Public Storage (NYSE: PSA) — 2011 Form 10-K
Business context and period: Annual report for the fiscal year ended December 31, 2011, filed February 24, 2012. Public Storage is a REIT principally owning and operating self-storage facilities. At year-end, it had interests in 2,058 U.S. facilities across 38 states and a 49% interest in Shurgard Europe; it also owned 42% of PS Business Parks (PSB). Domestic self-storage generated approximately 92% of 2011 revenue.
Financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1.752 billion | $1.645 billion |
| Net income | $836.5 million | $696.1 million |
| Net income allocable to common shareholders | $561.7 million; $3.29 per diluted share | $399.2 million; $2.35 per diluted share |
| FFO per diluted common share | $5.67 | $4.72 |
| Cash from operating activities | $1.203 billion | $1.093 billion |
| Cash from investing activities | $(81.4) million | $(266.6) million |
| Cash from financing activities | $(1.439) billion | $(1.133) billion |
| Cash and cash equivalents at year-end | $139.0 million | $456.3 million |
| Total debt at year-end | $398.3 million | $568.4 million |
Amounts are reported in U.S. dollars. FFO and NOI are non-GAAP measures; the filing cautions that FFO is not a substitute for net income or cash flow and does not reflect scheduled debt principal, capital improvements, distributions, or other obligations.
- Same-store U.S. self-storage: Revenue rose 4.6% to $1.507 billion and NOI rose 6.6% to $1.034 billion. Average occupancy was 91.1%, versus 89.8%; realized annual rent per occupied square foot was $12.90, up 2.8%. Gross margin before depreciation and amortization increased to 68.6% from 67.3%.
- Portfolio operations: Overall U.S. self-storage weighted-average occupancy was 90.7%; Europe was 81.9%. 2011 tenant reinsurance revenue was $71.3 million, approximately 4% of company revenue.
- Liquidity and leverage: Cash from operations, less $69.8 million of real-estate capital improvements and distributions to noncontrolling interests and shareholders, left $273.1 million available for debt principal payments and reinvestment. Debt was 4.8% of book equity; the defined Debt Ratio was approximately 3%. The company had no credit-line borrowings at year-end and had $300 million of revolving capacity, subject to renewal.
- Debt maturities: $52.2 million was due in 2012 and $264.9 million in 2013, including $186.5 million of unsecured notes. The company said it intended to repay debt at maturity rather than refinance with additional debt.
- Distributions: Common distributions totaled $3.65 per share in 2011, versus $3.05 in 2010. Preferred distributions were $224.9 million. In February 2012, the Board declared a regular common dividend of $1.10 per share, a 15.8% increase from $0.95.
Material changes versus 2010
- Common-shareholder net income increased $162.5 million, and diluted FFO per share increased 20.1%. Management attributed improvement to stronger property operations, higher Shurgard-related earnings and income, lower foreign-exchange losses, and reduced income allocations to Series A equity shares.
- Same-store U.S. revenue growth accelerated from 0.4% in 2010 to 4.6% in 2011, supported by higher occupancy and realized rents. Management reported more pricing power and aggressive existing-tenant rate increases in the second half of 2011.
- Debt declined by $170.1 million, while year-end cash declined by $317.2 million. Financing cash outflow included $1.147 billion of preferred-share redemptions, partly offset by $835.6 million of preferred-share issuance; common-share distributions also increased.
- General and administrative expense rose to $52.4 million from $38.5 million, principally due to $11.3 million of performance-based share compensation. The foreign-currency loss narrowed to $7.3 million from $42.3 million.
Outlook, risks, and unusual items
- Management expected positive year-over-year rental-income growth in 2012, but gave no specific company-wide revenue, earnings, or FFO guidance. It expected approximately 4.5% growth in property-tax expense, moderate payroll, call-center, and insurance cost growth, and about $75 million of 2012 capital improvements.
- Development activity remained substantially curtailed, with a nominal pipeline and no current plans to expand development. Management saw potential 2012 acquisition opportunities but noted competition and uncertainty over attractive terms. As of February 24, 2012, the company was under contract to buy six properties for $42 million in cash, subject to conditions.
- For Shurgard Europe, the filing reported $402.7 million of loans receivable and a $375.5 million equity investment, both exposed to currency and operating risks. Shurgard’s Wells Fargo loan required substantial principal reduction from operating cash flow, limiting repayment of Public Storage’s loan and growth funding. Management did not expect Europe same-store NOI growth in 2012 or cash distributions from its equity interest in the foreseeable future.
- Other notable items included $10.8 million of net gains on real-estate sales and debt retirement and $2.2 million of impairment charges in 2011. The company reported that pending legal matters were not expected to result in material losses; it also cited real-estate competition, economic weakness, property taxes, disasters and insurance limits, environmental exposure, REIT qualification, technology/security, and foreign-currency risks.
- Subsequent to year-end, Public Storage issued $460 million gross of 5.90% Series S preferred shares and redeemed Series L and E preferred shares for $206.7 million and $141.3 million, respectively; a further $8.8 million Series Y redemption was scheduled for March 2012. These transactions affect the post-year-end capital and preferred-dividend profile.
Important facts for investors to verify
- Whether U.S. same-store occupancy, realized rents, and rental-income growth continued after the late-2011 rate increases, and how new-tenant promotions affected retention and pricing.
- The renewal terms for the $300 million revolver, which was due to expire March 27, 2012, and the company’s plan and capacity to address the $264.9 million of 2013 debt maturities.
- Shurgard Europe’s operating cash flow, required Wells Fargo amortization, and ability to repay Public Storage’s €311 million loan at maturity, including foreign-exchange exposure.
- The effect of preferred-share issuance and redemptions on ongoing preferred dividends, common distributions, and per-share results; confirm whether the declared $1.10 common dividend was paid.
- Whether the six-property $42 million acquisition closed and whether expected acquisition yields and stabilization assumptions were achieved.