Public Storage — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Public Storage is a REIT primarily engaged in self-storage ownership and operations. At quarter-end, it had interests in 2,262 self-storage facilities across the U.S. and Europe, and an approximately 42% interest in PS Business Parks (PSB). Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $592.6 | $538.0 | $1,162.0 | $1,057.7 |
| Operating income | $302.9 | $265.7 | $567.9 | $482.8 |
| Net income | $328.0 | $278.3 | $611.3 | $506.6 |
| Net income allocable to common shareholders | $263.9 | $218.4 | $476.5 | $392.4 |
| Diluted earnings per common share | $1.52 | $1.26 | $2.75 | $2.27 |
| FFO per diluted share (non-GAAP) | $2.15 | $1.99 | $4.06 | $3.73 |
- Revenue and operations: Q2 revenue increased 10.1%; self-storage revenue rose 10.0%. Six-month revenue increased 9.9%. Self-storage operating income increased 17.7% in Q2 and 18.2% year to date. Same-store NOI grew 9.0% in Q2 and 8.7% for six months; same-store revenue growth was 6.8% and 6.4%, respectively.
- Same-store drivers and margins: Q2 same-store occupancy averaged 95.4%, up 0.7 percentage points, and realized annual rent per occupied square foot rose 6.3%. Same-store operating margin before depreciation was 73.5%, versus 72.0% in Q2 2014. Property-tax expense rose 5.0% in Q2.
- Cash flow: Six-month operating cash flow was $826.0, up from $726.0. Investing used $188.0, including $100.1 for development and $87.8 for acquisitions. Financing used $804.6, including $661.6 of shareholder distributions and $145.0 to redeem preferred shares. Cash fell to $20.3 at June 30 from $187.7 at year-end.
- Debt and liquidity: Balance-sheet liabilities totaled $329.1, including $11.0 drawn on the credit facility and $47.7 of notes payable; total debt was approximately $58.7. The $11.0 facility draw was repaid July 2. The amended revolving facility has a $500 million limit and matures in 2020; the company reported covenant compliance. Management cited more than $700 million of liquid resources, including $474 million of available borrowing capacity and $250 million of expected retained operating cash flow, against approximately $450 million of planned capital needs over the next year.
- Equity and distributions: Total equity was $9,305.7 at June 30. Common dividends declared were $1.70 per share for Q2 and $3.10 for the first half. Preferred distributions for the first half were $125.0. The company redeemed Series O preferred shares at par for $145.0, plus accrued dividends.
Material changes versus prior periods
- Common-share net income rose 20.8% in Q2 and 21.4% for the first half; diluted EPS increased to $1.52 and $2.75, respectively. FFO per share increased 8.0% in Q2 and 8.8% year to date.
- Same-store performance strengthened, with rent growth and occupancy gains. Non-same-store NOI also grew substantially as acquired and developing facilities contributed more income.
- Reported earnings included $16.7 of Q2 and $18.2 of first-half gains on real estate sales, involving one commercial and two self-storage facilities sold in eminent-domain proceedings.
- Equity earnings from unconsolidated entities declined to $7.5 in Q2 from $14.1 and to $23.7 for six months from $28.7. Shurgard Europe contributed less, reflecting higher financing and acquisition costs and weaker euro translation; PSB earnings increased.
- General and administrative expense rose 36.5% in Q2 and 31.4% for six months, largely due to legal costs, which increased $3.2 in Q2 and $7.2 for the first half.
Outlook, commentary, and risks
- Management expected continued rental growth during the rest of 2015 from existing-tenant increases, move-in rates, promotions, and, to a lesser extent, occupancy. It expected rent increases to existing tenants to be similar to the prior year. These are qualitative expectations, not formal earnings guidance.
- Management expected same-store property-tax expense to rise about 5% in the remainder of 2015. It also anticipated inflationary increases in several operating cost categories. Development-related earnings dilution was expected to grow as new capacity takes three to four years to stabilize.
- The development and expansion pipeline was expected to add 3.9 million net rentable square feet at an estimated cost of $479 million; $145 million had been incurred by June 30, with most remaining spending expected over roughly 18 months. Some projects depend on entitlement approvals and permits.
- The company was under contract to acquire nine facilities for $96.7 million, subject to completion. Acquisition competition, permitting constraints, and the ability to achieve expected yields may limit growth.
- Shurgard Europe’s euro exposure may weigh on reported earnings. Management specifically noted that exchange rates prevailing in the first half could adversely affect second-half 2015 earnings if they continued.
- Flooding in the Houston market affected certain facilities and contributed to tenant-reinsurance losses; it also led to a reduction in the same-store pool from 2,000 to 1,990 facilities. The company’s catastrophe coverage could be exhausted in the event of multiple events.
- Other risks include real-estate demand and competition, economic conditions, development and acquisition execution, REIT qualification and tax rules, litigation, insurance exposures, and foreign-currency movements. Management said material loss from existing legal proceedings was remote, but expected higher legal costs in the remainder of 2015.
Important facts for investors to verify
- Whether same-store rent growth and occupancy gains persist, particularly as management expects occupancy gains to narrow near practical limits.
- Execution, remaining cost, entitlement status, and expected returns for the $479 million development pipeline and the contracted $96.7 million acquisition.
- How much reported earnings growth reflects recurring operations versus the $18.2 million of first-half real-estate sale gains and other nonrecurring items.
- Shurgard Europe’s operating performance, refinancing costs, and euro sensitivity; also verify whether the exchange-rate assumptions described by management held.
- Cash generation and distributions relative to planned investment, preferred dividends, and the possible redemption of Series P preferred shares for $125 million.
- Legal-cost developments and the financial impact of Houston flooding and tenant-reinsurance claims.