Public Storage — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited interim results; financial amounts below are in U.S. dollars and millions unless stated otherwise.
Business context
Public Storage is a REIT focused on self-storage, with ancillary merchandise and tenant-reinsurance operations. At quarter-end, it reported interests in 2,374 U.S. self-storage facilities, one facility in London, a 49% interest in Shurgard Europe, and an approximately 42% interest in PS Business Parks (PSB). Its 2,042-facility same-store pool represented about 83% of the rentable square feet in its consolidated U.S. self-storage portfolio.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $686.4 | $663.1 | $1,996.2 | $1,909.1 |
| Operating income | $360.1 | $352.9 | $1,043.4 | $1,000.1 |
| Net income | $358.3 | $369.1 | $1,057.5 | $1,044.8 |
| Net income allocable to common shareholders | $279.7 | $309.0 | $837.5 | $831.1 |
| Diluted EPS | $1.61 | $1.78 | $4.81 | $4.78 |
| FFO per diluted share | $2.35 | $2.51 | $7.00 | $6.94 |
| Core FFO per share | $2.61 | $2.53 | $7.48 | $7.14 |
Self-storage NOI increased 3.4% in Q3 and 4.1% year to date. Same-store NOI rose 2.6% and 3.1%, respectively; same-store revenue grew 2.4% and 3.2%. Same-store operating margin before depreciation was 73.9% in Q3 versus 73.7% a year earlier, and 73.1% year to date versus 73.2%.
Same-store weighted average occupancy was 94.5% in Q3, down from 95.3%; quarter-end occupancy was 93.2%, down 1.1 percentage points year over year. Q3 realized annual rent per occupied square foot rose 3.4% to $17.52, but rents for new move-ins declined 0.7% year over year. Management said rent roll-down and softer demand were weighing on growth.
Cash flow, balance sheet and capital
- Operating cash flow: $1,502.5 for the first nine months, compared with $1,480.0 in 2016.
- Investing cash flow: cash used was $397.2, including $84.8 of maintenance capital expenditures, $240.5 of construction spending and $81.7 for acquisitions.
- Financing cash flow: cash used was $594.6, including $1,227.6 in shareholder distributions. Cash increased $510.7 to $694.2 at September 30.
- Debt and liquidity: notes payable were $1,425.9 on the balance sheet; principal debt was $1,433.7, including Euro-denominated and mortgage debt. The company issued $1.0 billion of unsecured notes in September: $500 million due 2022 at 2.370% and $500 million due 2027 at 3.094%. Weighted average effective debt rate was 2.6%. The $500 million revolver was undrawn, with $481.3 million available after letters of credit.
- Capital resources and needs: management estimated approximately $1.4 billion of resources over the next year against planned needs of $447.8 million. The estimate included cash, revolver capacity and $250 million of expected retained operating cash flow. Current development and redevelopment projects were estimated at $600.2 million total cost, with $378.3 million remaining.
- Distributions: nine-month distributions to shareholders totaled $1.2 billion. On October 25, the board declared a regular quarterly common dividend of $2.00 per share.
Changes, outlook and material items
- Q3 common-shareholder income fell $29.3 million and diluted EPS declined $0.17 year over year. The filing attributes the decrease principally to preferred-share redemption allocations, hurricane-related losses and higher foreign-exchange losses, partly offset by higher self-storage NOI.
- For the first nine months, common-shareholder income increased $6.4 million. Higher self-storage NOI and equity earnings from unconsolidated real estate entities were partly offset by increased foreign-exchange losses and hurricane-related costs.
- Euro-denominated debt generated foreign-exchange losses of $13.4 million in Q3 and $44.5 million year to date, versus $3.7 million and $6.0 million in the comparable 2016 periods. Future results remain exposed to exchange-rate movements.
- Hurricanes Harvey and Irma temporarily closed 115 Houston and 125 Florida properties. The company recorded $7.8 million in casualty losses and $5.2 million in incremental tenant-reinsurance costs; 13 properties with significant operating disruption were removed from the same-store pool. Management did not expect insurance proceeds because estimated losses, including business interruption, were below deductibles.
- Management reported softer demand across substantially all major markets and increased new supply in several markets. It planned increased Internet marketing and lower new-tenant rates/promotions, while warning these measures could pressure near-term revenue. It expected existing-tenant rent increases in the remainder of 2017 to be similar to 2016 and continued revenue growth, but provided no specific earnings or revenue guidance.
- Management expects development and redevelopment to dilute earnings in the short term while facilities fill, and said this dilution may increase. Acquisition competition, permitting and entitlement approvals may constrain growth. Eight facilities totaling $67.8 million were acquired or under contract after quarter-end.
- Legal proceedings were described as unlikely to result in material loss; no material off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether same-store revenue and occupancy trends continue to weaken, particularly in markets facing new supply, and whether rent increases offset lower move-in pricing.
- Actual hurricane-related property damage, tenant-reinsurance claims and any subsequent insurance recovery.
- Euro movements and their effect on earnings, equity and the U.S.-dollar value of Euro debt.
- Development pipeline spending, entitlement progress, lease-up pace and returns compared with management’s expectations.
- Availability and cost of capital, the timing of debt maturities, preferred-share redemptions, and the sustainability of distributions relative to operating cash flow and investment needs.