Public Storage — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed February 25, 2013. The filing is an annual report, not a standalone Q4 report. It includes unaudited quarterly data, but does not clearly provide Q4 diluted earnings per share attributable to common shareholders.
Business context
Public Storage is a Maryland REIT and the largest U.S. self-storage owner/operator, with interests in 2,078 U.S. facilities totaling about 132 million net rentable square feet. It also owns 49% of Shurgard Europe and approximately 41% of publicly traded PS Business Parks (PSB). Domestic self-storage generated 93% of 2012 revenue.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $1.827 billion | $1.718 billion | +6.4% |
| Operating income | $872.0 million | $762.8 million | +14.3% |
| Net income | $943.0 million | $836.5 million | +12.7% |
| Net income allocable to common shareholders | $669.7 million; $3.90 diluted per share | $561.7 million; $3.29 diluted per share | +19.2% per share |
| FFO per common share | $6.31 | $5.67 | +11.3% |
| Core FFO per common share | $6.68 | $5.93 | +12.6% |
| Cash from operating activities | $1.286 billion | $1.203 billion | +6.8% |
Operating income was approximately 47.7% of revenue, versus 44.4% in 2011. Same-store U.S. self-storage revenue rose 4.9%; net operating income (NOI) increased 7.9%. Same-store occupancy averaged 91.8% (91.2% in 2011), realized rent per occupied square foot increased 4.4% to $13.49, and same-store gross margin before depreciation rose to 70.6% from 68.7%. NOI and FFO are non-GAAP measures; the company cautions that they are not substitutes for GAAP earnings or cash flow.
Capital improvements were $67.7 million. Cash from operations after capital improvements and distributions to common, preferred, and noncontrolling holders was $252.8 million, available for debt payments and reinvestment. Cash and cash equivalents were $17.2 million at year-end. Total assets were $8.793 billion, down from $8.933 billion.
Year-end debt was $468.8 million, including $133.0 million drawn on the revolving credit facility; the company reported a debt ratio of about 4% under its preferred-share documents. Notes payable were $335.8 million, including $186.5 million of unsecured notes maturing March 15, 2013. The company issued $500 million of preferred shares on January 16, 2013, repaid the credit-line balance, and reported no outstanding line borrowings by February 2013. It expected 2013 scheduled principal repayments of approximately $254.6 million.
Material changes and unusual items
- Common-shareholder earnings increased $108.0 million year over year, reflecting improved property operations, lower preferred distributions, and a more favorable foreign-exchange result; partially offset by a $36.3 million reduction related to EITF D-42 accounting for preferred-share redemptions.
- Same-store revenue growth was primarily rate-driven, including annual increases for longer-term tenants and reduced promotional discounts. Operating costs declined 1.7%, led by lower payroll, repairs, and media advertising; property taxes rose 3.0%.
- Public Storage issued $1.7 billion gross of preferred securities in 2012 and redeemed $2.0 billion of older preferred shares at par, principally refinancing higher-coupon issues at lower rates. It paid $4.40 per common share in 2012, versus $3.65 in 2011.
- Foreign-currency translation produced an $8.9 million gain in 2012, compared with a $7.3 million loss in 2011. The company does not hedge its euro-denominated Shurgard loan.
- Shurgard Europe same-store revenue declined 1.1% and occupancy fell to 83.1% from 85.2% on a constant-currency basis. Its European bank loan requires substantial cash-flow principal repayments.
Outlook, commentary, and risks
Management expected positive year-over-year U.S. rental-income growth through 2013, driven by improved occupancy and realized rents early in the year and rent increases later. It expected first-quarter occupancy to improve with aggressive pricing, but occupancy in the second through fourth quarters to be flat year over year. Management expected property-tax expense to rise about 4%, payroll to grow below inflation, and maintenance expense before snow removal to decline modestly. The board declared a $1.25 common quarterly dividend in February 2013, up 13.6% from $1.10.
The company planned to continue pursuing acquisitions and development. Its development pipeline covered about 1.3 million square feet, estimated to cost $169 million; $36 million had been incurred by year-end, with most remaining spending expected in 2013. Projects face entitlement and permitting contingencies, and management said the amount of future development was uncertain. The company stated that operating cash flow and available capital were expected to meet current obligations, while access to capital remained important for growth.
Key disclosed risks include local competition and economic weakness; real-estate operating, development, and acquisition risks; California concentration (about one-fifth of U.S. properties); natural disasters and insurance limits; property-tax, regulatory, and REIT-qualification exposure; cybersecurity and system disruption; and currency, refinancing, and joint-venture risks involving Shurgard. The Hughes family owned about 15.9% of common shares and could significantly influence shareholder matters. Management considered pending legal matters unlikely to result in a material loss. The auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the March 2013 $186.5 million senior-note maturity was repaid as planned and how 2013 debt repayments were funded.
- Whether U.S. same-store rent growth and occupancy trends met management’s 2013 expectations, including the effect of aggressive pricing and promotional discounts.
- Progress, total spending, approvals, and expected yields for the $169 million development pipeline.
- Shurgard Europe’s refinancing and ability to repay the $411.0 million Public Storage loan due in February 2015, alongside its bank-loan amortization requirements.
- Preferred-share issuance, redemptions, dividend costs, and the sustainability of the $1.25 common quarterly dividend.
- Changes in property-tax expense, particularly in California, and any developments affecting REIT status, insurance exposure, or material contingencies.