Business Context and Reporting Period
Company: Public Storage (Public Storage, a Maryland REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Business Overview: Public Storage is a fully integrated, self-administered REIT engaged in the acquisition, development, ownership, and operation of self-storage facilities. As of June 30, 2007, the company operated 2,006 facilities in the U.S. and 168 facilities in Western Europe (acquired via the Shurgard merger in August 2006). The company also holds interests in commercial properties and ancillary operations including tenant reinsurance, merchandise sales, and truck rentals.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2007 | Six Months Ended June 30, 2006 |
|---|---|---|
| Total Revenues | $883,515 | $576,379 |
| Net Income | $136,882 | $243,078 |
| Net Income Allocable to Common Shareholders | $10,079 | $133,375 |
| Diluted EPS (Common) | $0.06 | $1.03 |
| Net Cash Provided by Operating Activities | $479,122 | $367,241 |
| Total Assets | $10,477,108 | $11,198,473 |
| Total Liabilities | $1,415,353 | $2,484,398 |
| Total Debt (Notes Payable + Credit Facilities) | $1,051,018 | $1,811,284 |
| Cash and Cash Equivalents | $46,743 | $535,684 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 53% year-over-year, driven primarily by the inclusion of Shurgard facilities acquired in August 2006. Self-storage rental income rose from $513.6 million to $810.0 million.
- Net Income Decline: Net income decreased 44% to $136.9 million. This decline is primarily attributed to:
- Increased amortization expense of $156.8 million related to intangible assets from the Shurgard merger.
- Increased depreciation expense of $71.4 million related to acquired facilities.
- Higher general and administrative expenses ($38.0 million vs. $13.8 million), including $9.6 million for a withdrawn European share offering and $2.0 million for REIT reorganization costs.
- Debt Reduction: Total debt decreased significantly due to the prepayment of $429 million in European collateralized notes in January 2007 and the repayment of a $300 million bridge loan. Total notes payable dropped from $1.47 billion to $981 million.
- Liquidity: Cash and cash equivalents decreased by $489 million, largely due to debt repayments, preferred share redemptions ($302 million), and capital expenditures.
- Deconsolidation: Effective May 24, 2007, the company deconsolidated 11 Shurgard facilities due to a loss of control, moving them to equity method accounting.
Guidance, Outlook, and Risks
- Operational Strategy: Management is focusing on filling vacant space in the acquired Shurgard portfolio through aggressive pricing and promotional discounts. This strategy has temporarily pressured rental rates and occupancy in the "Same Store" portfolio but aims to stabilize the overall portfolio occupancy (90.6% at June 30, 2007).
- Capital Allocation: The company intends to fund growth and debt obligations through internally generated cash flows and the issuance of permanent equity (common and preferred shares). The company recently issued $500 million of Series M preferred stock and $172.5 million of Series N preferred stock (subsequent to period end).
- Development Pipeline: The company has 56 projects in the development pipeline with estimated remaining costs of approximately $180 million to be incurred over the next 24 months.
- Risks and Contingencies:
- Legal Proceedings: Pending class action lawsuits regarding unit size misrepresentation (Serrao and Drake cases) and wage/hour violations. The company is vigorously contesting these claims.
- REIT Qualification: Failure to qualify as a REIT would result in significant corporate income tax liabilities.
- Market Risk: Exposure to foreign currency fluctuations (Euro/GBP) and interest rate changes on variable-rate debt.
- Insurance Exposure: The company retains risk for tenant reinsurance and property losses, with estimated maximum annual exposure below deductibles of approximately $37 million.
Investor Verification Checklist
- Shurgard Integration Progress: Verify the pace of occupancy stabilization in the acquired Shurgard portfolio and the impact on rental rate growth in the core "Same Store" portfolio.
- Amortization Impact: Confirm the duration and magnitude of non-cash amortization charges related to Shurgard intangible assets, which significantly depress GAAP net income.
- Debt Maturities: Review the schedule of debt maturities, particularly the $327 million in European joint venture debt and domestic mortgage notes, to assess refinancing needs.
- Preferred Share Obligations: Assess the annual distribution requirements for the expanding portfolio of preferred shares (approx. $229 million/year for shares outstanding at June 30, 2007).
- Legal Exposure: Monitor the status of the Serrao and Drake class action lawsuits regarding unit size misrepresentation, as potential liabilities are currently unquantified.