for the 2012 nine-month period. These gains primarily reflected the U.S.-dollar value of the euro-denominated Shurgard loan.
- Shurgard Europe same-store NOI declined 3.5% in Q3 and 3.8% for the nine months on a constant-currency basis. Lower occupancy and revenue included the effect of a 20% UK VAT on rental revenue effective November 2012.
Outlook, risks and notable items
- Management expected to acquire 88 facilities for approximately $754 million in Q4 2013; $324 million of those acquisitions had closed by November 5, with the remainder under contract and subject to customary closing conditions. The filing states that available cash, revolver capacity and expected retained operating cash flow were insufficient by themselves to fund the planned acquisitions and other near-term capital needs.
- Management expected a Shurgard joint-venture partner to purchase 51% of Public Storage’s Shurgard loan for approximately $214 million before year-end, but completion was not assured. The loan was denominated in euros, bore 9% interest, and matured in February 2015; currency movements therefore affected reported earnings and potential repayment proceeds.
- Development and expansion projects were expected to add 1.6 million rentable square feet at an estimated total cost of $188 million; $46 million had been incurred by quarter-end. Some projects were subject to entitlement and permitting contingencies. Property-tax expense was expected to grow approximately 7.2% in Q4 versus the prior-year quarter.
- Management identified real-estate demand and competition, acquisition and development execution, local permitting, California concentration (about 20% of facilities), foreign-exchange and affiliate refinancing exposure, REIT qualification, insurance claims, and economic conditions as risks. The company reported no material off-balance-sheet arrangements and considered material loss from pending legal proceedings remote. No impairment charges were recorded for the periods presented.
- The company reported that it believed it met REIT requirements and recorded no federal income tax on REIT taxable income. It also noted that preferred-equity issuance conditions had become less favorable; it did not expect to issue preferred shares at that time.
Important facts for investors to verify
- Whether the remaining Q4 facility acquisitions closed as planned, at the stated price and with expected financing.
- Whether the anticipated $214 million Shurgard loan transaction closed, and how it affected liquidity, interest income and currency exposure.
- Subsequent revolver borrowings, cash availability and the funding of acquisition, development and PSB investment commitments.
- Whether domestic occupancy and rent growth, and the expected Q4 narrowing of occupancy comparisons, matched management’s outlook.
- Shurgard Europe’s operating trends, UK VAT effects, bank-debt repayments and ability to service its obligations to Public Storage.
- Dividend coverage and REIT distribution requirements, as well as the effect of preferred-share distributions on common-shareholder returns.