Public Storage — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Public Storage is a REIT focused on self-storage, with U.S. operations providing 93% of quarterly revenue. It held interests in 2,080 self-storage facilities across the U.S. and Europe, and a 41% interest in PS Business Parks.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $470.9 million | $439.8 million | +7.1% |
| Operating income | $211.3 million | $184.9 million | +14.3% |
| Net income | $212.2 million | $206.7 million | +2.7% |
| Net income allocable to common shareholders | $161.9 million; $0.94 per diluted share | $125.3 million; $0.73 per diluted share | +29.2% in common income |
| FFO per diluted common share | $1.57 | $1.35 | +16.3% |
| Core FFO per diluted common share | $1.65 | $1.44 | +14.6% |
| Operating cash flow | $309.3 million | $279.5 million | +10.7% |
Same-store self-storage revenue increased 5.4% and net operating income (NOI) increased 9.5%. Average occupancy rose to 91.9% from 90.3%; realized annual rent per occupied square foot rose 3.7% to $13.79. Same-store NOI margin was approximately 67.9%, versus 65.4%. Total self-storage NOI increased 11.3% to $298.7 million. These NOI and FFO measures are non-GAAP.
Investing cash outflow was $41.4 million, including $7.8 million of maintenance capital expenditures, $27.8 million for development, and $13.5 million for acquisitions, partly offset by other investing inflows. Financing cash flow was $113.9 million: the company issued $725.0 million gross of preferred shares, repaid $133.0 million drawn on its credit facility and $193.2 million of notes, and paid $263.7 million in shareholder distributions. Cash increased to $398.3 million from $17.2 million at year-end.
At March 31, total assets were $9.10 billion, total liabilities $347.5 million, and total equity $8.75 billion. Debt comprised $142.4 million of secured notes; there were no credit-facility borrowings, with $15.3 million of letters of credit reducing capacity under the $300 million facility. The notes had a 5.0% weighted-average effective rate, with $61.2 million of principal maturities in the remainder of 2013. Common dividends declared were $1.25 per share, up from $1.10; preferred distributions were $48.6 million for the quarter.
Material changes and drivers
- Common-share earnings increased substantially despite only modest growth in total net income, principally because preferred-share allocations declined by $31.4 million year over year, including the absence of the prior-year $24.9 million preferred-redemption allocation.
- Self-storage performance improved with stronger occupancy and rents, lower same-store operating costs, and contributions from acquired and other non-same-store facilities. Same-store property taxes rose 3.7%; repairs and maintenance and advertising costs fell.
- Foreign currency results reversed: a $12.7 million exchange loss in Q1 2013 compared with a $12.2 million gain in Q1 2012. The loss primarily reflected the Euro-denominated Shurgard Europe loan receivable.
- Preferred shares outstanding increased by 29.0 million depositary shares through Series W and X issuance, generating $725.0 million gross proceeds and $701.7 million net proceeds after issuance costs.
- Equity earnings from unconsolidated real estate entities rose to $11.6 million from $9.1 million, mainly reflecting higher PS Business Parks earnings.
Outlook, risks and contingencies
- Management expected positive year-over-year rental-income growth to continue during 2013, mainly from higher realized rents, but expected the favorable occupancy comparison to narrow. Results are seasonal, and first-quarter results are not necessarily indicative of the full year.
- Management expected approximately 4% growth in property-tax expense for the remainder of 2013; on-site manager payroll approximately flat; and continued reductions in advertising and repairs and maintenance, though repairs reductions were expected to moderate. Supervisory payroll and share-based compensation were expected to rise.
- The development pipeline included 19 projects adding about 1.3 million rentable square feet, estimated to cost $169 million; $64 million had been incurred, leaving about $105 million in commitments. Some projects were contingent on approvals. Management expected about $73 million of 2013 maintenance capital expenditures.
- Management reported sufficient cash and operating cash flow for operations, debt service, capital improvements and distributions. It intended to meet debt maturities rather than refinance with additional debt and generally sought to fund growth with retained cash flow and equity. The board declared a $1.25 common quarterly dividend on May 9, 2013.
- Shurgard Europe’s same-store NOI declined 0.9% and occupancy fell to 80.4% from 83.7%; management expected its same-store revenue to decline year over year for the rest of 2013. A French facility closure resulted in a $2.8 million charge at Shurgard Europe. Shurgard was considering refinancing in 2013, which could repay Public Storage’s loan but reduce future interest income. No near-term equity distributions from Shurgard were expected.
- Key exposures include real-estate demand and competition, property taxes and regulation, development permits and cost/yield execution, concentration of about 20% of facilities in California, and foreign-exchange movements. The company had no currency hedges for its Euro exposure. Insurance limits could be exhausted in multiple catastrophic events; tenant reinsurance also exposes the company to claims and regulatory requirements.
- The company reported no material off-balance-sheet arrangements. It considered the likelihood of material loss from pending legal matters remote. No impairments were recorded. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether same-store occupancy and rent growth persist, and whether management’s expectation of narrowing occupancy comparisons affects revenue growth.
- The quality and comparability of reported FFO, Core FFO and NOI, including their non-GAAP reconciliations and exclusions.
- Euro exposure and Shurgard Europe’s ability to refinance its bank debt, repay the $398.6 million Public Storage loan, and maintain operating performance.
- Funding and delivery of the $105 million remaining development commitments, including projects subject to entitlement approvals, alongside debt maturities and distributions.
- Preferred-share issuance costs, ongoing preferred distribution burden, and the effect of future capital raising or redemption decisions on common-share earnings.