Public Storage — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Public Storage is a REIT focused on self-storage. At quarter-end it had interests in 2,069 self-storage facilities, including 2,055 U.S. facilities and a 49% interest in Shurgard Europe, plus an approximately 41% interest in PS Business Parks (PSB).
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total operating revenue | $472.9 million, up 6.1% | $1,361.3 million, up 6.3% |
| Operating income | $230.5 million, up 15.3% | $627.4 million, up 14.6% |
| Net income | $264.8 million, versus $194.5 million | $670.5 million, versus $616.0 million |
| Net income allocable to common shareholders; diluted EPS | $202.5 million; $1.18, versus $118.0 million; $0.69 | $460.2 million; $2.68, versus $397.5 million; $2.33 |
| FFO per diluted common share (non-GAAP) | $1.73, up 34.1% | $4.46, up 7.0% |
| Cash dividends declared per common share | $1.10, versus $0.95 | $3.30, versus $2.70 |
Same-store self-storage revenue increased 4.8% in Q3 and 4.9% year to date; same-store NOI rose 7.9% and 7.5%, respectively. Same-store occupancy averaged 92.7% in Q3 and 91.9% year to date. Q3 same-store gross margin was 71.3%, versus 69.2%; year-to-date gross margin was 68.9%, versus 67.2%. Realized rent per occupied square foot increased 4.5% in both periods.
For the first nine months, operating cash flow was $955.8 million, capital improvements were $58.6 million, and cash remaining after capital improvements and distributions to common, preferred, and noncontrolling holders was $171.8 million. Cash and cash equivalents were $535.8 million at September 30, up from $139.0 million at year-end 2011. Notes payable totaled $347.9 million, down from $398.3 million; the $300 million revolver had no borrowings, with $15.3 million of standby letters of credit reducing availability. Debt is fixed-rate, with $264.9 million of principal maturities in 2013. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Common diluted EPS rose 71% in Q3 and 15% year to date. Management attributed the improvement to stronger property operations, lower preferred-share allocations, and, in Q3, a $9.0 million foreign-exchange gain versus a $28.3 million loss a year earlier.
- Same-store revenue growth reflected higher rental rates, reduced promotional discounts, and improved occupancy. Same-store operating costs fell 2.3% in Q3 and 0.6% year to date, despite higher property taxes.
- Year-to-date FFO growth was more modest than Q3 growth, partly because EITF D-42 preferred-redemption allocations reduced FFO by $0.33 per diluted share in 2012, versus $0.17 in 2011; foreign exchange also changed direction between periods.
- Cash increased alongside substantial preferred-share issuance and redemption activity. The company issued $1.7 billion gross of preferred securities and redeemed approximately $1.2 billion during the first nine months; notes payable also declined.
Outlook, commentary, risks and unusual items
- Management expected positive year-over-year growth in domestic same-store rental income to continue, while maintaining a strategy of at least 90% full-year average same-store occupancy. It expected 2012 property-tax expense growth of approximately 3.5%, payroll to be relatively flat for the rest of 2012, and about $73 million of capital improvements for full-year 2012.
- Management expected to increase development activity over the next 12–18 months, but said development would not significantly affect liquidity or earnings over that horizon. Acquisitions remained an opportunity, subject to competition and availability. No specific full-year earnings or FFO guidance is provided in the filing.
- After quarter-end, the company acquired three facilities for $37.3 million and was under contract to acquire three more for approximately $26.7 million, subject to contingencies. It redeemed $367.3 million of Series F and X preferred shares in October and announced redemption of $362.5 million of Series Z, A and D shares for December 27, 2012. Management expected approximately $12 million of related EITF D-42 allocations in Q4.
- Hurricane Sandy affected the New York/New Jersey market after quarter-end. The company reported minimal apparent property damage, reopened all facilities within days, and expected less than $1.5 million of additional Q4 repair costs with no significant revenue impact; its assessment could change as remediation continued.
- Key exposures include competition and local economic conditions, real-estate operating and development risks, property taxes, REIT qualification and tax matters, catastrophic losses and insurance limits, and currency fluctuations. A €311 million Shurgard Europe loan ($399.8 million at quarter-end) bears 9% interest, matures in February 2015, and exposes reported earnings and repayment value to euro-dollar movements; the company had no currency hedges. Shurgard Europe’s cash flow is largely directed to its bank loan, limiting potential repayments to Public Storage.
- Management said pending legal matters were not expected to result in material loss. The filing reported no material off-balance-sheet arrangements and no material quarterly change in internal control over financial reporting. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether domestic same-store rent, occupancy, and NOI trends continue, and how seasonal pricing and promotional discounts affect them.
- Cash available after the announced preferred redemptions, acquisitions, capital spending, and shareholder distributions; also confirm funding plans for the $264.9 million of 2013 debt maturities.
- Shurgard Europe’s operating performance, debt-related cash restrictions, loan repayment prospects, and the effect of euro-dollar movements.
- The final financial and operating effects of Hurricane Sandy and any revisions to the company’s initial damage and cost estimates.
- FFO and NOI are non-GAAP measures; review the filing’s reconciliations and do not treat FFO as a substitute for cash flow, net income, or capacity to pay dividends.