Business context and reporting period
Public Storage’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010, compared with the same 2009 periods. The REIT primarily owns and operates U.S. self-storage facilities; it also has interests in European self-storage through Shurgard Europe and in commercial properties through PS Business Parks (PSB). At quarter-end, the company reported interests in 2,044 self-storage facilities and approximately 129.2 million net rentable square feet in the U.S., plus European and commercial investments.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data and where noted.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $422.8 | $412.1 | $1,228.5 | $1,222.5 |
| Net income | $245.8 | $244.0 | $506.9 | $602.8 |
| Net income allocable to common shareholders | $182.2 | $173.5 | $277.8 | $468.5 |
| Diluted earnings per common share | $1.07 | $1.03 | $1.64 | $2.78 |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $821.7 | $837.5 |
- Self-storage facility revenue rose 3.2% in Q3 and 0.8% for the nine months. Ancillary revenue declined 4.4% and 3.6%, respectively.
- Same-store revenue increased 1.2% in Q3 but decreased 0.4% year to date. Same-store occupancy averaged 91.0% in Q3 (up from 89.6%); realized annual rent per occupied square foot was $12.66 (down 0.5%). Year-to-date same-store NOI declined 1.4%; Q3 NOI increased 0.2%. Same-store gross margin before depreciation was 67.3% in Q3 versus 67.9%.
- At September 30, cash and cash equivalents were $513.5 and marketable securities were $102.1, versus cash of $763.8 at December 31, 2009. Total assets were $9.65 billion.
- Notes payable were $589.5, up from $518.9 at year-end 2009; the company reported no line-of-credit borrowings and $18.1 of standby letters of credit against its $300 million facility. Reported debt was 6.7% of total equity on a book-value basis. The portfolio included approximately $7.0 billion of unencumbered self-storage facilities.
- Nine-month cash flow from operations of $821.7 less $68.6 in capital improvements and distributions to noncontrolling interests and shareholders left $173.7 available for debt principal payments and reinvestment, compared with $296.3 in 2009.
Material changes versus the prior comparable period
- Q3 common-shareholder income rose $8.7 and diluted EPS increased $0.04. Management attributed the improvement primarily to stronger same-store operations and a $55.5 foreign-currency gain, partly offset by the prior-year $30.3 PSB-related disposition gain.
- Nine-month common-shareholder income fell $190.7 and diluted EPS declined $1.14. Key factors included a $28.6 foreign-currency loss versus a $19.9 gain in 2009, different allocations associated with preferred-security redemptions, and a $30.3 PSB-related gain recognized in 2009.
- Same-store revenue trends improved from the 5.1% year-over-year decline in Q3 2009 to 1.2% growth in Q3 2010. Higher occupancy supported the latest quarter, while realized rents remained below prior-year levels.
- In the first nine months, the company acquired 38 facilities for total consideration of $225.4, including $131.7 of assumed mortgage debt and $93.7 cash. These acquisitions contributed to higher depreciation and amortization.
- Operating cash flow decreased $15.8 year over year, while cash distributions to Public Storage shareholders increased to $560.7 from $468.5.
Outlook, commentary, risks and unusual items
- Management expected improved self-storage operating trends to continue in Q4 2010, but said revenue trends after Q4 were unclear. It cautioned that promotions could prevent higher occupancy and in-place rents from translating into near-term rental income growth.
- The company expected Q4 property-tax expense growth of 1%–2%, repairs and maintenance spending to continue rising at recent rates, general and administrative expense of approximately $8–$10 per quarter, and about $4.0 of Q4 tenant-intangible amortization. These are management expectations, not formal full-year earnings guidance.
- Management stated that cash, short-term investments and operating cash flow should be sufficient for operating expenses, debt service, improvements and distributions for the foreseeable future. It also cited access to its undrawn $300 million credit facility. Capital commitments over the next year were estimated at $364.7, including preferred-security redemptions, debt principal payments and a proposed four-property acquisition.
- Debt principal maturities included $149.9 in 2011 and $265.6 in 2013. The company said its current intention was to repay debt at maturity rather than refinance with additional debt. Covenants were met at quarter-end.
- After quarter-end, Public Storage issued $125 million of 6.50% Series P preferred shares; called $108.8 million of Series B preferred shares for redemption; and repurchased $100.4 million of Series J preferred partnership units. It had also issued $145 million of Series O preferred shares earlier in 2010.
- Foreign-currency exposure is significant: the company held a €378.7 million loan receivable from Shurgard Europe, reported as $515.4 million, bearing 9% interest and maturing March 2013. The loan is denominated in euros and is not hedged; currency movements drove substantial gains and losses in reported income. Management said it considered the loan’s credit risk minimal, while acknowledging no assurance.
- Risks cited include economic weakness affecting tenant demand and moving activity, competition, property taxes and other real-estate operating costs, acquisition and integration risks, currency fluctuations, joint-venture exposure, access to capital, regulation and maintaining REIT qualification. Management reported no material off-balance-sheet arrangements and believed other pending legal matters were unlikely, in aggregate, to materially affect operations or financial position. The disclosed wage-and-hour case had been dismissed at trial and the dismissal sustained on appeal, with further review pending.
- Reported results included a $55.5 Q3 foreign-currency gain, a $28.6 nine-month foreign-currency loss, $2.5 of nine-month asset impairment charges, and gains on property dispositions. Management noted that interim results may not indicate full-year performance, partly because of seasonality.
Important facts for investors to verify
- Whether same-store revenue recovery persists and can support rent growth without heavier promotional discounting; monitor occupancy, realized rents and NOI together.
- How much reported earnings and equity are affected by euro-dollar movements and the Shurgard Europe loan’s repayment prospects.
- Liquidity after the announced preferred redemptions, scheduled debt payments, distributions, capital improvements and any acquisitions.
- The timing and funding of the $149.9 million 2011 and $265.6 million 2013 debt maturities, and whether management’s stated repayment approach changes.
- Whether property-tax, payroll, repair and maintenance cost growth pressures same-store margins, and whether the four proposed acquisitions close on expected terms.