Public Storage — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Public Storage is a self-storage REIT operating 2,492 U.S. facilities with approximately 170 million net rentable square feet, alongside ancillary businesses and equity investments in Shurgard and PS Business Parks (PSB). Comparisons are with Q1 2019 unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $716.1 million | $689.0 million | +3.9% |
| Self-storage revenue | $674.2 million | $650.4 million | +3.7% |
| Self-storage net operating income (NOI) | $466.3 million | $456.8 million | +2.1% |
| GAAP net income | $367.1 million | $367.7 million | -0.1% |
| Net income allocable to common shareholders | $313.1 million | $301.7 million | +3.8% |
| Diluted earnings per common share | $1.79 | $1.73 | +3.5% |
| FFO per diluted share | $2.61 | $2.52 | +3.6% |
| Core FFO per diluted share | $2.58 | $2.53 | +2.0% |
| Net cash from operating activities | $463.0 million | $469.8 million | -1.5% |
Same-store revenue increased 1.2%, but same-store NOI rose only 0.1%: revenue growth was offset by a 4.0% increase in operating costs. Same-store occupancy averaged 93.1% versus 92.5%; realized annual rent per occupied square foot increased 0.8%. Same-store gross margin before depreciation declined to 70.4% from 71.2%.
Cash and equivalents were $718.4 million at March 31, 2020, up from $409.7 million at year-end. Cash from investing activities was a $289.9 million outflow, including $186.2 million for acquisitions; financing activities provided $135.5 million, principally from $545.2 million of net proceeds from a new euro-denominated note, partly offset by distributions. Cash and equivalents, including restricted cash, totaled $742.1 million at quarter-end.
Notes payable were $2.439 billion at quarter-end, versus $1.902 billion at December 31, 2019. The increase mainly reflects the January 2020 issuance of €500 million of 0.875% senior notes due 2032. Weighted average effective debt cost was 2.4%. The $500 million revolver was undrawn, with $484.1 million available after letters of credit. Management reported covenant compliance and no substantial debt principal maturities before 2022.
Changes and notable items
- Self-storage NOI growth was driven mainly by acquired and newly developed or expanded facilities; same-store NOI was nearly flat. Same-store marketing expense rose 58.8%, and property taxes rose 5.0%.
- Depreciation and amortization increased 11.4% to $135.9 million, weighing on GAAP net income. Interest expense increased to $13.6 million from $8.1 million, reflecting additional debt issued in 2019 and 2020.
- Equity earnings from unconsolidated entities rose to $24.0 million from $17.7 million, including Public Storage’s $8.1 million share of a PSB real estate sale gain. Shurgard equity earnings fell, including a $3.5 million share of a casualty loss.
- Foreign currency exchange gains were $8.9 million, compared with $7.8 million. The company also recorded a $1.1 million gain on real estate sales. No real estate impairments were recorded.
- Quarterly common distributions were $2.00 per share; the company paid $349.8 million to common shareholders and restricted share unitholders. A further $2.00-per-share quarterly dividend was declared on April 21, payable in June.
Outlook, risks and contingencies
Management said the COVID-19 pandemic was expected to negatively affect Q2 and likely later periods. Facilities remained open as essential businesses, but the company reported materially lower demand and move-in volumes beginning in late March, despite lower new-tenant rates. It temporarily curtailed existing-tenant rent increases and had not determined when the program would resume. Management said year-over-year same-store rental income and NOI were likely to decline in the remainder of 2020; no numerical earnings guidance was provided.
As of April 30, management reported no material degradation in rent collections, but anticipated bad debt could rise from its historical level of approximately 2% of rent. Lower move-ins, possible changes in long-term tenant move-outs, delayed lien-sale auctions, operating disruptions and temporary employee pay and benefit enhancements pose additional risks. The company expected the temporary pay measures to increase on-site property manager payroll by approximately 30% year over year in Q2.
Management estimated approximately $1.4 billion of capital resources over the next year against $539.6 million of identified needs, including $718.4 million of cash, $484.1 million of revolver availability and approximately $200 million of expected retained operating cash flow. The development pipeline was estimated at $634.5 million, with $472.8 million remaining to spend, primarily over 18–24 months. COVID-19 could delay or cancel projects and affect acquisitions; management said capital-market disruption was not expected to materially affect plans over the next 12 months, subject to uncertainty.
Other disclosed risks include competition and new supply, particularly in several major U.S. markets; possible California property-tax increases tied to a November 2020 ballot initiative; foreign currency exposure; and execution and permitting risks for development. The company reported that material losses from pending legal proceedings were considered remote and that it had no material off-balance-sheet arrangements.
Key facts for investors to verify
- Subsequent operating results: move-in and move-out trends, occupancy, rent collections, bad debt and the resumption or continuation of tenant rate increases.
- Whether same-store revenue and NOI decline as management anticipated, and the effects of wage measures, marketing, property taxes and other costs on margins.
- Debt, cash and revolver availability, including the impact of euro exchange rates and future borrowing or refinancing costs.
- Development and acquisition spending, project delays or cancellations, and the pace at which newly acquired and developed facilities stabilize.
- Capital allocation and distributions, including the declared June dividend and any future preferred-share redemptions or common-share repurchases.