Public Storage — FY 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014, filed February 24, 2015. It includes unaudited quarterly data, including the fourth quarter, but reports primarily on the full year. Public Storage is a Maryland REIT whose principal business is owning and operating U.S. self-storage facilities. At year-end it had interests in 2,250 U.S. facilities; it also held a 49% interest in Shurgard Europe and a 42% interest in PS Business Parks (PSB).
Key financial metrics
Amounts below are U.S. dollars; financial statement amounts are rounded to millions.
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Revenue | $2,195.4 million | $1,981.7 million | Up 10.8% |
| Operating income | $1,068.1 million | $962.5 million | Up 11.0%; operating margin approximately 48.7% versus 48.6% |
| Net income | $1,150.0 million | $1,057.5 million | Up 8.7% |
| Net income allocable to common shareholders | $908.2 million; $5.25 diluted EPS | $844.7 million; $4.89 diluted EPS | Up 7.5% in common income and $0.36 per diluted share |
| FFO per diluted share | $7.98 | $7.53 | Up 6.0%; non-GAAP measure |
| Core FFO per share | $8.09 | $7.44 | Up 8.7%; company-defined non-GAAP measure |
| Cash from operating activities | $1,606.8 million | $1,430.3 million | Up 12.3% |
| Cash used in investing activities | $213.0 million | $1,412.4 million | Lower outflow, including loan proceeds from Shurgard and reduced acquisitions |
| Cash used in financing activities | $1,225.4 million | $16.2 million | Primarily distributions and repayment of bridge borrowings |
| Cash and total debt at year-end | $187.7 million cash; $64.4 million debt | $19.2 million cash; $839.1 million debt | Bridge financing was repaid in 2014 |
Same-store U.S. facilities generated $1,836.7 million in revenue, up 5.4%, and $1,338.0 million in net operating income (NOI), up 6.7%. Same-store NOI margin before depreciation was 72.9%, compared with 71.9%. Average occupancy increased to 93.9% from 93.3%, and realized annual rent per occupied square foot rose 4.8% to $14.84.
Common distributions were $5.60 per share for 2014, versus $5.15 in 2013. The company distributed $232.6 million to preferred shareholders and $967.9 million to common shareholders and restricted share unitholders. Preferred equity totaled $4.325 billion at year-end; it is equity, not debt. The company reported $9.5 billion in total equity and $9.8 billion in total assets.
Material changes versus the prior comparable period
- Revenue and operating income increased, driven by same-store operating growth and acquired or newly developed facilities. Same-store revenue growth combined higher realized rent with modest occupancy gains.
- Same-store operating costs rose 1.9%, slower than revenue growth. Property taxes increased 3.3%; repairs and maintenance rose 8.1%, partly because snow-removal costs increased.
- Depreciation and amortization increased to $437.1 million from $387.4 million, largely reflecting acquisitions and acquired tenant intangibles.
- The company acquired 44 facilities for approximately $431 million in 2014, compared with 121 facilities for approximately $1.2 billion in 2013. Acquisitions contributed to growth but also increased depreciation.
- PSB equity earnings rose to $56.3 million from $23.2 million, including Public Storage’s $36.5 million share of PSB’s real-estate sale gain. Shurgard Europe equity earnings declined to $29.9 million from $32.7 million.
- Interest and other income fell to $4.9 million from $22.6 million, principally because the Shurgard shareholder loan was sold in part and then repaid. Foreign currency results shifted from a $17.1 million gain to a $7.0 million loss.
Outlook, management commentary, risks and unusual items
- Management expected continued U.S. rental growth in 2015 from annual increases for existing tenants, higher move-in rates and reduced promotional discounts. It cautioned that short-term rental and occupancy trends are volatile and not necessarily predictive.
- Management expected property-tax expense growth of approximately 4%–5% in 2015, modestly higher on-site payroll, inflationary pressure on several operating costs, and approximately flat advertising expense. These are operating expectations, not formal earnings guidance.
- The development pipeline at year-end was estimated at $411 million and 3.5 million net rentable square feet; $105 million had been spent, with most remaining costs expected in 2015. Some projects depended on approvals. Management warned that new developments may take three to four years to stabilize and could dilute earnings in the near term.
- Management estimated 2015 capital resources of approximately $774 million: $188 million cash, $286 million available credit capacity and $300 million expected retained operating cash flow. Capital commitments were approximately $356 million, and expected maintenance capital expenditures were about $80 million. The company also said it might redeem up to $270 million of preferred shares and might issue medium- or long-term debt.
- In 2014, the company issued $762.5 million of preferred securities at an average coupon of 6.11% and repaid $750.1 million of bridge financing. Year-end debt was $64.4 million; the company reported a 0.5% Debt Ratio under its governing-document definition and compliance with its debt covenants.
- Shurgard Europe’s debt increased following refinancing, and Public Storage is exposed to euro movements. Management estimated that, if the exchange rate remained at $1.14 per euro throughout 2015, its equity earnings from Shurgard would fall approximately 14%, or $4.7 million, all else equal.
- Unusual items included PSB’s property-sale gain, a $7.8 million legal-settlement accrual in tenant reinsurance costs, and a $4.1 million reduction in those costs related to recognition of a deferred tax asset. The Shurgard loan repayment ended the associated loan balance and largely removed related future interest and foreign-exchange exposure.
- Principal risks include intense local competition, economic and demand changes, acquisition and development execution, property taxes and other operating-cost inflation, natural disasters and insurance limits, environmental or tenant claims, cybersecurity and systems disruption, REIT qualification and tax matters, and currency, debt and joint-venture risks in Europe. The Hughes family owned approximately 15.5% of common shares and could exert significant influence.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2014. The company said material loss from the legal proceedings described was remote.
Most important facts for investors to verify
- Whether same-store rent growth, occupancy and expense trends continued in 2015, especially as management expected occupancy gains to narrow.
- Development spending, entitlement status, stabilization pace and the effect of the pipeline on earnings and returns on capital.
- Acquisition pricing and yields, including whether new purchases meet management’s risk-adjusted return expectations.
- Cash available after shareholder distributions and maintenance spending; planned debt issuance or preferred-share redemptions and their cost.
- Shurgard’s operating performance, refinancing and euro exposure, plus PSB’s contribution excluding property-sale gains.
- Details and subsequent developments regarding the tenant reinsurance settlement, other legal contingencies, and the potential effect of insurance limits or adverse events.