Public Storage, Inc. (PSA), a leading real estate investment trust (REIT), has reported relatively modest second quarter results with FFO (funds from operations) of $1.40 per share compared to $1.10 in the year-earlier quarter.

Same-store revenue decreased 3.5% or $12.6 million year-over-year due to a 2.9% decline in realized rent per occupied square foot and a 1.1% fall in average occupancies. Total cost of operations decreased 3.4% during the quarter with reductions in media advertising and repairs and maintenance expenses, partially offset by an increase in property taxes. Consequently, net operating income decreased 3.6% year-over-year.

During the quarter, Public Storage sold 51% of its stake in Shurgard Europe to the New York Common Fund for $606 million. Public Storage currently owns 49% of the venture and continues to manage the properties. Spread across seven countries, Shurgard Europe has an interest in 184 facilities spanning 9.8 million net rentable square feet.

We like the sale from a strategic standpoint. The sale brings in a strong institutional partner, and gives Public Storage plenty of cash to pursue acquisitions, development and possibly share buybacks.

Furthermore, Public Storage has extended its existing €391.9 million loan to Shurgard Europe to March 31, 2010. The company also extended its commitment to provide Shurgard Europe up to €305 million additional loans, which would be utilized to either fund new acquisitions or repay its debt.

At quarter end, Public Storage had approximately $585 million of unrestricted cash and $300 million availability on its line of credit. The company has $524 million debt maturing in 2009 and no outstanding debt in 2010. With adequate liquidity, we believe that Public Storage will be able to meet its near-term debt maturities.

However, with the continued recession in the US, self-storage operations are likely to deteriorate in the upcoming quarters as consumers cut out on non-essential spending. In addition, slower housing sales and new home starts will negatively affect demand for space. This could affect the long-term profitability of the company. Nevertheless, we maintain our Neutral recommendation.

Zacks Investment Research
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