Public Storage — Q2 2010 Form 10-Q
Business context and reporting period. Public Storage is a REIT focused on owning and operating self-storage facilities, primarily in the U.S. This unaudited filing covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. Self-storage generated more than 91% of revenue in both six-month periods.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $408.0 | $406.5 | $805.7 | $810.4 |
| Net income | $131.2 | $205.4 | $261.1 | $358.8 |
| Net income allocable to common shareholders | $60.8 | $135.5 | $95.6 | $295.0 |
| Diluted earnings per common share | $0.36 | $0.80 | $0.56 | $1.75 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $525.6 | $542.2 |
- Same-store operations: Q2 same-store revenue fell 0.2% and net operating income (NOI, a non-GAAP measure) fell 1.5%. Six-month same-store revenue declined 1.2% and NOI declined 2.2%. Q2 same-store occupancy improved to 91.0% from 90.0%, while realized rent per occupied square foot fell 1.5% to $12.32. Same-store NOI margin was 65.7%, versus 66.6%.
- Cash flow and distributions: Six-month operating cash flow was $525.6 million. After $37.0 million of maintenance capital improvements, distributions to noncontrolling interests and shareholders, $108.8 million remained for debt principal payments and reinvestment, versus $183.3 million in 2009.
- Liquidity and debt: At June 30, cash was $474.3 million and short-term marketable securities were $94.9 million. Notes payable totaled $593.3 million, primarily fixed-rate, with a 5.3% weighted average effective rate. The $300 million revolving credit facility had no borrowings; $18.1 million of letters of credit reduced available capacity. Debt-to-total-equity was 6.8% based on book values.
- Balance sheet: Total assets were $9.57 billion, down from $9.81 billion at December 31, 2009. Total equity was $8.73 billion, down from $9.06 billion.
Material changes versus prior comparable periods
- Common-shareholder earnings declined $74.7 million in Q2 and $199.4 million for the six months. A major driver was foreign-currency loss on the euro-denominated Shurgard Europe loan: $49.2 million in Q2 2010 versus a $33.2 million gain in Q2 2009, and $84.0 million for the 2010 half-year versus a $1.5 million loss in 2009.
- Common earnings per share also reflect changes in allocations associated with securities redemptions. Public Storage redeemed all Series A Equity Shares for $205.4 million in April and Series V preferred shares with a $155.0 million liquidation preference in May. It issued $145 million of Series O preferred shares at 6.875% in April.
- Core storage revenue trends improved from the steepest same-store decline of 4.5% in Q3 2009; same-store revenue was down 0.2% year over year in Q2 2010. Higher occupancy was offset by lower realized rents and higher operating costs.
- During Q2, the company acquired 31 facilities for an aggregate $198.1 million, including $131.7 million of assumed mortgage debt, expanding its portfolio by about 1.97 million net rentable square feet.
Outlook, risks and unusual items
- Management expected improved operating trends to continue through Q3 2010, but said revenue trends after that quarter were unclear. The company planned to prioritize occupancy through pricing, promotions and marketing.
- Management expected approximately $86 million of 2010 capital improvements, including $9 million to rebrand and improve recently acquired facilities; ongoing G&A was estimated at $8 million to $10 million per quarter. Property-tax expense was expected to grow about 3.5% for the rest of 2010.
- Seven additional facilities were under contract for approximately $27 million, with closing expected late in Q3 subject to customary conditions. Development activity had substantially ceased; management saw potential acquisition opportunities but gave no assurance they would proceed.
- Debt maturities include approximately $149.9 million in 2011 and $265.6 million in 2013. Management said it intended to repay debt at maturity rather than rely on refinancing. It reported no significant capital commitments beyond near-term requirements until 2013.
- Key exposures include continued weakness in storage demand, rent and occupancy pressure, euro/U.S. dollar movements, and reliance on Shurgard Europe for repayment and interest on a $477.0 million loan bearing 9% and maturing in March 2013. Management stated it had not hedged this currency exposure.
- Other considerations include REIT qualification and distribution requirements, estimates used for property taxes and impairment testing, catastrophe/tenant-insurance exposure, and pending legal matters. Management said other pending legal proceedings were not expected to have a material adverse effect in aggregate. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Subsequent to quarter-end, the company repurchased $9.2 million of Series Y preferred depositary shares. The board declared a regular common dividend of $0.80 per share on August 5, 2010.
Important facts for investors to verify
- Whether improving same-store revenue and occupancy trends persisted after Q2, and whether rent pressure or expense growth affected NOI.
- The size and earnings impact of euro currency movements on the Shurgard loan and investment; distinguish operating performance from translation gains and losses.
- The drivers of the sharp year-over-year change in common-shareholder earnings, including preferred/security redemption allocations and nonrecurring 2009 comparisons.
- Liquidity after distributions, capital improvements, acquisitions and upcoming debt maturities; confirm available revolver capacity after letters of credit.
- Completion and financing of the seven contracted acquisitions, and realized costs and returns on the 31 facilities acquired in Q2.