Public Storage 10-Q Summary: Quarter Ended March 31, 2008
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2008, for Public Storage, a Maryland real estate investment trust (REIT). The Company operates self-storage facilities in the U.S. and Europe (under the Shurgard brand), along with ancillary operations including tenant reinsurance, merchandise sales, and commercial property management. A defining event for this period was the sale of a 51% interest in Shurgard Europe to an institutional investor on March 31, 2008, resulting in the deconsolidation of European operations effective that date.
Key Financial Metrics
- Revenue: Total revenues were $462.8 million, an increase from $433.6 million in the prior year period. Self-storage rental income was $424.8 million.
- Net Income: Net income was $512.3 million, a significant increase from $59.8 million in the prior year. This was driven primarily by a $341.9 million gain on the disposition of the Shurgard Europe interest.
- Earnings Per Share (Diluted): $2.64 per common share, compared to a loss of $0.03 per share in the prior year.
- Cash Flow: Net cash provided by operating activities was $230.1 million. Net cash provided by investing activities was $511.9 million, largely due to proceeds from the Shurgard Europe transaction.
- Liquidity: Cash and cash equivalents totaled $726.9 million at March 31, 2008, up from $245.4 million at year-end 2007.
- Debt: Total notes payable were $644.8 million. The Company had no outstanding borrowings on its $300 million revolving credit facility.
- Margins: Net operating income (NOI) before depreciation and amortization for domestic self-storage operations was $237.6 million.
Material Changes vs. Prior Period
- Deconsolidation of Shurgard Europe: The most significant change was the sale of 51% of Shurgard Europe. This resulted in a $341.9 million gain on disposition and the removal of European assets and liabilities from the consolidated balance sheet. Future European results will be reported via the equity method.
- Foreign Exchange Gains: The Company recognized a foreign currency exchange gain of $41.0 million (compared to $5.0 million in 2007) related to the note receivable from Shurgard Europe, driven by the weakening of the U.S. Dollar against the Euro.
- Depreciation and Amortization: Expenses decreased by $53.9 million to $122.5 million. This reduction is primarily due to the cessation of amortization on intangible assets acquired in the 2006 Shurgard Merger and the deconsolidation of European facilities.
- Share Repurchases: The Company repurchased 1.52 million common shares for approximately $111.9 million during the quarter.
Outlook, Risks, and Management Commentary
- Guidance: Management anticipates quarterly distributions of $0.55 per common share for 2008. They do not expect an increase in distributions despite the large book gain from the Shurgard Europe sale, as the gain is not taxable for REIT distribution purposes.
- Capital Strategy: The Company intends to fund growth and debt obligations through cash on hand, retained cash flows, and equity issuances. They plan to fully amortize outstanding debt rather than refinance.
- Development Pipeline: There are 29 projects in the development pipeline with total estimated costs of $125.2 million. Approximately $89.3 million remains to be spent over the next 24 months.
- Risks: Key risks include the potential failure to qualify as a REIT, environmental liabilities, competition in local markets, and foreign currency fluctuations affecting the remaining 49% interest in Shurgard Europe. The Company also faces litigation regarding tenant insurance licensing and employment claims.
- Unusual Items: The $341.9 million gain on disposition is a non-recurring item. Additionally, approximately $25 million in incentive compensation related to the Shurgard Europe transaction was approved after the quarter-end and will be expensed in the second quarter of 2008.
Investor Verification Checklist
- Verify the tax implications of the $341.9 million gain on the Shurgard Europe disposition and its impact on future REIT distribution requirements.
- Confirm the status of the $618.8 million note receivable from Shurgard Europe and the timeline for its repayment via third-party debt.
- Review the details of the pending arbitration regarding the European joint venture partners (First Shurgard and Second Shurgard).
- Assess the impact of the $25 million incentive compensation expense expected in Q2 2008 on future earnings.
- Monitor the progress of the 29 development projects and the $89.3 million remaining capital commitment.