Public Storage quarterly report, Q3 FY2015

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Business context and reporting period

Public Storage is a REIT focused on self-storage, with ancillary merchandise and tenant-insurance operations. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. At quarter-end, it had interests in 2,266 self-storage facilities, including 2,254 consolidated U.S. facilities and a 49% equity interest in Shurgard Europe; it also held an approximately 42% interest in PS Business Parks (PSB).

Financial performance and position

  • Third-quarter results: Revenue was $618.9 million, up 9.1%; operating income was $324.5 million, up 16.1%; and net income allocable to common shareholders was $273.5 million, up 18.0%. Diluted EPS rose to $1.58 from $1.34.
  • Nine-month results: Revenue was $1.772 billion, up 9.7%; net income allocable to common shareholders was $750.0 million, up 20.2%; diluted EPS was $4.32 versus $3.61. FFO per share, a non-GAAP measure, increased 9.0% to $6.33; Core FFO per share increased 9.5% to $6.44.
  • Self-storage operations: Same-store revenue increased 6.7% in Q3 and 6.5% for nine months. Same-store NOI increased 8.4% and 8.6%, respectively; same-store operating margin before depreciation was 74.2% in Q3 versus 73.0% a year earlier. Q3 same-store average occupancy was 95.3%, up 0.6 percentage points, while realized rent per occupied square foot rose 6.0%.
  • Cash flow and investment: Nine-month operating cash flow was $1.298 billion versus $1.153 billion. Investing activities used $286.1 million, including $159.5 million for construction in process and $104.9 million for acquisitions. Financing activities used $1.163 billion, including $1.017 billion of shareholder distributions. Cash ended at $35.7 million, down from $187.7 million at year-end 2014.
  • Balance sheet and debt: Total assets were $9.655 billion and total equity $9.179 billion at September 30. Consolidated notes payable were $55.7 million; there were no revolver borrowings, and $485 million of capacity was available after standby letters of credit. The company reported compliance with credit-facility covenants. These figures precede the subsequent euro debt issuance.
  • Distributions: Common dividends declared were $1.70 per share for Q3 and $4.80 per share for nine months, versus $1.40 and $4.20 in 2014. Nine-month distributions to common and preferred shareholders totaled approximately $1.017 billion.

Material changes versus prior comparable periods

  • Management attributed common earnings growth primarily to higher self-storage NOI: same-store NOI rose $29.5 million in Q3 and $84.6 million for nine months; non-same-store NOI rose $12.1 million and $41.8 million, respectively.
  • Same-store rental income growth reflected rent increases to existing tenants, higher move-in rates and improved occupancy. Same-store operating costs rose more slowly than revenue, although property taxes increased 6.1% in Q3 and 5.1% for nine months.
  • Equity earnings from PSB increased, aided by its facility-sale gains. Shurgard Europe equity earnings declined to $8.7 million for nine months from $26.6 million, reflecting acquisition costs, higher interest and depreciation, and the weaker euro, partly offset by improved operations.
  • General and administrative expense increased $5.7 million in Q3 and $16.5 million for nine months, mainly due to higher legal costs and share-based compensation. Nine-month real estate-sale gains were $18.5 million, principally from facilities sold in eminent-domain proceedings.

Outlook, risks and unusual items

  • No full-year earnings or EPS guidance was provided. Management expected continued rental growth in the remainder of 2015 from tenant rent increases, new-tenant rates, promotions and, to a lesser extent, occupancy. It expected existing-tenant increases to be similar to the prior year.
  • Management expected property-tax expense growth of about 5.5% for the remainder of 2015 and anticipated modest inflationary increases in several operating costs. It cautioned that demand is seasonal and short-term operating trends may not predict future results.
  • The development pipeline was expected to add about 4.0 million rentable square feet at an estimated total cost of $506.6 million; $175 million had been incurred by quarter-end, with remaining spending expected mainly over the next 18 months. Management warned that new developments can take three to four years to stabilize and will dilute earnings in the near term; some projects depend on entitlement approvals.
  • After quarter-end, the company issued €242 million of unsecured senior notes at 2.175%, due in ten years. It also acquired or was under contract to acquire 11 facilities for $107.7 million. Management estimated capital resources exceeding $1 billion against planned needs of about $577 million, including development spending, preferred redemption, acquisitions and debt repayment.
  • Risks include competition, local economic and real-estate conditions, development and acquisition execution, regulation and REIT qualification, litigation, natural disasters, tenant-insurance claims, and foreign-exchange exposure. The company noted that a weaker euro could reduce Shurgard-related earnings. It expected approximately $1.0 million of incremental claims expense from South Carolina flooding in Q4; Houston flooding had also increased claims costs. A $3.5 million legal settlement accrual contributed to higher legal costs. Management considered material loss from pending legal matters remote.

Important facts for investors to verify

  1. Whether same-store rent and occupancy gains persist, and whether tenant rent increases affect move-outs or market demand.
  2. Development-pipeline total cost, remaining commitments, permitting contingencies, stabilization timing and expected earnings dilution.
  3. The effect of euro movements and the new euro-denominated debt on reported earnings, cash flows and currency exposure.
  4. Dividend and preferred-share obligations relative to operating cash flow, capital spending and the company’s stated capital-resource estimates.
  5. How non-GAAP FFO and Core FFO reconcile to GAAP results, including the effects of sale gains, preferred redemptions and acquisition costs.