Public Storage — FY2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Public Storage is a Maryland REIT focused on self-storage. At year-end, it had interests in 2,429 U.S. facilities across 38 states, with 162.0 million rentable square feet, and managed 33 facilities for third parties. It also held a 42% interest in PS Business Parks (PSB) and a 35.2% interest in Shurgard Europe.
Financial performance and condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2,754.3 million | $2,668.5 million | +3.2% |
| Net income | $1,717.2 million | $1,448.5 million | +18.6% |
| Net income allocable to common shareholders | $1,488.9 million | $1,171.6 million | +27.1% |
| Diluted earnings per common share | $8.54 | $6.73 | +26.9% |
| FFO per diluted share | $10.45 | $9.70 | +7.7% |
| Core FFO per diluted share | $10.56 | $10.23 | +3.2% |
| Cash from operating activities | $2,061.5 million | $1,975.7 million | +4.3% |
| Cash used in investing activities | $513.8 million | $739.9 million | Lower use |
| Cash used in financing activities | $1,619.6 million | $992.2 million | Higher use |
Amounts are in U.S. dollars. FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Self-storage operations: Revenue was $2,597.6 million, up 3.4%; segment net operating income (NOI) was $1,901.9 million, up 2.5%. Same-store revenue rose 1.5%, but same-store NOI increased only 0.9% as operating costs grew 3.2%. Same-store occupancy averaged 93.2%, down from 93.8%; realized rent per occupied square foot increased 2.3% to $17.54. Same-store operating margin before depreciation was 74.2%, versus 74.6%.
- Liquidity and debt: Year-end cash and equivalents were $361.2 million; total assets were $10.93 billion. Debt was approximately $1.42 billion, with a weighted-average effective interest rate of 2.6%. The $500 million revolving facility had no borrowings and $483.8 million of available capacity after letters of credit. Preferred equity was $4.03 billion. Management estimated approximately $1.1 billion of capital resources over the next year against planned needs of $711.4 million.
- Cash distributions: Common distributions were $8.00 per share for 2018, unchanged from 2017; preferred distributions totaled $216.3 million. The Board declared a $2.00-per-share common quarterly dividend in February 2019.
Material changes and unusual items
- Net income growth substantially exceeded FFO growth and included a $151.6 million gain recorded when Shurgard Europe’s IPO diluted Public Storage’s ownership from 49% to 35.2%, although Public Storage sold no shares. The result also included a $31.5 million gain on the sale of a West London property to Shurgard Europe and $37.7 million of the Company’s share of PSB real estate sale gains.
- General and administrative expense rose $35.8 million to $118.7 million, primarily reflecting $30.7 million of accelerated share-based compensation expense after the CEO and CFO announced their retirement from executive roles at year-end. Share-based compensation expense is expected to decline in 2019.
- Same-store revenue growth slowed from 3.0% in 2017 to 1.5% in 2018. Management cited softer demand, reduced pricing power for new tenants, and additional competing supply in several markets. Chicago and Dallas-Fort Worth same-store revenue declined 2.3% and 2.6%, respectively.
- Same-store property tax expense increased 5.3% in 2018; management expected approximately 5.0% growth in 2019. The filing also reports a $18.1 million foreign-currency gain in 2018, compared with a $50.0 million loss in 2017.
- Shurgard Europe completed its public offering in October 2018. Public Storage received a $145.4 million cash distribution from Shurgard in July. Management expected lower ongoing equity earnings from Shurgard in 2019, partly because offering proceeds might not be deployed immediately.
Outlook, risks, and contingencies
- Management expected continued moderate revenue growth in 2019, supported primarily by rent increases to existing tenants; it cautioned that near-term trends are volatile and not assurance of future growth. Increased internet marketing, competitive rates, and promotional discounts could support demand but weigh on near-term revenue trends.
- Management expected 2019 property maintenance capital expenditures of approximately $200 million, versus $139.4 million in 2018, and anticipated continued development dilution at levels similar to 2018. The $607.4 million development and redevelopment pipeline was expected to add approximately 5.2 million rentable square feet; projects have permitting and other contingencies. Fourteen facilities were acquired or under contract after year-end for $102.4 million.
- Debt principal maturities were concentrated in 2022 ($502.5 million) and thereafter ($891.5 million); the 2022 notes include $500 million due in September. The company reported compliance with debt covenants and no material off-balance-sheet arrangements.
- Key risks include intensifying self-storage supply and competition, local economic weakness, rising property taxes and labor costs, development delays or cost overruns, natural disasters and insurance limits, cybersecurity and operational-system disruptions, litigation, currency exposure, and maintaining REIT qualification. A California “split roll” property-tax initiative qualified for the November 2020 ballot; adoption could substantially increase taxes on the company’s California properties.
- The company called its 6.375% Series Y preferred shares for redemption at par ($285 million) on March 28, 2019. The filing states legal proceedings were not expected to result in material losses. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether same-store occupancy, new-tenant pricing, and revenue growth stabilize amid increased market supply; monitor especially Chicago, Dallas-Fort Worth, and other markets identified by management.
- Whether expense growth—particularly property taxes, payroll, marketing, and maintenance—continues to outpace same-store revenue growth.
- How much reported earnings growth reflects recurring operations versus the Shurgard IPO, property-sale gains, PSB gains, currency movements, and accelerated compensation expense; compare GAAP earnings with FFO and Core FFO.
- Progress, remaining cost, approvals, and lease-up of the development pipeline, as well as returns on acquisitions and redevelopment projects.
- Liquidity after the Series Y redemption and planned capital spending, and refinancing exposure around the $500 million 2022 debt maturity.
- Potential California property-tax changes and Shurgard’s operating results, distributions, currency exposure, and effect on Public Storage’s equity earnings.