Public Storage quarterly report, Q2 FY2014

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Public Storage — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014; balance-sheet figures are as of June 30, 2014 unless noted. Amounts below are in millions of dollars except per-share data and operating statistics. Public Storage is a REIT focused on self-storage; it reported interests in 2,208 self-storage facilities and a 49% interest in Shurgard Europe, plus a 42% interest in PS Business Parks.

Financial performance and position

  • Revenue: Q2 revenue was $538.0, up 10.9% year over year; first-half revenue was $1,057.7, up 10.6%. Self-storage facility revenue was $500.8 for Q2 and $986.4 for the first half.
  • Profit and per-share results: Q2 net income was $278.3, up 6.3%; net income allocable to common shareholders was $218.4, or $1.26 diluted EPS, versus $207.7 and $1.20. First-half net income was $506.6, up 6.9%; common-shareholder income was $392.4, or $2.27 diluted EPS, versus $369.6 and $2.14.
  • Operating performance: Self-storage NOI, a non-GAAP measure, increased 12.2% to $358.4 in Q2 and 11.3% to $687.9 in the first half. Same-store NOI rose 6.9% and 6.3%, respectively. Same-store Q2 revenue grew 5.3%, supported by 4.6% higher realized rent per occupied square foot and occupancy up 0.7 percentage points to 94.7%. The same-store gross margin before depreciation was 72.0% for Q2 versus 70.9%.
  • FFO: FFO per diluted share was $1.99 for Q2, up 8.7%, and $3.73 for the first half, up 9.7%. Core FFO per share, also non-GAAP, was $1.97 and $3.78, up 9.4% and 9.6%. These measures are not substitutes for GAAP earnings or cash flow.
  • Cash flow: First-half operating cash flow was $726.0, versus $672.6 in 2013. Investing activities provided $101.7, largely reflecting $216.2 received from selling 51% of the Shurgard shareholder loan; investing activities used $104.8 in the prior-year period. Financing used $458.6, including $593.9 of shareholder distributions. Cash increased by $369.2 to $388.0.
  • Debt and liquidity: Debt totaled approximately $397.0, comprising a $322.0 term loan and $75.0 of notes payable; the term loan matured December 2, 2014. The $300 million revolver was undrawn, with approximately $286 million available after standby letters of credit. Management cited $763 million of capital resources, including cash, the subsequent Shurgard loan repayment, and estimated second-half retained operating cash flow. At June 30, liabilities were $635.0 and equity was $9,311.5. Virtually all real estate facilities were unencumbered.
  • Distributions and capital: Common dividends declared were $1.40 per share in Q2 and $2.80 for the first half, versus $1.25 and $2.50 in 2013. First-half preferred distributions were $110.2. Public Storage issued $572.5 gross proceeds of preferred shares during the first half, with $17.4 of issuance costs.

Changes versus the prior comparable period

  • Management attributed common-shareholder earnings growth primarily to higher self-storage NOI: up $38.9 in Q2 and $69.8 in the first half. Same-store gains reflected higher rents and occupancy; acquired properties also contributed.
  • Depreciation and amortization increased by $15.5 in Q2 and $33.5 in the first half, mainly due to facilities acquired since January 2013, partially offsetting NOI gains.
  • First-half same-store operating costs increased 2.6%, including higher property taxes, snow removal, and utilities. Severe winter weather affected costs in several markets.
  • Interest and other income declined to $1.0 in Q2 and $3.4 in the first half, principally because Public Storage sold 51% of its Shurgard loan in January 2014 and consequently received less of the interest.
  • Foreign exchange results were volatile: a $1.7 Q2 loss versus a $5.9 gain in 2013, and a $4.0 first-half loss versus a $6.8 loss. Currency movements primarily affected the euro-denominated Shurgard investment and loan.

Outlook, risks, contingencies, and unusual items

  • Operating outlook: Management said current trends were consistent with continued revenue growth in the remainder of 2014 and expected to continue rent increases for longer-term tenants. It expected year-over-year occupancy gains to narrow as comparisons became more difficult. The filing provides no specific full-year revenue, earnings, or FFO guidance.
  • Costs and development: Management expected same-store property-tax growth of about 4.5% for the remainder of 2014, flat on-site manager payroll, and inflationary increases in several other operating-cost categories. Development and expansion projects were expected to add 2.1 million rentable square feet at an estimated total cost of $242 million; some projects depended on approvals. Approximately $70 million of remaining project spending was expected in the second half of 2014, with the balance in 2015.
  • Acquisitions and financing: On July 1, 2014, the company acquired 25 facilities for about $240 million. As of August 4, four more facilities were under contract for about $40 million. Management cautioned that acquisition competition and permitting, site availability, and return requirements could constrain growth. Shurgard Europe’s July refinancing repaid its shareholder loan; Public Storage received $205 million for its 49% share and repaid $200 million of its term loan, leaving $122 million outstanding as of August 4. Management expected higher third-party interest expense to reduce its quarterly Shurgard equity earnings by about $1.4 million relative to Q2.
  • Unusual items: First-half tenant reinsurance costs included a $7.8 million accrual for a contingent legal settlement. A $4.1 million reduction in those costs reflected recognition of a deferred tax asset. The company also anticipated recording a $3.0 million foreign-exchange loss in July related to repayment of the Shurgard loan. No impairment charges were recorded in the periods presented.
  • Risks and contingencies: The filing identifies real-estate and local economic conditions, competition, acquisition and development execution, foreign currency and joint-venture exposure, REIT qualification and tax rules, cybersecurity, insurance exposure, and access to capital as risks. Management said the likelihood of material loss from existing legal proceedings was remote. Insurance limits could be exhausted in multiple catastrophic events. The company reported no material off-balance-sheet arrangements and compliance with credit-facility covenants.

Important facts for investors to verify

  1. Whether same-store rent growth and occupancy gains continue, especially as management expected occupancy comparisons to tighten.
  2. How the July acquisitions and development pipeline affect future NOI, depreciation, capital requirements, and returns.
  3. Repayment or refinancing of the remaining $122 million term loan before its December 2014 maturity, and subsequent borrowing capacity.
  4. The realized impact of Shurgard’s refinancing on Public Storage’s equity earnings, foreign-exchange exposure, and cash receipts.
  5. The outcome and accounting treatment of the $7.8 million tenant-reinsurance legal settlement accrual, and any changes in claims or insurance exposure.
  6. Whether distributions remain supported by operating cash flow after preferred and common dividends, development spending, and acquisitions.