How did Public Storage's core self-storage business perform in 2010?

Same Store revenues were essentially flat at $1.428 billion (up 0.3%). Occupancy improved 1.2% to 89.8%, but reduced rents and higher promotional discounts offset that gain, leaving realized rent per occupied square foot down 1.2% to $12.56. Momentum improved through the year, with Q4 2010 same-store rental income up 2.0%, and management expects to push rate increases to existing tenants more aggressively in 2011.

Why did net income to common shareholders fall in 2010?

Net income allocable to common shareholders fell to $399.2 million ($2.35 per diluted share) from $586.0 million ($3.47) in 2009. The main drivers were a $42.3 million foreign currency loss on the euro-denominated Shurgard Europe loan (versus a $9.7 million gain in 2009), a $35.8 million increase in income allocated to redeemed securities under EITF D-42, and the absence of a $30.3 million 2009 gain tied to a PS Business Parks equity offering.

How financially exposed is Public Storage to Europe?

The company holds a 49% equity interest in Shurgard Europe with a book value of $264.7 million and a $495.2 million (€373.7 million) loan due March 2013, bearing 9% interest. The loan is unsecured and exposed to euro/dollar movements, and Shurgard Europe faces refinancing needs at its joint ventures in May 2011 and July 2013. Management notes that Shurgard Europe's ability to refinance may be limited, which could require negotiated extensions or capital contributions.

Is the dividend well covered and is the balance sheet safe?

Operating cash flow was $1.09 billion in 2010, and cash available after capital improvements and noncontrolling distributions was about $991 million for Public Storage shareholders, versus $754.8 million paid in distributions, leaving roughly $236 million for debt principal and reinvestment. Debt is low at $568.4 million (about 6.5% of book total equity), with $456 million in cash and $102 million in marketable securities, and the company has a $300 million undrawn credit line expiring March 2012. The company carries Standard & Poor's A (senior debt) and preferred-share ratings of Baa1/BBB+/A-.

What are the main ownership and governance considerations for investors?

The Hughes Family, led by Chairman B. Wayne Hughes, owned about 16.7% of common shares at year-end 2010, and the declaration of trust permits them to hold up to 47.66% and to use cumulative voting, giving them significant influence over trustee elections and extraordinary transactions. Ownership limits of 3% for other holders of common shares and Maryland law provisions could also deter takeover attempts. The company also has a right of first refusal on Hughes-owned Canadian facilities operated under the Public Storage name, but holds no economic interest in them.

Public Storage 10-K FY2010 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.

Public Storage (PSA) closed 2010 with a strong balance sheet and stable, if still-recovering, core self-storage operations.

Same Store revenues were flat at $1.428 billion^a (up 0.3%), with occupancy rising 1.2% to 89.8% offset by a 1.2% decline in realized rent per square foot. Management indicates trends improved through the year, with same-store rental income up 2.0% in Q4 2010 and expectations for more aggressive rate increases to existing tenants in 2011. Net income allocable to common shareholders fell to $399.2 million ($2.35 diluted EPS) from $586.0 million, driven mainly by a $42.3 million foreign currency loss on the Shurgard Europe loan and by 2009 one-time gains that did not recur.

Net income allocable to Public Storage shareholders was $672.0 million^b. The balance sheet remains conservative: notes payable were $568.4 million against total assets of $9.5 billion (debt ratio about 4%, versus a 50% covenant limit), and cash plus marketable securities totaled roughly $558.5 million. Growth has been modest: 42 facilities were acquired for $239.6 million in 2010 and development is nominal.

Key risks include the $495.2 million^c loan to Shurgard Europe due March 2013 (exposed to euro movements and European refinancing risk), the 49% Shurgard Europe equity stake, the 41% PS Business Parks stake, a Hughes Family ownership of about 16.7% with a declaration of trust allowing up to 47.66%, and REIT qualification dependence. Common distributions were $3.05 per share in 2010 (up from $2.20 in 2009), and the Board declared a $0.80 quarterly dividend in February 2011. Management expects the recovery to continue into early 2011 but notes that competitive pricing pressure and the concentration of properties in California remain headwinds.

