Public Storage — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request refers to 2013 Q4, this is an annual filing; quarterly figures are identified separately below. Amounts are in U.S. dollars.
Business context
Public Storage is a Maryland REIT focused on self-storage. At year-end it had interests in 2,200 U.S. facilities across 38 states, totaling about 141 million net rentable square feet. The company also held a 49% interest in Shurgard Europe and an approximately 42% common equity interest in PS Business Parks (PSB). Domestic self-storage generated 93% of 2013 revenue.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1.982 billion | $1.843 billion | +7.6% |
| Operating income | $962.5 million | $872.0 million | +10.4% |
| Operating margin | 48.6% | 47.3% | +1.3 percentage points |
| Net income | $1.058 billion | $943.0 million | +12.1% |
| Net income allocable to common shareholders | $844.7 million | $669.7 million | +26.1% |
| Diluted earnings per common share | $4.89 | $3.90 | +$0.99 |
| FFO per diluted common share | $7.53 | $6.31 | +19.3% |
| Core FFO per diluted common share | $7.44 | $6.68 | +11.4% |
| Cash provided by operating activities | $1.430 billion | $1.286 billion | +11.3% |
| Cash used in investing activities | $1.412 billion | $290.5 million | Outflow increased |
Same-store U.S. facilities recorded revenue growth of 5.3% and NOI growth of 8.2%. Average occupancy rose to 93.3% from 91.9%, realized annual rent per occupied square foot increased 3.8% to $14.13, and same-store operating costs fell 1.3%. The same-store operating margin before depreciation was 71.9%, up from 70.0%.
At December 31, 2013, cash and cash equivalents were $19.2 million, total assets were $9.876 billion, total debt was $839.1 million, and total equity was $8.819 billion. Debt was about 6% of assets before accumulated depreciation under the company’s stated Debt Ratio definition. The balance sheet also included $3.563 billion of preferred equity. Operating cash flow exceeded common and preferred shareholder distributions, but investment spending was elevated following acquisitions.
Common distributions were $5.15 per share for 2013, versus $4.40 in 2012. The board declared a $1.40 common quarterly distribution in February 2014. Maintenance capital expenditures were $71.3 million in 2013.
Material changes and Q4 data
- Public Storage acquired 121 facilities in 2013 for approximately $1.15 billion in cash, a sharp increase from 24 facilities for $225.5 million in 2012. Acquisitions contributed to higher revenue and depreciation.
- The development and expansion pipeline totaled about 1.8 million square feet, with estimated total costs of $196 million; $52 million had been incurred by year-end. Some projects remained subject to contingencies, including entitlement approval.
- Preferred securities issued totaled $725 million in 2013, versus $1.7 billion in 2012. Management said prevailing market coupon rates had risen to about 6.5%, compared with 5.2% on the preferred securities issued in early 2013.
- Fourth-quarter 2013 self-storage and ancillary revenue was $513.5 million, compared with $469.7 million in Q4 2012. Net income was $298.0 million versus $272.6 million, and diluted EPS was $1.41 versus $1.22.
- European same-store operations weakened: 2013 revenue declined 1.9% and NOI declined 3.4% at constant exchange rates, with average occupancy falling to 81.2% from 83.1%.
Outlook, risks and unusual items
- Management expected continued revenue growth in 2014, anticipated passing similar rent increases to long-term customers as in 2013, and expected earnings growth from acquired and developing facilities as they stabilized. It cautioned that short-term operating trends are volatile and not necessarily predictive.
- Management forecast 2014 same-store property tax growth of approximately 4.5%–5%, modestly higher on-site payroll, and higher repairs and utilities in early 2014 because of severe winter weather in some markets.
- Year-end 2014 estimated capital commitments included $726.2 million of debt maturities and approximately $145 million of remaining development spending. Management stated expected capital resources were insufficient to cover commitments and identified possible financing through securities, debt, greater credit capacity, or joint ventures.
- A $700 million unsecured term loan, entered into in December 2013 to finance acquisitions, was due December 2, 2014. At February 25, 2014, $600 million remained outstanding and the revolving credit facility had no borrowings. The company also had $88.953 million of secured notes payable at year-end.
- On January 28, 2014, the Shurgard Europe joint-venture partner purchased 51% of Public Storage’s €311 million shareholder loan for $216.2 million cash; the remaining loan maturity was extended to April 2019. Shurgard Europe also had a bank loan of about €107.5 million due November 2014 and was seeking refinancing.
- Non-GAAP measures FFO, Core FFO and NOI supplement—but do not replace—GAAP earnings and cash flow. FY2013 included a $17.1 million foreign-exchange gain, primarily related to the euro-denominated Shurgard loan. Depreciation and amortization rose $29.6 million, largely due to acquisitions. No impairment charges were recorded in the periods presented.
- Key risks include local competition and economic conditions, acquisition integration and development approvals, property taxes and operating-cost inflation, natural disasters and insurance limits, cybersecurity and systems disruption, foreign-exchange and Shurgard refinancing exposure, and continued REIT qualification. The Hughes family held about 15.8% of common shares and may significantly influence shareholder votes. The company reported that material loss from disclosed legal proceedings was considered remote.
Most important facts for investors to verify
- Whether the 2013 acquisition portfolio and development pipeline deliver expected stabilized returns, given acquisition costs, integration needs, and entitlement risks.
- How the $600 million term-loan balance due in December 2014 was ultimately refinanced or repaid, and the cost and effect of any replacement capital.
- Shurgard Europe’s ability to refinance its November 2014 bank maturity and the implications of the shareholder-loan sale and extension for Public Storage’s future income and foreign-exchange exposure.
- Whether U.S. same-store occupancy, rent growth, and cost control remained durable as management expected, particularly with occupancy comparisons becoming more difficult.
- The sustainability and coverage of common distributions, including the impact of required REIT distributions and preferred-share obligations.