01—Abstract
Summary
Summary of the 10-K filed February 27, 2012. Cited figures are marked; the original filing is the authoritative source.
Public Storage's FY2011 10-K shows a company that remains highly profitable and very lightly levered, with growth now driven by improving same-store self-storage fundamentals rather than acquisitions or development.
Net income allocable to common shareholders was $561.7 milliona, or $3.29 per diluted share, up from $2.35 in 2010, and FFO per diluted share rose 20.1% to $5.67. Same Store revenue grew 4.6% on 1.4 points of higher occupancy (91.1%) and a 2.8% increase in realized rent per occupied square foot, and management said rental rate increases accelerated in the second half of 2011 and expects continued positive rental income growth in 2012. Balance sheet strength is pronounced: the Debt Ratio was about 3%, notes payable totaled only $398.3 million, the company held $139.0 million of cash, and 1,966 facilities were unencumbered.
The main investor debates are the company's heavy reliance on preferred equity as its primary growth financing and its exposure to Shurgard Europe. Public Storage issued $862.5 millionb of preferred securities in 2011 and another $460 million in January 2012, while redeeming roughly $1.1 billion of older, higher-coupon preferreds, which lowers cost of capital but keeps leverage in the form of perpetual preferred stock.
The 49% Shurgard Europe stake and the $402.7 millionc loan to it carry currency risk and depend on a European borrower whose same-store revenue growth slowed to 1.3% in 2011 and whose Wells Fargo loan must be repaid before Public Storage's loan. Acquisition activity was modest (11 facilities for $80.4 million), development was nominal, and the company announced a 15.8% increase in its quarterly common dividend to $1.10 per share in February 2012.
02—Key points
Key Highlights
- FY2011 net income allocable to common shareholders of $561.7 million, or $3.29 per diluted share, up $0.94 from $2.35 in 2010; FFO per diluted share of $5.67 vs. $4.72 in 2010 (+20.1%).
- Same Store Facilities (1,931 properties) revenue up 4.6% to $1.507 billion; NOI up 6.6%; weighted average occupancy 91.1% (+1.4 pts) and realized rent per occupied square foot $12.90 (+2.8%).
- Balance sheet is very conservative: Debt Ratio approximately 3% (covenant limit 50%), total notes payable $398.3 million, cash of $139.0 million, and 1,966 unencumbered facilities with net book value of about $6.9 billion.
- Heavy reliance on preferred equity for growth: $862.5 million of preferred issued in 2011, $460.0 million more in January 2012, and roughly $1.1 billion of older preferreds redeemed in 2011 to reduce cost of capital.
- Shurgard Europe exposure: 49% equity stake plus a $402.7 million euro-denominated loan at 9.0% maturing February 2015; Same Store revenue growth slowed to 1.3% in 2011 from 3.0% in 2010, and the Wells Fargo loan is repaid first.
- Dividend and distributions rising: 2011 common distributions of $3.65 per share, and the Board declared a 15.8% increase in the regular quarterly dividend to $1.10 per share on February 23, 2012.
- Limited growth investment: only 11 facilities acquired for $80.4 million in 2011, a nominal development pipeline, and a pending $42 million acquisition of six properties expected to close in Q1 2012.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 27, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $1.74B$1.61B | +7.6% |
| Operating Income | $762.81M$692.65M | +10.1% |
| Interest Expense | $24.22M$30.23M | −19.9% |
| Net Income | $823.84M$672.04M | +22.6% |
| EPS (Basic) | $3.31$2.36 | +40.3% |
| EPS (Diluted) | $3.29$2.35 | +40.0% |
| Shares Outstanding (Basic) | 169.66M168.88M | +0.5% |
| Shares Outstanding (Diluted) | 170.75M169.77M | +0.6% |
05—Questions
Frequently Asked Questions
Why did net income per share rise so much in 2011?
The increase was driven mainly by improved property operations, with Same Store NOI up 6.6%, and by a much smaller foreign currency loss of $7.3 million versus $42.3 million in 2010. Higher equity earnings and interest income from Shurgard Europe, plus lower income allocations to redeemed Equity Shares, Series A, also contributed. Net income allocable to common shareholders rose to $561.7 million from $399.2 million.
How strong is the balance sheet and how much debt does the company carry?
Very strong. Notes payable were $398.3 million at year-end 2011 against total assets of $8.93 billion, and the company reported a Debt Ratio of about 3% against a 50% limit set by its Senior Preferred Shares. Cash was $139.0 million, the $300 million line of credit was undrawn, the senior unsecured debt carried an A rating from S&P, and there were no significant maturities until 2013 ($264.9 million).
Why does Public Storage use preferred stock instead of debt to fund growth?
Management says preferred securities have no maturity or sinking fund, carry no financial covenants, and can be redeemed at the company's option after the non-call period, allowing refinancing at lower rates. Dividends on preferreds also count toward REIT distribution requirements. The trade-off is that preferred dividends (about $225 million per year) are a fixed cost that reduces cash available to common shareholders.
What are the main risks from the Shurgard Europe investment?
Key risks include currency movements affecting both the $375.5 million equity investment and the euro loan, limited control as a 49% partner with a 51% pension fund owner, and the fact that Shurgard Europe must prioritize repaying its $274 million Wells Fargo loan before Public Storage's loan. Shurgard Europe's Same Store revenue growth slowed to 1.3% in 2011, and the company does not expect cash distributions from Shurgard Europe in the foreseeable future.
Is the company's self-storage recovery likely to continue?
Management pointed to improving trends, with rental income up year over year since Q3 2010 and rate increases accelerating in the last two quarters of 2011, and it expects positive year-over-year rental income growth in 2012. However, it cautioned that competitive pricing will remain necessary to attract new tenants, that property tax expense is expected to grow about 4.5% in 2012, and that there can be no assurance the trends will continue.
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