Public Storage — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the same periods in 2015. Public Storage is a REIT focused on self-storage. At quarter-end, it had direct and indirect interests in 2,310 U.S. facilities and a 49% interest in Shurgard Europe.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $634.2M | $588.6M | $1,246.0M | $1,153.5M |
| Operating income | $336.9M | $300.1M | $647.2M | $561.6M |
| Net income | $358.4M | $328.0M | $675.7M | $611.3M |
| Net income allocable to common shareholders | $280.8M | $263.9M | $522.1M | $476.5M |
| Diluted earnings per common share | $1.61 | $1.52 | $3.00 | $2.75 |
| FFO per diluted share (non-GAAP) | $2.34 | $2.15 | $4.43 | $4.06 |
Q2 revenue rose 7.7%; six-month revenue rose 8.0%. Self-storage same-store revenue increased 6.0% in Q2 and 6.2% for the half, chiefly from higher realized rents. Same-store occupancy averaged 95.3% in Q2, versus 95.4%; realized rent per occupied square foot increased 6.1%. Same-store NOI rose 6.6% in Q2 and 8.4% for the half. Self-storage NOI margin before depreciation was 73.5% in Q2 versus 73.2%.
Six-month operating cash flow was $964.7M, compared with $839.6M. Investing activities used $287.8M and financing activities used $520.8M. Cash ended at $260.1M, up from $104.3M at year-end 2015. Capital expenditures to maintain facilities were $38.2M in cash; development spending was $135.0M and cash acquisitions were $184.7M.
Financial position and capital
At June 30, 2016, total assets were $10.0B and total equity was $8.8B. Debt was $436.8M: $379.8M of euro-denominated senior unsecured notes and $57.0M of mortgage notes. The company had no revolver borrowings and reported $484.8M of available capacity under its $500M credit facility, net of letters of credit. Debt carried a 2.3% weighted-average effective rate; the notes and credit facility covenants were reported in compliance. Total liabilities of $1.23B include $487.5M of preferred shares called for redemption and presented as a liability.
Cash distributions paid in the first half totaled $729.0M, including $607.6M to common shareholders and restricted unit holders ($3.50 per share) and $121.5M to preferred shareholders. The board declared a Q3 common dividend of $1.80 per share. In July, the company issued Series D preferred shares for $325.0M gross proceeds and redeemed Series R preferred shares for $487.5M.
Material changes and unusual items
- Common-shareholder income increased $16.9M in Q2 and $45.6M for the first half. Higher self-storage NOI was the principal driver; the Q2 comparison also benefited from an $8.6M foreign-exchange gain. Preferred-redemption allocations reduced common income by $15.5M in Q2 and $26.9M in the half.
- Q2 2015 included $16.7M in gains on real estate investment sales; first-half 2015 included $18.2M, versus $0.7M in first-half 2016.
- The company acquired 24 facilities for $197.6M in the first half and opened development and expansion projects adding 1.269M square feet. At quarter-end, projects in process were expected to add 4.9M square feet at an estimated total cost of $630.7M.
- Preferred-share refinancing in the first seven months of 2016 included redemptions totaling $862.5M at a 6.42% weighted-average coupon and issuances totaling $825.0M at a 5.156% weighted-average coupon.
- No impairment charges were recorded in the periods presented. Management reclassified certain prior-period revenue and expense items and revised segment presentation; prior-period amounts were adjusted for comparison.
Outlook, commentary, and risks
Management expects same-store revenue growth to moderate during the remainder of 2016, while anticipating continued rent increases to existing tenants and higher rates for new tenants. It reported softer demand in Houston, Denver, Chicago, New York, and Washington, D.C., attributing it partly to local conditions and additional supply. Increased internet and planned television marketing, lower rental rates, and larger promotions may support demand but are expected to pressure near-term operating trends. Management also expects property-tax expense growth of approximately 4.5%–5% for the remainder of 2016 and a significant Q3 increase in advertising and selling expense.
Management estimated next-12-month capital resources of approximately $1.4B against current planned needs of approximately $1.1B. Planned needs included $402.6M remaining for the current development pipeline, $169.4M for acquisitions acquired or under contract after quarter-end, $26.7M in debt principal repayments, and the $487.5M Series R redemption. Management cautioned that needs could rise with additional development or acquisitions. Development faces entitlement and permitting constraints and can dilute earnings while facilities lease up; management estimated three to four years to stabilize newly developed space.
Key risks include local economic and demand shifts, new competition and supply, property taxes, development and acquisition execution, foreign-currency movements and European operations, REIT qualification and tax matters, insurance exposure, and legal or regulatory claims. The company said material loss from pending legal proceedings was remote. Its property insurance limits could be exceeded in multiple catastrophic events. No material off-balance-sheet arrangements were reported. Management stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether same-store rent growth can continue as demand softens and occupancy trends diverge by market, particularly in Houston and Chicago.
- Whether the development pipeline and post-quarter acquisitions meet expected yields, timing, permitting requirements, and funding assumptions.
- The effect of preferred redemptions, new preferred issuance, and the common dividend on cash needs and per-share results.
- How euro exchange rates and Shurgard Europe’s debt, taxes, and operating performance affect reported earnings and equity.
- Whether reported growth is sustained in operating cash flow and core operations, considering prior-period property-sale gains and foreign-exchange movements.