Public Storage quarterly report, Q2 FY2013

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Public Storage — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Public Storage is a REIT focused on self-storage, with investments in European self-storage operator Shurgard Europe and commercial-property REIT PS Business Parks (PSB).

Business context and operating portfolio

At June 30, Public Storage had interests in 2,081 self-storage facilities in the U.S. and Europe, including approximately 133 million U.S. net rentable square feet; it also held a 49% interest in Shurgard Europe and an approximately 41% interest in PSB. Domestic self-storage generated 93% of revenue in the first half.

Financial and operating results

  • Revenue: Q2 total revenue was $485.4 million, up 6.5% from $455.8 million. First-half revenue was $956.3 million, up 6.8% from $895.6 million.
  • Profit and per-share results: Q2 net income was $261.7 million versus $198.9 million; diluted EPS was $1.20 versus $0.77. First-half net income was $473.9 million versus $405.7 million; diluted EPS was $2.14 versus $1.50. Common-shareholder income was $207.7 million for Q2 and $369.6 million for the first half.
  • Same-store self-storage: Q2 revenue rose 5.1% and NOI rose 8.4%; first-half revenue rose 5.3% and NOI rose 8.9%. Q2 average occupancy was 94.0%, up from 92.4%, and realized rent per occupied square foot increased 3.4% to $13.85. First-half NOI was $575.8 million.
  • Margins and costs: Same-store gross margin before depreciation was 70.8% in Q2 versus 68.7%; first-half margin was 69.4% versus 67.1%. Same-store operating costs declined 2.0% in Q2 and 2.2% in the first half, despite higher property taxes.
  • FFO: Management-reported FFO per diluted common share was $1.83 for Q2 versus $1.38 and $3.40 for the first half versus $2.73. Core FFO per share was $1.80 versus $1.62 for Q2 and $3.45 versus $3.06 for the first half. Both are non-GAAP measures.
  • Cash flow: First-half operating cash flow was $672.6 million, compared with $605.8 million. Investing activities used $104.8 million and financing activities used $172.8 million. Cash increased to $410.9 million from $17.2 million at year-end 2012.
  • Debt and liquidity: Notes payable were $111.7 million at June 30, down from $335.8 million at year-end; the $133.0 million credit-facility balance at year-end was repaid in January. No credit-facility borrowings were outstanding at June 30 or August 2. The revolving facility is $300 million, subject to reductions for standby letters of credit. Management said cash and operating cash flow should be sufficient for operating needs, debt service, capital improvements and distributions.
  • Distributions and equity: Common dividends declared were $1.25 per share for Q2, versus $1.10; first-half dividends were $2.50 versus $2.20. The Board declared another $1.25 quarterly common dividend on August 1. Preferred-share liquidation preference increased to $3.56 billion following $725 million of gross Series W and X issuance in the first half.

Material changes and unusual items

  • Q2 common-shareholder income increased $75.4 million year over year. Management attributed the increase primarily to a $29.6 million favorable change in foreign-exchange results, a $28.5 million increase in self-storage NOI, and $16.8 million less income allocated to preferred holders in connection with redemption accounting. First-half common-shareholder income increased $111.9 million, principally from $58.8 million higher self-storage NOI and $43.9 million less preferred-redemption allocation.
  • Foreign-currency results were a $5.9 million gain in Q2 2013 versus a $23.7 million loss in Q2 2012; for the first half, the company recorded a $6.8 million loss versus an $11.5 million loss. These results primarily reflect the U.S.-dollar value of the euro-denominated Shurgard loan. The company had no currency hedges.
  • Self-storage expansion and development spending added 293,000 square feet during the first half. The development pipeline was estimated to add 1.4 million square feet at an aggregate cost of approximately $198 million; $74 million had been incurred by June 30.
  • After quarter-end, the company expected to acquire 29 facilities for approximately $374 million, adding about 2.3 million square feet. Approximately $101 million had been completed by August 2; the remainder was under contract and subject to customary closing conditions.

Outlook, risks and contingencies

  • Management expected continued domestic revenue growth for the rest of 2013 but cautioned that the year-over-year occupancy advantage was likely to narrow as comparisons became more difficult. It gave no specific full-year revenue, earnings or FFO guidance in the supplied filing text.
  • Management expected approximately 5% growth in same-store property taxes for the remainder of 2013, moderate payroll increases, flat repairs and maintenance excluding snow removal, and continued advertising-cost declines at a slower pace than in the first half.
  • Shurgard Europe same-store occupancy was 80.2% in Q2 versus 83.4%; same-store revenue declined 3.0% and NOI declined 6.9% at constant exchange rates. A 20% U.K. VAT on rental revenue, effective November 2012, pressured U.K. rents. Management expected European same-store revenue to decline year over year for the remainder of 2013.
  • Public Storage’s $404.5 million loan to Shurgard Europe is euro-denominated, bears 9% interest and matures in February 2015. Shurgard Europe’s bank debt requires significant principal repayments through November 2014, limiting expected repayments on Public Storage’s loan in the interim. Shurgard was considering refinancing amounts owed to Public Storage; a refinancing could reduce interest income and currency gains or losses.
  • Key disclosed risks include real-estate demand and competition, development approvals and cost/timing, acquisitions and integration, foreign exchange and joint-venture exposure, REIT qualification and tax matters, insurance and catastrophic losses, and concentration of approximately 20% of facilities in California. Management said pending legal claims were not expected to result in material loss; insurance limits could be exhausted by multiple catastrophic events. No impairment charges were recorded for periods presented.

Important facts for investors to verify

  • Whether same-store occupancy, rent growth and NOI growth persist as management expects the occupancy comparison to narrow.
  • Completion, final price and financing of the 29-facility acquisition program, and progress, costs and approvals for the $198 million development pipeline.
  • Shurgard Europe’s operating performance, bank-debt repayment and any refinancing of its $404.5 million Public Storage loan, including resulting effects on cash receipts and foreign-exchange exposure.
  • Cash requirements from common and preferred distributions, remaining debt maturities and the company’s continued access to equity capital on acceptable terms.
  • Exposure to rising property taxes, insurance claims, California market concentration, REIT compliance and other contingencies identified in the filing.