10-QPeriod: Q2 FY2007

Public Storage Quarterly Report for Q2 Ended Jun 30, 2007

Filed August 9, 2007For Securities:PSAPSA-PRPSA-PFPSA-PGPSA-PHPSA-PIPSA-PJPSA-PMPSA-PNPSA-POPSA-PPPSA-PQPSA-PSPSA-PKPSA-PL

Summary

Public Storage (PSA) reported its second quarter 2007 financial results, showing a significant decrease in net income compared to the prior year. This decline was primarily driven by higher depreciation and amortization expenses, largely resulting from the acquisition of Shurgard Storage Centers in August 2006. The company also incurred increased general and administrative expenses related to its proposed European share offering and its reorganization as a Maryland REIT. Despite the drop in net income, the company highlighted operational improvements, including growth in its Same Store portfolio and newly developed/acquired facilities. Occupancy rates for the domestic self-storage portfolio improved year-over-year, although promotional discounts to drive occupancy impacted realized rental rates. Management expressed confidence in the company's liquidity and ability to fund its operations and growth strategies through internally generated cash flow and equity issuances, while continuing its strategy of retiring debt.

Key Highlights

  • 1Net income decreased to $77.1 million in Q2 2007 from $128.9 million in Q2 2006, primarily due to increased amortization and depreciation from the Shurgard acquisition.
  • 2General and administrative expenses rose significantly due to costs associated with a proposed European share offering and REIT reorganization.
  • 3Same Store net operating income (before depreciation) grew by 1.5% year-over-year, driven by a 1.7% increase in revenue.
  • 4The company's domestic self-storage portfolio average occupancy improved to 89.7% in Q2 2007 from 88.6% in Q2 2006, with in-place rents showing growth.
  • 5Diluted earnings per common share decreased significantly to $0.08 in Q2 2007 from $0.55 in Q2 2006.
  • 6The company ended the quarter with $46.7 million in cash and cash equivalents, down from $535.7 million at the end of 2006, primarily due to debt repayments and preferred share redemptions.
  • 7Public Storage issued $500 million of 6.625% Series M Preferred Stock in January 2007 and followed up with a $172.5 million issuance of 7.000% Series N Preferred Stock in July 2007.

Frequently Asked Questions

The primary reasons for the decline in net income are increased amortization expenses related to intangible assets acquired in the Shurgard merger and higher depreciation expenses on facilities acquired from Shurgard. Additionally, increased general and administrative expenses associated with a proposed European share offering and the company's REIT reorganization also contributed to the decline.

The Shurgard acquisition, completed in August 2006, has significantly increased Public Storage's asset base, revenue, and operating expenses. While it boosted rental income and expanded the company's geographic reach, it also led to a substantial increase in depreciation and amortization expenses, impacting net income. The integration of Shurgard's properties is ongoing, with efforts focused on improving occupancy and operational efficiencies.

Public Storage ended the quarter with $46.7 million in cash and cash equivalents. The company believes its internally generated cash flow is sufficient to cover operating expenses, capital improvements, debt service, and distributions. They primarily fund growth and acquisitions through permanent equity capital, specifically common and preferred equity, citing advantages in managing REIT distribution requirements and avoiding refinancing risks associated with traditional debt.

The company is implementing aggressive pricing, promotional discounts, and expanded marketing programs to improve occupancy levels across its entire portfolio. While this strategy has led to growth in occupancy, it has also put pressure on realized rental rates and growth for the Same Store facilities due to a shift in new tenant demand towards the acquired Shurgard properties. Management expects these pressures to ease as Shurgard properties stabilize and the overall tenant base becomes more seasoned.