Public Storage — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing includes fourth-quarter results; it is not a standalone quarterly report.
Business context
Public Storage is a Maryland REIT focused primarily on self-storage. At year-end, it consolidated 2,336 U.S. facilities with 154 million net rentable square feet and owned one U.K. facility. It also held a 42% interest in PS Business Parks and a 49% interest in Shurgard Europe. The filing reports 2,348 U.S. facilities including unconsolidated interests.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $2.561 billion | $2.382 billion | +7.5% |
| Operating income | $1.374 billion | $1.232 billion | +11.6% |
| Net income allocable to common shareholders | $1.184 billion | $1.053 billion | +12.4% |
| Diluted earnings per common share | $6.81 | $6.07 | +12.2% |
| FFO per diluted share | $9.70 | $8.79 | +10.4% |
| Core FFO per diluted share | $9.79 | $8.90 | +10.0% |
| Cash provided by operating activities | $1.945 billion | $1.748 billion | +11.3% |
| Cash used in investing activities | $716.7 million | $440.1 million | Higher investment outflow |
Self-storage NOI rose 8.4% to $1.788 billion. Same-store revenue increased 5.5% and same-store NOI rose 6.6%; same-store operating margin before depreciation was 74.9%, up from 74.1%. Average same-store occupancy remained 94.5%, while year-end occupancy decreased to 92.3% from 92.8%. Realized annual rent per occupied square foot increased 5.6% to $16.65.
At December 31, 2016, total assets were $10.130 billion, cash and cash equivalents were $183.7 million, and total debt was $390.7 million ($359.8 million of euro-denominated unsecured notes and $30.9 million of mortgage debt). Preferred equity was $4.368 billion. The $500 million revolving facility had no borrowings and $484.8 million of available capacity. Common distributions were $7.30 per share for the year, versus $6.50 in 2015; the Board declared a $2.00 quarterly common dividend in February 2017.
Fourth-quarter 2016 reported net income was $415.7 million and diluted net income per common share was $2.03, compared with $365.3 million and $1.74 in fourth-quarter 2015.
Material changes versus the prior year
- Same-store revenue growth moderated to 5.5% from 6.6%, although rent increases to existing tenants supported results. Same-store NOI growth slowed to 6.6% from 8.5%.
- Management reported softer demand: move-ins were below move-outs, and average rent per move-in rose only 1.3%, versus 5.7% in 2015. Rent roll-down increased to $9.9 million from $4.8 million.
- Acquisition and development activity expanded: Public Storage acquired 55 facilities for approximately $429 million, compared with 17 for approximately $169 million in 2015. Non-same-store NOI increased 24.1%.
- Debt increased to $390.7 million from $319.0 million, principally reflecting additional euro-denominated notes. A $17.6 million foreign-currency gain contributed to reported earnings.
- Preferred-share refinancing included $1.175 billion of new issues and $862.5 million of redemptions. Redemption-related EITF D-42 allocations were $26.9 million, versus $8.9 million in 2015.
Outlook, risks and unusual items
- Management expected same-store revenue growth to moderate further in 2017. It cited softer demand and limited new-tenant pricing power in Houston, Chicago, Washington, D.C., Denver and New York, partly associated with local conditions and new supply.
- The company planned higher Internet and television marketing spending and lower new-tenant rates or increased promotions to support demand; management cautioned these measures could weigh on near-term revenue trends.
- Management forecast approximately $250 million of retained operating cash flow over the next 12 months. Estimated resources of $918.5 million exceeded then-planned needs of $458.0 million, including $429.9 million remaining for the development pipeline. The pipeline was expected to add 5.3 million square feet at an estimated total cost of $660.2 million, with some projects subject to contingencies such as approvals.
- Development may dilute near-term earnings while new or redeveloped facilities lease up, a process management said can take three to four years; it expected this dilution to increase in 2017 and beyond.
- Key risks include competition and new supply, real-estate and development risks, property-tax and labor-cost inflation, natural disasters and insurance limits, litigation, cybersecurity, REIT qualification, and foreign-exchange, tax and joint-venture risks related to Shurgard Europe. The Hughes family held approximately 14.3% of common shares and could significantly influence shareholder matters.
- Legal proceedings were described as ordinary-course matters with material loss considered remote. No impairments were recorded in the periods presented. The filing reports an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether the 2017 demand softness and slower rent growth persisted, particularly in the named major markets, and how occupancy and realized rents developed.
- Actual leasing pace, costs, approvals and returns for the $660.2 million development pipeline, including the near-term earnings dilution.
- Debt and preferred-capital refinancing plans, euro exposure and the cost or availability of new capital.
- Whether property taxes, payroll, marketing and other operating costs rose as management anticipated.
- Reconciliation of GAAP earnings with FFO and Core FFO, which are non-GAAP measures, and the sustainability of distributions relative to operating cash flow and capital needs.