Public Storage — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Public Storage is a REIT focused on self-storage. At quarter-end, it had interests in 2,444 U.S. self-storage facilities with approximately 164 million net rentable square feet, plus a roughly 35% interest in Shurgard Europe and a roughly 42% interest in PS Business Parks (PSB).
Key financial metrics
Amounts below are in millions, except per-share data and where stated.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $689.0 | $669.9 | +2.9% |
| Net income | $367.7 | $344.4 | +6.7% |
| Net income allocable to common shareholders | $301.7 | $287.8 | +4.8% |
| Diluted earnings per common share | $1.73 | $1.65 | +$0.08 |
| FFO per diluted share | $2.52 | $2.37 | +6.3% |
| Core FFO per diluted share | $2.53 | $2.48 | +2.0% |
| Operating cash flow | $473.6 | $458.5 | +$15.1 |
- Self-storage revenue was $650.4 million, up 3.0%; self-storage operating costs rose 6.3% to $193.7 million, and segment net operating income (NOI) increased 1.6% to $456.8 million.
- Same-store revenue increased 1.5%, but same-store NOI grew only 0.6% to $419.6 million as operating costs rose 3.9%. Same-store occupancy averaged 92.5%, versus 92.1%; realized annual rent per occupied square foot increased 1.2% to $17.41.
- Same-store operating margin before depreciation was 71.3%, compared with 71.9%. Property taxes rose 5.0% and marketing expense 27.6% in the same-store portfolio.
- Cash and equivalents were $218.0 million at March 31, down from $361.2 million at year-end 2018. Net cash from operating, investing and financing activities was a $142.7 million outflow; cash, equivalents and restricted cash declined $142.6 million during the quarter. Investing outflows included $79.5 million for acquisitions and spending on maintenance, development and expansion.
- Notes payable were $1.406 billion, compared with $1.412 billion at December 31, 2018. The weighted-average effective debt rate was 2.6%; reported interest expense was $8.1 million. No revolving-credit borrowings were outstanding, and $484.1 million of capacity was available after letters of credit.
- Total assets were $10.875 billion and total equity was $9.095 billion. The company reported no material off-balance-sheet arrangements.
Material changes and notable items
- Common-shareholder net income increased by $13.9 million. Management attributed the improvement principally to $7.4 million higher self-storage NOI, a $19.6 million year-over-year swing in foreign-exchange results, and lower general and administrative expense. These benefits were partly offset by lower equity earnings from PSB and Shurgard Europe and an $8.5 million preferred-share redemption allocation.
- Foreign-currency results were a $7.8 million gain, versus an $11.8 million loss in Q1 2018. Equity earnings from unconsolidated real-estate entities fell to $17.7 million from $30.8 million; the prior period included Public Storage’s $10.9 million share of PSB real-estate sale gains.
- General and administrative expense declined to $19.5 million from $31.5 million, largely reflecting prior-year accelerated share-based compensation associated with the retirement of the former CEO and CFO. Legal costs increased by $2.0 million.
- The company acquired 12 self-storage facilities during the quarter for a total cost of $81.3 million, including assumed mortgage debt. Development and redevelopment projects placed into operation added 1.6 million square feet.
- Public Storage issued $285.0 million of Series H preferred shares and redeemed $285.0 million of Series Y preferred shares. The redemption produced the $8.5 million allocation from common shareholders to preferred shareholders.
Outlook, liquidity and risks
- Management expected moderate same-store revenue growth for the remainder of 2019, primarily from rent increases to existing tenants; it cautioned that continued growth was uncertain. It cited softer demand and increased new supply in several markets, including Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York and Portland.
- Management expected same-store property-tax expense to increase approximately 5% for the rest of 2019, with continued marketing expense increases, inflationary wage and other cost pressure, and modestly higher depreciation. It expected development-related earnings dilution to continue at roughly 2018 and Q1 2019 levels.
- At March 31, management estimated approximately $1.4 billion of capital resources over the following year versus approximately $415 million of identified needs. Resources included cash, available credit, expected retained operating cash flow of $200–$250 million, and net proceeds from the subsequent $500 million senior-note offering. Identified needs included $116.4 million of acquisitions under contract and $298.6 million of remaining development-pipeline spending.
- Debt maturities were modest through 2021; approximately $502.6 million of principal was due in 2022. On April 12, 2019, the company issued $500 million of 3.385% senior notes due 2029. On April 19, it extended its $500 million revolving credit facility to April 2024 and reduced its borrowing spread and facility fee.
- The company expected 2019 maintenance capital expenditures of approximately $200 million. Construction commitments were $99.1 million at quarter-end, primarily payable in the remainder of 2019 and 2020. Development projects may face entitlement and permitting constraints, delays, cost overruns and stabilization risk.
- The Board declared a $2.00-per-share common dividend in April 2019, payable at the end of June. Management identified competition and new supply, local economic conditions, property taxes, labor and operating costs, foreign-exchange movements, development execution, REIT qualification, insurance exposure, and potential California property-tax changes as risks. Legal proceedings were described as unlikely to cause a material loss.
Important facts for investors to verify
- Whether same-store rent growth can offset rising property taxes, marketing and other operating costs, particularly in markets with substantial new supply.
- Occupancy, move-in pricing and rent trends by market, and whether the reported 92.5% same-store average is sustained through the seasonally stronger demand period.
- Development and acquisition returns, stabilization timelines, remaining project costs, and the impact of ongoing development dilution.
- How the Shurgard Europe ownership reduction, uninvested offering proceeds, distributions and euro exchange rates affect future equity earnings and cash flows.
- Funding and refinancing plans for the 2022 debt maturity, and the company’s use of post-quarter debt proceeds and amended credit capacity.
- That GAAP earnings benefited from foreign-exchange gains and lower prior-year-comparison compensation expense; FFO and Core FFO are non-GAAP measures and should be considered alongside GAAP results and cash flows.