02—Key points

Key Highlights

Largest U.S. self-storage operator: 2,048 domestic facilities (about 130 million net rentable sq ft) in 38 states, plus 188 Shurgard Europe facilities and a 41% stake in PS Business Parks.
Same Store revenues stabilized at $1.428 billion (+0.3%), with occupancy up 1.2% to 89.8% while realized rent per occupied sq ft fell 1.2% to $12.56; Q4 2010 same-store rental income rose 2.0%.
Net income allocable to common shareholders declined to $399.2 million ($2.35 diluted EPS) from $586.0 million, largely due to a $42.3 million FX loss on the Shurgard Europe loan and the absence of 2009 gains.
Conservative leverage: notes payable of $568.4 million against $9.5 billion of total assets; debt ratio about 4% versus a 50% covenant; $456.2 million cash and $102.3 million marketable securities.
Key concentration and related-party risk: $495.2 million loan to Shurgard Europe due March 2013, plus the Hughes Family's 16.7% ownership and a Canadian Public Storage-branded business the company does not own.
Distributions of $3.05 per common share in 2010 ($515.3 million), up from $2.20 in 2009; the Board declared a $0.80 dividend on February 25, 2011.
Capital deployment restarted modestly: 42 facilities acquired for $239.6 million in 2010, five more in Nevada for $19.5 million in January 2011, and a $121 million loan to PS Business Parks in February 2011.

03—One dollar

04—Financials

Financial Highlights

10-KFY2010filed March 1, 2011

Revenue$1.61B Net Income$672.04M41.6% Net Margin EPS (Diluted)$2.35 Total Assets$9.50B Cash & Equivalents$456.25M Free Cash Flow$1.09B

Financial Statements

FY2010 against FY2009

Line item	FY2010FY2009	FY2009	Change
Revenue	$1.61B$1.62B	$1.62B	−0.6%
Operating Income	$692.65M—	—	—
Interest Expense	$30.23M$29.92M	$29.92M	+1.0%
Net Income	$672.04M$834.62M	$834.62M	−19.5%
EPS (Basic)	$2.36$3.48	$3.48	−32.2%
EPS (Diluted)	$2.35$3.47	$3.47	−32.3%
Shares Outstanding (Basic)	168.88M168.36M	168.36M	+0.3%
Shares Outstanding (Diluted)	169.77M168.77M	168.77M	+0.6%

05—Questions

Frequently Asked Questions

How did Public Storage's core self-storage business perform in 2010?
Same Store revenues were essentially flat at $1.428 billion (up 0.3%). Occupancy improved 1.2% to 89.8%, but reduced rents and higher promotional discounts offset that gain, leaving realized rent per occupied square foot down 1.2% to $12.56. Momentum improved through the year, with Q4 2010 same-store rental income up 2.0%, and management expects to push rate increases to existing tenants more aggressively in 2011.
Why did net income to common shareholders fall in 2010?
Net income allocable to common shareholders fell to $399.2 million ($2.35 per diluted share) from $586.0 million ($3.47) in 2009. The main drivers were a $42.3 million foreign currency loss on the euro-denominated Shurgard Europe loan (versus a $9.7 million gain in 2009), a $35.8 million increase in income allocated to redeemed securities under EITF D-42, and the absence of a $30.3 million 2009 gain tied to a PS Business Parks equity offering.
How financially exposed is Public Storage to Europe?
The company holds a 49% equity interest in Shurgard Europe with a book value of $264.7 million and a $495.2 million (€373.7 million) loan due March 2013, bearing 9% interest. The loan is unsecured and exposed to euro/dollar movements, and Shurgard Europe faces refinancing needs at its joint ventures in May 2011 and July 2013. Management notes that Shurgard Europe's ability to refinance may be limited, which could require negotiated extensions or capital contributions.
Is the dividend well covered and is the balance sheet safe?
Operating cash flow was $1.09 billion in 2010, and cash available after capital improvements and noncontrolling distributions was about $991 million for Public Storage shareholders, versus $754.8 million paid in distributions, leaving roughly $236 million for debt principal and reinvestment. Debt is low at $568.4 million (about 6.5% of book total equity), with $456 million in cash and $102 million in marketable securities, and the company has a $300 million undrawn credit line expiring March 2012. The company carries Standard & Poor's A (senior debt) and preferred-share ratings of Baa1/BBB+/A-.
What are the main ownership and governance considerations for investors?
The Hughes Family, led by Chairman B. Wayne Hughes, owned about 16.7% of common shares at year-end 2010, and the declaration of trust permits them to hold up to 47.66% and to use cumulative voting, giving them significant influence over trustee elections and extraordinary transactions. Ownership limits of 3% for other holders of common shares and Maryland law provisions could also deter takeover attempts. The company also has a right of first refusal on Hughes-owned Canadian facilities operated under the Public Storage name, but holds no economic interest in them.

06—Continue

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