Public Storage — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this annual filing includes fourth-quarter results but is not a standalone Q4 report. Public Storage is a Maryland REIT primarily operating U.S. self-storage facilities, with ancillary tenant insurance and merchandise operations and equity investments in PS Business Parks and Shurgard Europe.
Business context and operating footprint
- At year-end, the company consolidated 2,386 U.S. self-storage facilities in 38 states, with 159 million net rentable square feet. It also owned one facility in London and held a 49% interest in Shurgard Europe, which owned 221 facilities.
- Its 42% interest in PS Business Parks provides exposure to commercial properties. Self-storage is the principal source of company earnings.
- The 2,042 same-store facilities represented approximately 82% of U.S. consolidated self-storage rentable area.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $2.669 billion | $2.561 billion | +4.2% |
| Operating income | $1.423 billion | $1.374 billion | +3.5% |
| Net income | $1.448 billion | $1.460 billion | -0.8% |
| Net income allocable to common shareholders | $1.172 billion | $1.184 billion | -1.0% |
| Diluted earnings per common share | $6.73 | $6.81 | -1.2% |
| Funds from operations (FFO) per diluted share | $9.70 | $9.70 | Flat |
| Core FFO per diluted share | $10.23 | $9.79 | +4.5% |
| Cash provided by operating activities | $1.976 billion | $1.945 billion | +1.6% |
Self-storage revenue rose 4.4% to $2.512 billion and self-storage net operating income (NOI) increased 3.7% to $1.855 billion. Same-store revenue grew 3.0% and NOI grew 2.8%; same-store operating margin before depreciation was 74.6%, versus 74.7% in 2016. Average same-store occupancy declined to 93.8% from 94.5%, while realized annual rent per occupied square foot rose 3.9% to $17.19.
Ancillary operations generated $156.1 million of revenue and $105.8 million of net income. Equity earnings from unconsolidated real estate entities increased to $75.7 million from $56.8 million, including higher earnings from PS Business Parks and Shurgard Europe.
Liquidity, debt and distributions
- Year-end cash and equivalents were $433.4 million. The $500 million revolving credit facility had no borrowings; $483.9 million remained available after letters of credit.
- Total debt was $1.431 billion, up from $390.7 million in 2016. The increase principally followed the September 2017 issuance of $1.0 billion of unsecured notes: $500 million due 2022 at 2.370% and $500 million due 2027 at 3.094%. The reported average effective debt rate was 2.6%.
- Debt maturities included approximately $502.1 million in 2022 and $921.0 million thereafter. The company reported compliance with debt covenants.
- Management estimated approximately $1.2 billion of capital resources for the following year against planned needs of $378.9 million. Resources included cash, available revolver capacity and expected retained operating cash flow of $200–$300 million.
- Operating, investing and financing cash flows were $1.976 billion provided, $739.9 million used and $992.2 million used, respectively. Maintenance capital expenditures were $124.8 million in 2017.
- Common distributions were $8.00 per share for 2017, versus $7.30 in 2016. The Board declared a $2.00 quarterly common distribution in February 2018. Preferred shares outstanding had $4.025 billion liquidation preference.
Material changes, outlook and risks
- Slowing same-store growth: Same-store revenue growth declined from 5.8% in 2016 to 3.0% in 2017, and quarterly year-over-year growth eased to 2.1% in Q4. Management cited softer demand, lower move-ins, limited pricing power for new tenants and increased competing supply in several markets.
- 2018 outlook: Management expected moderate revenue growth, primarily from rent increases to existing tenants, and said current trends were consistent with that outlook. It expected similar existing-tenant rent increases to 2017, while lowering new-tenant rates and maintaining promotions to support move-ins—actions that could weigh on near-term revenue growth.
- Management forecast approximately 4.5% growth in property-tax expense and approximately $100 million of maintenance capital expenditures in 2018; potential facility upgrades could increase capex. Development and redevelopment projects in process totaled approximately $613.8 million and 4.6 million square feet, with $349.4 million of remaining spend. Some projects depended on approvals and other contingencies.
- Development can dilute near-term earnings while facilities lease up; management expected this dilution to increase in 2018 and beyond. Property-tax increases, labor and maintenance costs, new supply, economic conditions and access to capital are key operating risks.
- Unusual items: The company recorded a $50.0 million foreign-currency translation loss on euro-denominated debt, versus a $17.6 million gain in 2016. Hurricanes Harvey and Irma led to a $7.8 million casualty loss and $5.2 million of incremental tenant-reinsurance costs; management expected no insurance recovery because estimated losses were below deductibles.
- Public Storage acquired the remaining 74.25% interest in a partnership owning 12 facilities on December 31, 2017 for $135.5 million, bringing those properties into consolidation. It also issued $580 million of preferred securities and redeemed $922.5 million of older preferred shares during 2017.
- The filing identifies risks involving competition and oversupply, natural disasters and insurance limits, currency exposure, REIT qualification and tax-law changes including the Tax Cuts and Jobs Act, litigation, cybersecurity and regulatory requirements. Management said material loss from existing legal proceedings was remote. No material off-balance-sheet arrangements were reported.
- Management reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls. The CEO and CFO were expected to step down from those roles effective January 1, 2019.
Most important facts for investors to verify
- Whether same-store revenue growth and occupancy stabilized after the 2017 deceleration, particularly in markets with elevated new supply.
- Whether the $1.0 billion debt issuance, future maturities and preferred distributions affect capital costs, refinancing flexibility or common-shareholder cash flow.
- Progress, approvals, costs and lease-up performance for the $613.8 million development and redevelopment pipeline.
- Actual 2018 property-tax, maintenance and other operating-cost growth compared with management estimates.
- Effects of foreign-exchange movements, hurricanes and the 2017 tax-law changes on earnings, liquidity and REIT status.
- Reconciliation of GAAP earnings to non-GAAP FFO, Core FFO and NOI; these measures are not substitutes for GAAP earnings or cash flow.