Public Storage annual report, FY2010

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Public Storage — FY 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. The filing is an annual report, not a standalone fourth-quarter filing. Public Storage is a REIT focused on self-storage, with commercial-property and European self-storage investments. At year-end, it had interests in 2,048 U.S. facilities and a 49% interest in Shurgard Europe.

Financial performance and position

  • Revenue: $1.647 billion, up 1.4% from $1.625 billion in 2009. Rental income and ancillary operations were $1.618 billion, up 1.4%.
  • Profit: Net income was $696.1 million versus $790.5 million. Net income allocable to Public Storage shareholders was $672.0 million versus $834.6 million. Net income allocable to common shareholders was $399.2 million, or $2.35 per diluted share, down from $586.0 million, or $3.47 per diluted share.
  • Operating performance: Same-store revenue was $1.428 billion, up 0.3%; same-store net operating income (NOI, a non-GAAP measure) was $960.3 million, up 0.1%. Same-store operating margin before depreciation was 67.3%, compared with 67.4%. Average occupancy improved to 89.8% from 88.7%, while realized rent per occupied square foot fell 1.2% to $12.56.
  • Fourth-quarter trend: Same-store rental income increased 2.0% year over year in Q4 2010, following declines earlier in the year. Quarterly consolidated net income was $189.2 million versus $187.7 million in Q4 2009; diluted common earnings were $0.71 versus $0.70 per share.
  • Cash flow: Operating cash flow was $1.093 billion, down from $1.113 billion. Investing activities used $266.6 million; financing activities used $1.133 billion. Cash and cash equivalents ended the year at $456.3 million.
  • Liquidity: Cash plus short-term investments totaled $558.5 million; short-term investments were $102.3 million. The $300 million revolving credit facility had no borrowings at year-end or February 28, 2011.
  • Debt: Notes payable totaled $568.4 million, up from $518.9 million, with a 5.4% weighted-average effective rate. Debt represented approximately 4% of assets under the company’s debt-ratio definition and 6.5% of total equity by book value. Debt maturities included $133.8 million in 2011 and $265.6 million in 2013.
  • Distributions: Common distributions were $3.05 per share for 2010, compared with $2.20 in 2009. Total REIT-qualifying distributions to shareholders were $754.8 million.

Changes versus prior year

  • Total revenue increased modestly, while common-shareholder earnings and diluted EPS declined materially.
  • Same-store operations stabilized: full-year revenue was nearly flat, occupancy improved, and Q4 same-store rental income turned positive. Lower realized rents offset much of the occupancy improvement.
  • The 2010 earnings comparison was affected by a $42.3 million foreign-currency loss, compared with a $9.7 million gain in 2009; redemption-related income allocations; and a $30.3 million gain related to a PS Business Parks equity offering recorded in 2009.
  • Acquisition activity resumed: Public Storage acquired 42 facilities for approximately $239.6 million in 2010; it had made few acquisitions in 2008 and 2009. Same-store revenue had declined 3.1% in 2009.

Outlook, commentary and risks

  • Management expected improved operating trends to continue into Q1 2011 and anticipated more aggressive rent increases to existing tenants during 2011. These are expectations, not assurances.
  • For 2011, management expected property-tax expense growth of about 3%, moderate payroll and repair-and-maintenance growth, slightly lower insurance expense, and general and administrative expense of $35–$40 million excluding acquisition costs. Expected maintenance capital improvements were approximately $81 million; development activity remained limited.
  • Management saw potential for additional U.S. acquisitions in 2011 but cautioned that opportunities, pricing and completed transactions were uncertain. Five Nevada facilities were acquired in January 2011 for about $19.5 million; a leasehold interest was acquired in February for about $6.6 million.
  • Europe exposure: Shurgard Europe owed Public Storage $495.2 million under a 9% euro-denominated loan due March 2013. Shurgard Europe joint ventures had third-party debt of about $272.7 million, including $125.2 million due in May 2011, with a one-year extension option. Refinancing constraints, operating weakness and currency movements could affect repayment and investment value.
  • Other risks and contingencies: Recession, local competition, occupancy and rental-rate pressure, property-tax increases, natural disasters, environmental liabilities, self-insured losses, access to capital, REIT qualification, joint-venture risks and cybersecurity or system disruptions. Management believed pending legal proceedings were unlikely, in aggregate, to materially affect results or financial position.
  • Unusual items: The company redeemed or repurchased several preferred and equity securities during 2010, including Equity Shares Series A for $205.4 million. It issued $145 million of Series O preferred shares at 6.875% and $125 million of Series P at 6.500%. A $121 million loan to PS Business Parks in February 2011 carried a six-month term and interest at three-month LIBOR plus 0.85%.

Most important facts for investors to verify

  • Whether the Q4 recovery in same-store rental income and occupancy continued, and whether rent increases offset discounting and lower realized rents.
  • The composition and sustainability of common-shareholder earnings, including foreign-exchange effects, preferred-security redemption allocations and prior-year gains.
  • Shurgard Europe’s ability to refinance or repay its 2011 joint-venture maturity and the $495.2 million Public Storage loan due in 2013, including euro-related exposure.
  • The company’s 2011 debt repayments, liquidity after distributions and security redemptions, and any changes in revolving-credit availability or capital-market access.
  • Whether acquisitions made at expected prices achieve stabilization and targeted cash flows, and whether management’s 2011 operating and expense expectations are realized.