Public Storage — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Public Storage is a REIT focused on self-storage, with interests in European self-storage operator Shurgard Europe and commercial property REIT PS Business Parks (PSB). At quarter-end, it had interests in 2,064 U.S. self-storage facilities and a 49% interest in Shurgard Europe.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Total revenue | $442.6 million | $419.7 million | Up 5.5% |
| Net income | $206.7 million | $210.6 million | Down 1.8% |
| Net income allocable to common shareholders | $125.3 million | $148.1 million | Down $22.8 million |
| Diluted EPS | $0.73 | $0.87 | Down $0.14 |
| FFO per diluted common share (non-GAAP) | $1.35 | $1.48 | Underlying FFO before specified FX and preferred-redemption effects was $1.44 vs. $1.28 |
| Net cash provided by operating activities | $279.5 million | $264.8 million | Up $14.7 million |
| Cash and cash equivalents at March 31 | $620.1 million | $139.0 million at Dec. 31, 2011 | Q1 cash increase reflected financing activity |
| Notes payable at March 31 | $373.0 million | $398.3 million at Dec. 31, 2011 | About $264.9 million matures in 2013 |
Amounts are U.S. dollars. Financial statements report figures in thousands unless otherwise indicated. Public Storage reported $14.3 million of capital improvements in Q1. After capital improvements and distributions to shareholders and noncontrolling interests, management’s non-GAAP measure of cash available for debt principal payments and reinvestment was $20.2 million, versus $55.6 million in Q1 2011. The common distribution was $1.10 per share for the quarter; preferred distributions were $55.1 million.
Material changes and operating performance
- Same-store self-storage revenue rose 4.8% and net operating income (NOI, a non-GAAP measure) rose 6.3%. Average occupancy improved to 90.3% from 89.8%; realized annual rent per occupied square foot rose 4.1% to $13.17. Same-store NOI margin was 66.0%, versus 65.0%.
- Total self-storage NOI increased 7.6%, to $268.7 million, supported by same-store growth and acquired properties. Six facilities totaling 532,000 rentable square feet were acquired for $42.0 million in Q1.
- Reported common EPS and FFO per share declined despite stronger property operations. Management attributed the change principally to lower foreign-currency gains and income allocations associated with preferred-share redemptions, including a $24.9 million allocation to preferred holders. Foreign-currency gain was $12.2 million, versus $31.3 million a year earlier.
- Equity earnings from unconsolidated real estate entities fell to $9.1 million from $13.7 million, mainly because PSB’s equity earnings declined; Shurgard Europe’s equity earnings increased.
Outlook, liquidity, risks and unusual items
- Management expected positive year-over-year same-store rental-income growth to continue, targeted average same-store occupancy of approximately 90% for full-year 2012, and expected non-same-store facilities to contribute earnings growth as they stabilized. The filing cautions that Q1 results are seasonal and not necessarily indicative of the full year.
- Management expected 2012 capital improvements of approximately $70 million, funded from operating cash flow; property-tax expense growth of about 4%; relatively flat on-site manager payroll; and full-year repairs and maintenance, excluding snow removal, near 2011 levels. It did not expect growth in Shurgard Europe same-store NOI in 2012.
- At March 31, the company had a $300 million revolving credit facility expiring in 2017, with no borrowings; $15.9 million of standby letters of credit reduced available capacity. The company reported compliance with debt covenants and stated it expected cash and operating cash flow to cover operations, debt service, capital improvements and distributions.
- Subsequent to quarter-end, Public Storage paid $476.6 million to redeem Series M preferred shares on April 11; called $172.5 million of Series N preferred shares for redemption on July 2; and reported contracts, subject to conditions, to acquire four properties for $46.0 million. These transactions affect liquidity after the reported quarter-end cash balance.
- Foreign-exchange exposure is significant: the company had a €311.0 million loan to Shurgard Europe, reported as $414.8 million, bearing fixed interest of 9% and maturing February 2015. The loan is unhedged; exchange-rate movements affect reported earnings and the dollar amount ultimately recovered. Shurgard Europe’s cash use for its bank loan limits potential principal repayments to Public Storage.
- Risks include real-estate and local economic conditions, competition, acquisition and integration execution, joint-venture performance, currency fluctuations, REIT qualification and regulation, property taxes, tenant-insurance claims, catastrophic events and access to capital. Management considered pending legal matters unlikely to result in a material loss; insurance limits could be exhausted in multiple catastrophic events.
Important facts for investors to verify
- Reconcile Q1 reported FFO and EPS with the redemption-related allocations and foreign-currency gains; FFO and NOI are non-GAAP measures and are not substitutes for cash flow or GAAP income.
- Assess liquidity after the April Series M redemption, the planned July Series N redemption, the proposed acquisitions and the $264.9 million of 2013 debt maturities.
- Track same-store rent, occupancy, operating costs and seasonality against management’s 2012 commentary, especially property taxes and repairs.
- Review collectability, currency exposure and repayment constraints for the Shurgard Europe loan, and the performance and capital structure of PSB.
- Confirm the status and final terms of the four pending acquisitions and Series N redemption; the acquisitions remained conditional in the filing.