Public Storage quarterly report, Q1 FY2011

Public Storage — Q1 2011 Form 10-Q

Reporting period: Three months ended March 31, 2011; unaudited. Public Storage is a REIT focused primarily on acquiring, developing, owning and operating self-storage facilities. Its portfolio also includes European self-storage interests and a commercial-property investment. Financial amounts below are in U.S. dollars.

Key financial results

Metric	Q1 2011	Q1 2010	Change
Total revenue	$419.8 million	$397.4 million	+5.6%
Net income	$210.6 million	$129.9 million	+62.1%
Net income allocable to common shareholders	$148.1 million	$34.7 million	+$113.4 million
Diluted earnings per common share	$0.87	$0.21	+$0.66
Net cash provided by operating activities	$264.8 million	$233.1 million	+$31.7 million

Self-storage rental revenue was $385.1 million, up 5.8%. Same-store revenue increased 3.4% to $362.9 million; same-store operating costs were essentially flat at $127.4 million, lifting net operating income (NOI, a non-GAAP measure) 5.4% to $235.5 million.
Same-store average occupancy was 89.8%, versus 88.3%; realized annual rent per occupied square foot was $12.62, up 1.4%. Revenue per available foot (REVPAF) rose 3.1% to $11.33. Same-store gross margin before depreciation and amortization was 64.9%, versus 63.7%.
Depreciation and amortization was $88.5 million, versus $84.7 million. General and administrative expense increased to $14.2 million from $10.1 million, mainly reflecting performance-based share compensation. Interest expense was $7.0 million, down from $7.3 million.
Cash and cash equivalents were $145.1 million at quarter-end, down from $456.3 million at December 31, 2010; the company also had no marketable securities remaining. Total assets were $9.44 billion and total liabilities $672.7 million.
Notes payable were $461.9 million, down from $568.4 million, following $105.5 million of principal payments. Debt was fixed-rate, with a weighted-average effective rate of 5.3%; management reported debt at 5.3% of total equity by book value. The $300 million revolving credit facility had no borrowings and $17.5 million of standby letters of credit outstanding; it expires March 2012.
After maintenance capital improvements of $11.9 million and distributions to noncontrolling interests and Public Storage shareholders, $55.6 million of operating cash flow remained for debt principal payments and reinvestment, compared with $48.6 million in Q1 2010.

Material changes and notable items

The increase in common-share earnings was substantially affected by a $31.3 million foreign-currency gain in Q1 2011, compared with a $34.8 million loss in Q1 2010. The gain principally reflected the stronger euro value of the company’s euro-denominated Shurgard Europe loan; it is not a measure of underlying self-storage operating growth.
Q1 2010 common earnings included a $25.7 million allocation related to redemption of Equity Shares, Series A. The filing identifies this as an EITF D-42 charge. The Series A shares were redeemed in April 2010.
Shurgard Europe acquired the remaining 80% interests in two joint ventures, adding 72 facilities, funded in part by a new $237.9 million Public Storage loan. At March 31, Public Storage’s loans to Shurgard Europe totaled $750.8 million, including a $512.9 million euro-denominated loan and the $237.9 million U.S.-dollar loan. The company said it did not expect short-term repayment of the latter after restructuring.
Public Storage also loaned PS Business Parks (PSB) $121 million in February; $5 million was repaid in April. Equity earnings from real estate entities increased to $13.7 million from $10.0 million, including a $3.0 million share of a PSB benefit from preferred-unit repurchases.
The company acquired five Nevada storage facilities for $19.6 million and completed a $3.7 million expansion. It was under contract to acquire two additional properties for approximately $28 million, subject to closing conditions.

Outlook, capital allocation and risks

Management said operating trends improved through 2010 and Q1 2011, and expected improved trends to continue in Q2 2011. It intended to be more aggressive with rent increases for existing tenants in 2011, while continuing competitive pricing and promotions for new tenants. Its full-year occupancy strategy was an average 89%–90% for same-store facilities.
Management expected the other, generally unstabilized facilities to contribute earnings growth in the remainder of 2011, while noting stabilization may take 24 months or longer and is not assured. The company had a minimal development pipeline and no current plans to expand development activity.
Management estimated approximately $67 million of capital improvements for the remainder of 2011. It described total remaining-2011 capital commitments of approximately $405.6 million, including $27.6 million of debt principal, the planned $28 million acquisitions and a $350 million partial redemption of Series I preferred shares.
Subsequent to quarter-end, the company issued $375 million of 6.5% Series Q preferred shares (gross proceeds) and called $350 million of 7.25% Series I preferred shares for redemption. The filing says the redemption would result in an approximately $10.8 million income allocation from common shareholders to preferred shareholders in Q2. The Board also declared a $0.95 common dividend per share on May 5, up 18.75% from $0.80.
Management said cash and internally generated operating cash flow should be sufficient for operating expenses, debt service, capital improvements and distributions for the foreseeable future, and that it was not dependent on new capital to meet obligations. It noted, however, that access to equity capital depends on market conditions. Approximately $265.6 million of debt principal was scheduled to mature in 2013.
Key risks include economic weakness and reduced tenant demand, competition, property-tax estimates and changes, natural disasters and insurance exposure, acquisition and integration execution, REIT qualification, joint-venture and European operations, and euro exchange-rate movements. The company reported no material off-balance-sheet arrangements; it considered pending legal matters unlikely to have a material adverse effect. Management stated disclosure controls were effective and no material change in internal control occurred during the quarter.

Important facts for investors to verify

How much of the earnings-per-share improvement reflects recurring property operations versus the foreign-currency gain and the prior-year preferred-share redemption allocation.
Whether same-store revenue, occupancy, rent growth and NOI trends persist through seasonal periods, and whether management achieves its occupancy and rent-pricing plans.
Credit, repayment and foreign-exchange exposure from the $750.8 million of Shurgard Europe loans, including the planned restructuring of the $237.9 million loan and Shurgard Europe’s third-party debt maturities.
Execution and funding of the planned Series I redemption, Series Q issuance, property acquisitions, common dividend and 2011 capital-improvement program.
Debt maturities, the March 2012 credit-facility expiration, and the company’s capacity to maintain distributions while funding investment and debt obligations.

Management cautioned that first-quarter results are not necessarily indicative of full-year results because of seasonality and other factors.