Public Storage quarterly report, Q3 FY2023

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Public Storage — Q3 2023 Form 10-Q

Business context and period. Public Storage owns and operates self-storage facilities, with ancillary tenant insurance, merchandise, and third-party management operations. This unaudited report covers the quarter and nine months ended September 30, 2023. At quarter-end, the company owned interests in 3,028 U.S. facilities with approximately 216.5 million rentable square feet and held a 35% interest in Shurgard. On August 14, it completed a holding-company/UPREIT reorganization; the company reported no change to consolidated assets, liabilities, or operating results.

Financial performance and position

  • Q3 revenue: $1.144 billion, up 5.1% from $1.088 billion. Self-storage revenue was $1.079 billion, up 5.0%; ancillary revenue was $65.1 million, up 7.1%.
  • Q3 earnings: Net income was $616.6 million versus $2.778 billion a year earlier; net income attributable to common shareholders was $563.2 million, or $3.20 per diluted share, versus $2.712 billion, or $15.38. The comparison is dominated by the $2.1 billion PS Business Parks (PSB) sale gain recorded in Q3 2022. Q3 2023 also included $47.9 million of foreign-exchange gains.
  • Q3 operating trends: Same-store revenue increased 2.5% and NOI increased 2.4%. Average occupancy declined to 93.4% from 94.5%; realized rent per occupied square foot rose 3.7%. Same-store operating cost increased 2.8%; reported same-store NOI margin before depreciation and amortization was 76.7%, versus 76.8%.
  • FFO: Q3 FFO was $4.58 per diluted share, down 1.7%; Core FFO was $4.33, up 4.8%. For the first nine months, FFO was $12.82 per share, down 2.0%, while Core FFO was $12.69, up 7.8%. These are non-GAAP measures and are not substitutes for net income or cash flow.
  • Nine-month results: Revenue was $3.358 billion, up 8.5%. Net income was $1.718 billion versus $3.951 billion; diluted EPS was $8.85 versus $21.44. Excluding the prior-year PSB sale gain, lower currency gains and the loss of PSB equity earnings also affected the comparison. Self-storage NOI rose 8.9% to $2.373 billion.
  • Cash flow: Nine-month operating cash flow was $2.455 billion, up from $2.381 billion. Investing activities used $3.048 billion, including $2.178 billion for the Simply Storage acquisition; financing activities provided $448.5 million. Cash and equivalents were $629.8 million at September 30, down from $775.3 million at year-end 2022.
  • Debt and liquidity: Notes payable totaled $9.030 billion on the balance sheet; principal outstanding was approximately $9.1 billion, with a 3.1% weighted-average effective rate. The $1.5 billion revolving facility had no borrowings and $14.6 million of letters of credit outstanding. The company reported compliance with debt covenants; its stated covenant measures included debt to total assets of approximately 16% and adjusted EBITDA to interest expense of approximately 21x.
  • Equity and distributions: Total equity was $10.202 billion. The quarterly common distribution was $3.00 per share; the board had raised the regular quarterly dividend from $2.00 effective in February 2023.

Material changes versus the prior comparable period

  • The $2.1 billion PSB disposition gain in 2022 makes reported earnings and EPS substantially lower year over year in 2023; it is not indicative of recurring operating performance.
  • Same-store revenue growth moderated: Q3 growth was 2.5%, compared with 6.1% for the first nine months. Management cited softer demand, lower occupancy, weaker move-in rates, and greater promotional discounts.
  • Debt and interest expense increased following a July 2023 $2.2 billion senior-note offering. Q3 interest expense rose to $58.4 million from $34.1 million; nine-month expense was $132.5 million versus $100.2 million.
  • On September 13, the company acquired BREIT Simply Storage for approximately $2.2 billion in cash, adding 127 owned facilities with 9.4 million rentable square feet and 25 third-party-managed facilities.
  • Q3 foreign-exchange gains were $47.9 million, down from $100.2 million in Q3 2022; nine-month gains were $19.9 million versus $237.3 million. Currency movements on Euro-denominated debt can make reported results volatile.

Outlook, management commentary, and risks

  • Management expected weaker industry demand for the remainder of 2023, citing macroeconomic uncertainty and reduced home-moving activity. It warned revenue growth could decline significantly and potentially turn negative year over year in Q4.
  • Management expected same-store property tax expense to grow 5.8% in 2023, primarily from higher assessed values, and anticipated inflationary pressure on on-site payroll. Marketing spending was increased to support move-ins.
  • The company estimated approximately $500 million of retained operating cash flow for 2023; it described expected retained operating cash flow over the next 12 months as approximately $400–$450 million. These are management estimates, not guarantees.
  • Approximately $806 million of principal repayments were scheduled in the next 12 months, including $700 million of dollar notes and €100 million of euro notes maturing in April 2024; management said it planned to refinance them. The company also cited $170.3 million of acquisitions under contract and $495.0 million remaining on its development pipeline.
  • Development and expansion projects totaled approximately $952.1 million, with completion costs of $495.0 million expected mainly over 18–24 months. The company noted permitting constraints and difficulty finding projects meeting return requirements.
  • Property of Tomorrow upgrades were expected to cost approximately $150 million in 2023; solar and LED spending was expected to be approximately $60 million. Solar panels had been installed at 395 facilities, toward a goal of more than 1,000.
  • Risks include softer demand and occupancy, inflation in labor and property costs, property-tax increases, foreign-exchange movements, natural disasters and insurance exposure, new competing storage supply, and possible deterioration in financing-market access or cost. Management considered material losses from disclosed legal proceedings remote; it reported no material changes to previously disclosed risk factors.

Most important facts for investors to verify

  • Track same-store occupancy, move-in rates, promotional discounts, and rent growth to assess whether demand and revenue stabilize after the expected Q4 slowdown.
  • Assess Simply Storage’s integration, occupancy, operating contribution, and returns against the approximately $2.2 billion purchase price and related borrowing.
  • Verify refinancing terms and cost for the April 2024 maturities, future interest expense, and continued covenant compliance.
  • Compare actual retained cash flow, capital spending, development commitments, and distributions with management’s estimates and the company’s ability to fund growth.
  • Separate recurring operating results from prior-year PSB gains and ongoing currency-related gains or losses; review FFO and Core FFO reconciliations alongside GAAP results.