01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Public Storage's FY2007 10-K (filed February 29, 2008) shows a company still digesting the August 2006 Shurgard merger, with net income up to $457.5 milliona in 2007 from $314.0 million in 2006, largely because 2006 included merger-related charges and a full year of the acquired portfolio in 2007.
Total revenues rose to $1.82 billionb, net operating income from domestic self-storage grew 21% to $492 million, and diluted EPS was $1.17 versus $0.33. Beneath the headline growth, however, same-store revenue growth has slowed sharply (2.1% for the legacy Public Storage pool), and Shurgard portfolio occupancy is being pushed up through aggressive pricing and discounting that is pressuring the legacy portfolio. Management also expects reduced 2008 development activity in the U.S. and anticipates continued softness in self-storage demand tied to the housing slowdown.
Balance sheet strength remains a core theme. Debt was about $1.07 billionc against $10.6 billion of total assets, with a debt ratio of roughly 8.4% and no drawn balance on the $300 million revolver. Preferred shares outstanding total about $3.5 billion, funding growth with permanent capital, and the company intends to fully amortize debt rather than refinance it.
Key near-term items include a proposed sale of a 51% stake in Shurgard Europe (not yet signed), a pending European joint venture arbitration scheduled for June 2008, and a $189 milliond First Shurgard loan extension request. For investors, the central questions are whether the legacy portfolio's occupancy and rent growth can recover, whether the Shurgard Europe transaction closes at the expected value, and how the company will handle roughly $340 million in common dividends (at $2.00 per share, with a $0.55 quarterly rate announced for 2008) while preferred redemptions and buybacks compete for cash.
02—Key points
Key Highlights
- Net income rose to $457.5M in 2007 from $314.0M in 2006; diluted EPS was $1.17 vs. $0.33, reflecting the full-year effect of the Shurgard merger and a $57.6M foreign currency gain on intercompany loans.
- Total revenues reached $1.82B (up 31.5%), with domestic self-storage NOI up 21% to $492M, though same-store Public Storage rental income grew only 2.1%.
- Balance sheet is conservative: debt of about $1.07B on $10.6B of assets, a debt ratio of roughly 8.4%, and an undrawn $300M revolving credit facility.
- Roughly $3.5B of preferred shares outstanding fund growth; Series W, X and V preferreds become redeemable in 2008, but management says refinancing is not advantageous under current market conditions.
- A proposed sale of a 51% stake in Shurgard Europe is in principle only, with no binding agreement signed and completion targeted for end of Q1 2008.
- Pending legal items include an ICC arbitration with European joint venture partners set for June 30, 2008, and a derivative lawsuit on appeal.
- Common distributions were $2.00 per share for 2007, with a $0.55 quarterly dividend declared for Q1 2008 (a 10% increase); the Hughes Family owns about 25% of common shares.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
| Revenue | $1.79B |
| Interest Expense | $63.67M |
| Net Income | $457.54M |
| EPS (Basic) | $1.18 |
| EPS (Diluted) | $-0.01 |
| Shares Outstanding (Basic) | 169.34M |
| Shares Outstanding (Diluted) | 169.85M |
05—Questions
Frequently Asked Questions
Why did net income more than double in 2007?
Most of the increase reflects the first full year of operations from the Shurgard merger, which closed in August 2006, and the absence of roughly $44M in 2006 merger integration costs and $176M in intangible amortization that depressed 2006 results. Other contributors were a $57.6M foreign currency gain and lower general and administrative expense. Depreciation and amortization rose sharply, partly offsetting these gains.
Is same-store growth healthy?
Mixed. Legacy Public Storage same-store rental income rose only 2.1% in 2007, with occupancy falling to 88.1% at year-end, partly because management shifted tenant flow to the acquired Shurgard facilities through discounting. Shurgard same-store revenue grew 4.7%, and management expects pressure on the legacy pool to ease, but it does not give a timeline for returning to higher growth.
What is happening with Shurgard Europe?
Public Storage reached an agreement in principle to sell a 51% interest in Shurgard Europe to a prospective investor at a price consistent with the terminated 2007 share offering. No binding agreement had been signed as of the filing, and closing depends on signing and conditions being met. Public Storage plans to keep a significant minority stake, and it must also seek a lender waiver on a change-of-control clause in the Second Shurgard credit facility.
Is the dividend secure, and how is it funded?
The 2007 common distribution totaled $340M ($2.00 per share), and the Board declared a $0.55 quarterly rate for Q1 2008. Operating cash flow of $1.01B covered preferred dividends (about $237M), common dividends, and capital improvements, leaving about $324M for debt principal and reinvestment. The REIT must distribute at least 90% of taxable income, so the payout is largely set by that requirement.
What are the main risks for investors?
Key risks include slowing self-storage demand from the housing slowdown and competitive discounting, the uncertain Shurgard Europe transaction, joint venture disputes including the First and Second Shurgard exit arbitration, the Hughes Family's ability to control shareholder votes (about 25% ownership, with a 47.66% permitted limit), and potential loss of REIT status, which would substantially reduce funds available for dividends.
06—Continue