Public Storage — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context
Public Storage is a REIT focused on acquiring, developing, owning, and operating self-storage facilities. At June 30, 2012, it had direct and indirect interests in 2,068 U.S. self-storage facilities, plus a 49% interest in Shurgard Europe and a 42% interest in PS Business Parks (PSB). Domestic self-storage generated 92% of revenue in the first half. Interim results are subject to seasonality and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $457.7 million | $434.4 million | $900.1 million | $853.8 million |
| Net income | $198.9 million | $210.9 million | $405.7 million | $421.5 million |
| Net income allocable to common shareholders | $132.3 million | $131.5 million | $257.7 million | $279.6 million |
| Diluted earnings per common share | $0.77 | $0.77 | $1.50 | $1.64 |
| FFO per diluted common share | $1.38 | $1.39 | $2.73 | $2.88 |
| Net cash provided by operating activities | Not presented quarterly | Not presented quarterly | $605.8 million | $582.5 million |
Q2 revenue increased 5.4% year over year, while net income fell 5.7%; common-shareholder income rose slightly and diluted EPS was unchanged. First-half revenue rose 5.4%, but net income declined 3.8%, common-shareholder income declined 7.8%, and diluted EPS fell 8.5%. FFO is a non-GAAP measure and does not account for debt principal payments, capital improvements, or distributions.
- Same-store domestic self-storage: Q2 revenue increased 5.1% and net operating income (NOI) increased 8.3%. Average occupancy was 92.6%, versus 92.3%; realized annual rent per occupied square foot increased 4.9% to $13.23. Same-store gross margin before depreciation and amortization was 69.3%, versus 67.3%.
- Cash, debt, and liquidity: Cash and cash equivalents were $438.5 million at June 30, versus $139.0 million at year-end 2011. Notes payable totaled $368.7 million, down from $398.3 million; reported debt was 4.5% of book equity. The $300 million revolving credit facility had no borrowings, with $15.3 million of standby letters of credit reducing availability.
- Cash uses and distributions: First-half capital improvements were $40.3 million. Distributions to common and preferred shareholders were $376.4 million and $107.0 million, respectively; cash from operations remaining for debt principal payments and reinvestment after capital improvements and distributions was $79.3 million. The board declared a regular quarterly common dividend of $1.10 per share on August 2, 2012.
- Debt maturities: $22.6 million of principal was due in the remainder of 2012 and $264.9 million in 2013. Management said its current intention was to repay debt at maturity rather than refinance with additional debt.
Material changes and unusual items
- Foreign-currency translation of the euro-denominated Shurgard Europe loan produced a $23.7 million Q2 loss and an $11.5 million first-half loss, compared with gains of $10.5 million and $41.7 million in the comparable 2011 periods. Management attributed much of the year-over-year decline in common results and FFO to this swing and to preferred-redemption allocations.
- Preferred-share redemption allocations under EITF D-42 reduced income allocable to common shareholders by $13.4 million in Q2 and $38.3 million for the first half. The company issued $1.21 billion gross of preferred shares in the first half and redeemed $833.3 million; three further series with $415.6 million aggregate liquidation value had been called for redemption at quarter-end.
- Same-store improvement was driven primarily by higher realized rents and slightly higher occupancy, while domestic property operating costs were broadly contained. Property-tax expense rose 4.1% in both Q2 and the first half.
- Interest and other income decreased year over year, partly because a Shurgard bridge loan outstanding in 2011 had been repaid and principal repayments had reduced the balance of the current loan.
Outlook, risks, and contingencies
- Management expected positive year-over-year domestic rental-income growth to continue and expected non-same-store facilities to contribute earnings growth during 2012. It maintained a nominal development pipeline, citing acquisitions as having a more favorable risk-adjusted return; future acquisitions remain subject to competition and pricing.
- Management expected 2012 capital improvements of approximately $68.6 million, property-tax expense growth of approximately 4%, and relatively flat on-site payroll expense in the remainder of the year. It did not expect growth in Shurgard Europe same-store NOI for the remainder of 2012.
- The $391.1 million Shurgard Europe loan is euro-denominated, bears fixed interest at 9%, and matures in February 2015. It is not hedged; currency movements affect reported earnings and the dollar value of repayment. Shurgard Europe’s bank loan requires substantial principal reductions, which management said would limit repayments on Public Storage’s loan. The company did not expect cash distributions from its Shurgard equity interest for the foreseeable future.
- Post-quarter events included payment of approximately $283 million to redeem Series C and N preferred shares in July, with approximately $132.5 million of Series W redemptions expected in August. The company acquired a Los Angeles facility for $5.5 million in July and was under contract, subject to contingencies, to acquire two more for approximately $31 million as of August 3.
- Management considered pending legal matters and other contingencies unlikely to result in a material loss. Insurance limits could be exhausted in the event of multiple catastrophic events. Other identified risks include real-estate demand and competition, economic conditions, foreign exchange, joint ventures, REIT qualification, property-tax estimates, and systems or data-security disruptions.
Investor facts to verify
- How euro movements and Shurgard Europe’s repayment constraints affect the loan’s dollar value, income, and ultimate collection.
- Whether domestic same-store rent growth and occupancy support management’s expectation of continued rental-income growth, including the effect of seasonal demand and promotional pricing.
- How the 2013 debt maturity will be funded and whether cash, operating flows, or capital-market conditions are sufficient after preferred redemptions and distributions.
- Whether acquisition economics, non-same-store stabilization, and the stated capital-improvement and operating-expense expectations are borne out.
- The impact of preferred-share issuance and redemptions on recurring distributions and income available to common shareholders.