Public Storage — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Public Storage is a REIT focused primarily on U.S. self-storage, with interests in European self-storage and commercial properties through PS Business Parks (PSB). Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
- Q3 revenue: $412.9, down 4.2% from $431.2 a year earlier. Self-storage revenue was $378.2, down 3.7%.
- Q3 earnings: Net income was $244.0 versus $147.9; diluted earnings per common share were $1.03 versus $0.42. The comparison was materially affected by foreign-exchange results and a PSB-related gain. Net income allocable to common shareholders was $173.5.
- Nine-month results: Revenue was $1,224.8 versus $1,306.8; net income was $602.8 versus $811.8. Diluted EPS was $2.78 versus $3.46, and net income allocable to common shareholders was $468.5.
- Same-store operations: Q3 revenue fell 4.6% and NOI fell 6.3%; nine-month revenue fell 3.0% and NOI fell 4.0%. Q3 average occupancy was 89.6% versus 90.5%, while realized rent per occupied square foot fell 4.2% to $12.73. Q3 same-store operating margin before depreciation and amortization was 67.8%, versus 69.1%.
- Cash flow: Nine-month operating cash flow was $837.5 versus $809.3. Capital improvements were $52.4 versus $72.6. Cash after capital improvements and distributions to shareholders, before debt principal payments and reinvestment, was $296.3 versus $232.1.
- Liquidity and debt: Cash and equivalents were $670.9, compared with $680.7 at year-end 2008. Notes payable were $521.7, down from $643.8; debt was 5.8% of total equity on a book-value basis. The $300 million revolving facility was undrawn; standby letters of credit of $18.3 million reduced availability.
- Capital distributions: Common dividends were $1.65 per share for the first nine months; the board declared a Q4 dividend of $0.55 per common share. Preferred-share liquidation preference was $3.40 billion. The filing reports no preferred-dividend arrears.
Changes, outlook, risks and unusual items
- Q3 earnings included a $21.4 million foreign-exchange gain, compared with a $53.2 million loss in Q3 2008, and a $30.3 million gain related to PSB’s public share offering. Nine-month 2008 results included a $341.8 million gain on the sale of a 51% interest in Shurgard Europe, a major reason 2009 year-to-date net income was lower.
- Management attributed weaker same-store performance to recession-related softness in demand, lower rental rates and occupancy. It said year-over-year same-store revenue trends had deteriorated through Q3; only two of the top 20 markets had positive Q3 revenue growth.
- Management expected same-store revenue for Q4 2009 to be lower than Q4 2008, and planned to manage occupancy through rental rates, promotions and marketing. It said visibility beyond Q4 was unclear. The filing does not provide full-year earnings guidance.
- Acquisitions and development were limited; management said the development pipeline was nominal and capital could be more effectively deployed elsewhere. It expected other facilities to continue contributing growth as they stabilize, subject to the same recession-driven rate and occupancy pressures.
- Effective November 1, 2009, the $571.8 million Shurgard Europe loan’s interest rate increased from 7.5% to 9.0%, and its maturity was extended to March 31, 2013. Public Storage also had a conditional commitment to lend Shurgard Europe up to €185 million for specified joint-venture acquisitions and a remaining commitment of $66.4 million for certain equity contributions.
- Unusual items included a $4.1 million gain on early debt retirement, an $8.2 million intangible-asset impairment and $3.5 million in truck-disposal expenses in discontinued operations. The company had ceased truck-rental operations and was marketing its containerized-storage business for sale.
- Key risks cited include prolonged economic weakness, competition, foreign-currency movements and European exposure, property-tax increases, access to capital, REIT qualification, and regulatory or insurance risks. Management said available cash and operating cash flow should cover foreseeable operating, capital, debt-service and distribution needs. The filing notes a pending appeal in an employment case; the class claims had been dismissed, leaving claims by the named plaintiff.
Important facts for investors to verify
- Whether same-store rent, occupancy and NOI stabilize or continue to decline, particularly in weaker regional markets.
- Shurgard Europe’s ability to service the loan and meet its obligations, alongside the effect of euro movements and the higher 9.0% loan rate.
- Cash available after capital spending, preferred and common distributions, and debt maturities; also assess the conditional European funding commitments.
- How much reported earnings depend on one-time gains, currency movements and preferred-security repurchases rather than recurring property operations.