Public Storage — Q2 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2018, compared with the same 2017 periods. Public Storage is a REIT focused on self-storage; at quarter-end it had interests in 2,402 U.S. facilities, one London facility, a 49% interest in Shurgard Europe, and an approximately 42% interest in PS Business Parks (PSB).
Financial and operating metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue ($ millions) | 685.5 | 664.3 | 1,355.5 | 1,309.9 |
| Operating income ($ millions) | 343.4 | 356.6 | 671.0 | 683.3 |
| Net income ($ millions) | 405.3 | 355.2 | 749.7 | 699.2 |
| Net income allocable to common shareholders ($ millions) | 348.3 | 276.7 | 636.1 | 557.8 |
| Diluted EPS | $2.00 | $1.59 | $3.65 | $3.20 |
| Diluted FFO per share | $2.65 | $2.31 | $5.02 | $4.65 |
| Core FFO per share | $2.57 | $2.51 | $5.05 | $4.88 |
- Revenue increased about 3.2% in Q2 and 3.5% year to date. Self-storage revenue drove most of the increase.
- Same-store revenue rose 1.5% in Q2 and 1.8% for six months; same-store NOI grew 1.2% and 1.4%, respectively. Q2 same-store NOI margin was 73.0%, versus 73.3% a year earlier. Average occupancy was 94.0% in Q2, down from 94.6%; realized rent per occupied square foot increased 2.4%.
- Operating income declined despite revenue growth. Same-store operating costs rose 2.6% in Q2, led by property taxes; depreciation and amortization increased 8.7% company-wide.
- Operating cash flow was $977.9 million for the first six months, versus $965.3 million in 2017. Investing cash outflow was $254.7 million, including $56.6 million of maintenance capital expenditures and $166.0 million for construction in process. Financing cash outflow was $817.9 million, including $806.2 million of shareholder distributions. Cash, equivalents and restricted cash ended at $361.4 million, down $94.6 million from year-end.
- Notes payable had a $1.421 billion carrying value ($1.428 billion principal); cash was $338.4 million. The $500 million revolving facility was undrawn, with $483.9 million available after letters of credit. The company reported compliance with debt covenants and described leverage as low; its unsecured debt ratings were A by S&P and A2 by Moody’s.
Changes versus the prior comparable periods
- Common-shareholder net income increased 25.9% in Q2 and 14.0% for the first six months; diluted EPS rose to $2.00 and $3.65, respectively. GAAP net income growth included foreign-exchange gains versus losses in 2017 and higher equity earnings from PSB, including its real estate sale gains.
- Core FFO per share grew more modestly: 2.4% in Q2 and 3.5% for six months. This measure excludes specified foreign-exchange and other items and is non-GAAP.
- Same-store revenue growth has slowed: management reported Q2 year-over-year growth of 3.4% in 2017 versus 1.5% in 2018. Same-store occupancy and new-tenant pricing also weakened, while property-tax and other operating costs increased.
- General and administrative expense increased $16.3 million in Q2 and $22.8 million for six months. Accelerated share-based compensation for the CEO and CFO accounted for a substantial portion.
Outlook, commentary, risks and unusual items
- Management cited softer demand across substantially all major markets, lower move-in volume and limited pricing power for new tenants; increased supply was a concern in markets including Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston and New York. The company is increasing internet marketing and using lower initial rates and promotions, which may weigh on near-term revenue.
- Management expected moderate same-store revenue growth in the remainder of 2018, primarily from rent increases to existing tenants, and expected those increases to be similar to 2017. It cautioned that trends are volatile and do not assure continued growth. No full-year EPS or revenue guidance is provided in the supplied filing text.
- At June 30, the development and redevelopment pipeline was approximately 6.1 million net rentable square feet with estimated total cost of $679.2 million; $445.2 million remained to be spent, primarily over the next 18 months. Management expects development-related earnings dilution to increase as projects take roughly three to four years to stabilize. Projects face entitlement and permitting constraints.
- Management estimated approximately $1.2 billion of capital resources over the next year against planned needs of about $551.5 million. Resources include cash, available credit, expected retained operating cash flow and a $145.4 million Shurgard Europe distribution received July 13, 2018. Planned needs include pipeline spending, $95.2 million of acquisitions under contract and $11.1 million of debt principal repayments. Construction commitments at quarter-end were $162.4 million.
- Fourteen facilities totaling $95.2 million were acquired or under contract after quarter-end. Shurgard Europe is considering an IPO, with no assurance it will proceed; its July distribution was funded partly with bank-loan proceeds. The company also reported the CEO and CFO will retire from executive roles at year-end 2018 and remain trustees; accelerated compensation expense is expected to continue through 2018.
- Other notable factors: a $24.0 million Q2 equity share of PSB real estate sale gains; foreign-currency gains of $21.9 million in Q2 and $10.1 million for six months, compared with losses in 2017; and no impairment charges recorded in the periods presented. Management said legal contingencies were not expected to result in material loss; principal risks include real-estate and market conditions, competition and new supply, development execution, currency exposure, joint ventures, insurance, regulation and REIT qualification.
Most important facts for investors to verify
- Whether same-store revenue, occupancy and new-tenant pricing stabilize, particularly in markets facing added supply.
- How much reported earnings growth depends on foreign exchange, PSB asset-sale gains and other nonrecurring or excluded items versus recurring operations.
- Development and redevelopment spending, lease-up pace, project yields and the effect of prolonged earnings dilution.
- Capital allocation and dividend coverage, including the use of the Shurgard distribution and any future acquisitions, preferred-share redemptions or share repurchases.
- Exposure to Euro movements and Shurgard Europe’s debt, operating performance and potential IPO; also verify debt maturities and covenant headroom.