Public Storage quarterly report, Q1 FY2014

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Public Storage — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Public Storage is a REIT focused on self-storage, with interests in U.S. self-storage, European self-storage through Shurgard Europe, and commercial properties through PS Business Parks (PSB). At quarter-end, it had interests in 2,202 self-storage facilities and an approximately 42% common equity interest in PSB. Financial statements are unaudited; management cautions that seasonal results are not necessarily indicative of full-year performance.

Financial performance and position

  • Revenue: $519.6 million, up 10.3% from $470.9 million. Self-storage revenue was $485.6 million, up 10.4%; ancillary revenue was $34.0 million, up 9.0%.
  • Profit: Operating income was $217.1 million, up 2.8%; net income was $228.3 million, up 7.6%. Net income allocable to common shareholders was $174.1 million, or $1.01 per diluted share, versus $161.9 million, or $0.94. The company reported FFO of $1.74 per diluted share and Core FFO of $1.80, versus $1.57 and $1.65, respectively.
  • Operating performance: Same-store revenue rose 5.1% and same-store net operating income (NOI) rose 5.6% to $301.1 million. Average occupancy increased to 92.6% from 91.9%; realized annual rent per occupied square foot rose 4.3% to $14.41. Same-store operating costs increased 4.0%.
  • Margins: Same-store NOI margin was 68.3%, compared with 68.0%. Total self-storage NOI was $329.5 million on $485.6 million of self-storage revenue. The filing does not present a single company-wide NOI margin.
  • Cash flow: Operating cash flow was $330.7 million, versus $309.3 million. Investing activities provided $173.1 million, principally reflecting $216.2 million of proceeds from selling a 51% interest in the Shurgard Europe loan; financing activities used $421.9 million. Ending cash was $101.1 million.
  • Debt and liquidity: Debt was approximately $460.2 million at March 31, comprising a $372.0 million term loan and $88.2 million of notes payable; the $50.1 million revolver balance at year-end was repaid. The term loan matures December 2, 2014. The $300 million revolving facility had no borrowings and approximately $285 million available after letters of credit. Total liabilities were $682.8 million and total assets were $9.68 billion.
  • Distributions and capital: Common dividends declared were $1.40 per share, versus $1.25. Q1 distributions to common and preferred shareholders totaled $294.2 million. The company issued $235 million gross of Series Y preferred shares in Q1 and a further $50 million gross in April.

Material changes versus Q1 2013

  • Common-share earnings increased $12.2 million, primarily because self-storage NOI increased $30.8 million, partly offset by $18.0 million more depreciation and amortization, largely associated with acquisitions.
  • Same-store revenue growth reflected higher rents and occupancy. Non-same-store NOI increased $14.9 million, principally from the 121 facilities acquired during 2013.
  • Ancillary cost of operations rose to $18.5 million from $9.4 million. Tenant reinsurance costs included a $7.8 million accrual related to a contingent legal settlement; tenant reinsurance net income consequently declined to $9.7 million from $16.5 million.
  • Foreign currency exchange loss fell to $2.3 million from $12.7 million. Interest and other income declined to $2.4 million from $5.6 million, mainly because the company sold a 51% interest in the Shurgard Europe shareholder loan on January 28, 2014.
  • Preferred equity increased to $3.80 billion from $3.56 billion following the Series Y issuance. Cash ended at $101.1 million, compared with $398.3 million at the end of Q1 2013; the periods’ cash balances reflect different financing and investing flows.

Outlook, management commentary, and risks

  • Management expected continued revenue growth during the remainder of 2014, citing current move-in, move-out, rent, and occupancy trends, while noting that short-term trends are volatile and seasonal. Management expected the year-over-year occupancy advantage to narrow as comparisons become more difficult.
  • Management expected property-tax growth of approximately 4.5%–5% for the rest of 2014; advertising and selling expense approximately flat; and continued growth in non-same-store earnings as recent acquisitions stabilize. Severe winter weather increased Q1 snow removal and utility costs.
  • The development and expansion pipeline was expected to add approximately 1.9 million rentable square feet at an estimated total cost of $195 million; $38 million had been incurred by March 31. Some projects depend on entitlement approvals. Management cited site availability, permitting, acquisition competition, pricing, and risk-adjusted returns as constraints.
  • Management estimated $625 million of capital resources, including cash, revolver capacity, April preferred-share proceeds, and projected retained operating cash flow for the remaining nine months of 2014. Estimated remaining 2014 capital commitments were approximately $586 million, including the $372 million term-loan repayment. Funding options included equity, debt, increased revolver capacity, or joint ventures.
  • Shurgard Europe had approximately €94 million of bank debt maturing in November 2014 and was exploring financing alternatives. Public Storage’s €-denominated investment and loan exposure are subject to currency fluctuations; the company reported no currency hedging for this exposure.
  • Key risks include real-estate demand and competition, economic and seasonal conditions, development and acquisition execution, interest-rate and refinancing exposure, foreign exchange, joint-venture performance, insurance and legal claims, and maintaining REIT qualification. Management reported no impairment charges and considered material loss from disclosed legal proceedings remote. Disclosure controls were judged effective at a reasonable assurance level.

Important facts for investors to verify

  1. How the company plans to repay or refinance the $372 million term loan due December 2014, and whether its liquidity estimates and subsequent financing proceeds are realized.
  2. Whether same-store rent and occupancy gains continue as management anticipated, particularly as occupancy comparisons become more difficult and seasonal demand changes.
  3. Whether the $7.8 million tenant-insurance legal settlement accrual is sufficient and whether additional claims affect reinsurance profitability.
  4. Whether the development pipeline meets cost, permitting, entitlement, and return expectations, and whether acquired facilities stabilize as planned.
  5. How Shurgard Europe’s November 2014 bank-loan maturity is addressed, and the effect of foreign exchange movements on the European investment and loan.
  6. How acquisition, development, and debt funding interact with the company’s substantial preferred and common distributions; FFO and Core FFO are non-GAAP measures and do not substitute for cash flow or net income.