Public Storage 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Public Storage, a Maryland real estate investment trust (REIT), for the period ended September 30, 2007. The Company operates self-storage facilities primarily in the United States and Europe (following the 2006 merger with Shurgard). As of September 30, 2007, the Company owned or had equity interests in 2,012 U.S. facilities and 169 European facilities. The Company reorganized into a Maryland REIT effective June 1, 2007.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2007 |
|---|---|---|
| Total Revenues | $468.96 million | $1,352.19 million |
| Net Income | $152.77 million | $289.65 million |
| Net Income Per Common Share (Diluted) | $0.51 | $0.57 |
| Net Cash Provided by Operating Activities | N/A | $751.59 million |
| Total Assets | $10.63 billion | N/A |
| Total Liabilities | $1.36 billion | N/A |
| Total Debt (Notes Payable) | $1.00 billion | N/A |
| Cash and Cash Equivalents | $168.59 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 26.3% for the three months and 42.7% for the nine months compared to the same periods in 2006. This is largely due to the full-year inclusion of Shurgard facilities acquired in August 2006.
- Net Income: Net income for the three months increased significantly to $152.77 million from $81.18 million in 2006, driven by a $30.4 million foreign currency exchange gain and reduced general and administrative expenses. However, for the nine months, net income decreased to $289.65 million from $324.26 million in 2006, primarily due to a $279.7 million increase in depreciation and amortization related to Shurgard assets.
- Foreign Exchange: The Company recorded a foreign currency exchange gain of $30.4 million (three months) and $41.0 million (nine months) due to the weakening of the U.S. Dollar against the Euro on intercompany loans.
- Debt Reduction: Total notes payable decreased from $1.47 billion at December 31, 2006, to $1.00 billion at September 30, 2007. This includes the prepayment of approximately $429 million in European collateralized notes in January 2007.
- Deconsolidation: Effective May 24, 2007, the Company deconsolidated 11 Shurgard facilities due to a loss of control, accounting for them via the equity method thereafter.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue aggressive pricing and marketing in the fourth quarter to drive occupancy levels. General and administrative expenses for Q4 2007 are expected to approximate $10 million to $13 million.
- Capital Strategy: The Company intends to fund growth and debt obligations through cash on hand, retained cash flows, and equity issuances. It plans to fully amortize outstanding debt rather than refinance.
- Development Pipeline: The Company has 55 projects in its development pipeline (39 U.S., 16 Europe) with estimated remaining costs of approximately $191.1 million to be incurred over the next 24 months.
- Risks:
- REIT Qualification: Failure to qualify as a REIT would result in significant corporate income tax liabilities.
- Foreign Currency: Significant exposure to Euro fluctuations regarding intercompany debt and European operations.
- Legal Proceedings: Ongoing class action lawsuits regarding unit size misrepresentation (Serrao and Drake cases) and shareholder derivative suits. An arbitration proceeding is ongoing regarding the exit from European joint ventures.
- Market Conditions: Slowing housing market and reduced demand in hurricane-impacted markets (e.g., Florida) may impact revenue growth.
Investor Verification Checklist
- Verify the impact of the $41 million foreign currency exchange gain on net income, as this is a non-operating item dependent on exchange rate fluctuations.
- Review the details of the deconsolidation of 11 Shurgard facilities and the resulting shift to equity method accounting.
- Confirm the status of the European joint venture arbitration and the potential impact on the $556 million intercompany debt repayment.
- Assess the sustainability of the reduced general and administrative expenses compared to the high integration costs incurred in 2006.
- Monitor the occupancy and rental rate trends of the "Shurgard Same Store" facilities versus the legacy "Public Storage Same Store" facilities.